Our Ref: B1/15C
19 October 2004
The Chief Executive
All Authorized Institutions
Dear Sir / Madam,
Residential mortgage lending ("RML")
The Hong Kong Monetary Authority ("the HKMA") has completed
recently a round of on-site examinations on authorized institutions
("AIs") which are active in RML business. The objective is to
review their compliance with the applicable guidelines issued by
the HKMA on residential mortgage loans, the risk management
practices in relation to equitable mortgage operations, and the
extent to which consumer credit data are used in the assessment of
RML applications.
Overall, the results of these examinations indicated that
effective risk management systems have been put in place by the AIs
generally for their RML business. However, we believe that it would
be useful to share with you our observations as follows:
1. 70% loan-to-value ratio guideline ("the 70%
guideline")
Individual institutions were found to have breached the HKMA's
70% guideline in the following circumstances:
-
Unsecured personal loan facilities were granted to certain
residential mortgage borrowers, such that the sum of the unsecured
personal loan facility and the RML granted to the borrower in each
case exceeded 70% of the value of the mortgaged property. The
unsecured personal loan facilities were drawn down on or shortly
before the day of final payment for the property and the loan
proceeds were credited directly to the bank account of mortgagor's
solicitor to facilitate the final payment. These arrangements
suggested strongly that these loans were used to finance the
acquisition of the underlying mortgaged properties.
-
A "top-up" loan secured by an existing mortgaged property was
granted but the sum of this top-up loan and the RML in question
exceeded 70% of the value of the mortgaged property when the top-up
loan was approved.
AIs are reminded that the HKMA takes a serious view of
non-compliance with the 70% guideline. AIs should ensure strict
compliance with the 70% guideline, whether it is a new RML (with or
without an additional unsecured personal loan) or a "top-up" loan
secured by a mortgaged property. In so far as unsecured personal
loan is concerned, it would be appropriate to refer to the guidance
given in the circular letter dated 12 September 1996. It is also
important that the market value of the property is professionally
and objectively appraised, after deducting the cash rebate or other
discount, if any, offered by the property developer. The granting
of any unsecured personal loan facility to a borrower who has taken
out a RML should be subject to a separate credit decision based on
the institution's normal criteria for unsecured loans. The drawdown
of the personal loan facility should be permitted only after the
completion of the purchase of the property so that the facility is
not used to finance the downpayment.
2. Debt servicing ratio ("DSR") test and use of consumer
data
The following exceptions were noted when individual AIs assessed
the repayment ability of the residential mortgage borrowers:
-
the maximum DSR adopted was higher than 60%;
-
credit card and revolving loan repayments were not included as
debt elements in the calculation of the DSR test;
-
reasonable income proofs were not obtained from borrowers;
or
-
consumer credit data from a Credit Reference Agency ("CRA"), or
a satisfactory alternative arrangement, was not used in assessing
the borrowers' other financial obligations.
AIs should have a clearly defined and documented policy to
assess the repayment capability of residential mortgage borrowers
and ensure that the policy is observed in practice. In particular,
all monthly repayments relating to the mortgage loan application
under review and all other debt repayments known to the institution
should be taken into account for the purpose of DSR test. To this
end, AIs are expected to make use of the consumer credit data from
a CRA in assessing the borrowers' monthly repayment obligations,
unless there are satisfactory alternative arrangements.
Satisfactory evidence for the verification of the income level of
the borrowers should be obtained. The DSR should not be higher than
50-60% generally, and the upper end of this range should be
confined to higher income earners.
3. Equitable mortgages
In addition to the risks associated with legal mortgages,
equitable mortgages are exposed to the default risk of the
developer (where the project cannot be completed) or the risk of
misappropriation of loan proceeds kept in the stakeholder
accounts.
AIs are expected to evaluate fully the developer's ability to
complete the development project before participating as an
equitable mortgage lender, and set appropriate caps to limit the
total exposure against a single project, a single developer as well
as the total amount of equitable mortgages. Moreover, AIs should
implement proper measures to ensure that equitable mortgage loan
proceeds are paid to a stakeholder approved by the lending banks
providing the building mortgage loan1.
Should you have any questions on the above, please do not
hesitate to approach your usual contact in the Banking Supervision
Department.
Yours faithfully,
Y K Choi
Executive Director
(Banking Supervision)
1 The Lands Department has
recently introduced additional measures to impose, among others,
stricter rules on the appointment of stakeholders and the
administration of stakeholder account for projects subject to the
Government's Consent Scheme. Further details could be found in the
Lands Department's Circular Memorandum No. 54 issued on 8 July 2004
(www.info.gov.hk/landsd/).
