The HKMA issued guidelines to banks at the end of last month, introducing a new round of supervisory measures on property mortgage to strengthen banks’ risk management and resilience. However, market participants pointed out that with the new round of prudential measures in force, some prospective first-time homebuyers might turn to finance companies for property mortgages in order to circumvent the cap on loan-to-value (LTV) ratio. This has raised public concerns about whether such practice has become prevalent and whether banking stability in Hong Kong will be affected as a result. I would like to clarify the situation with the following Q&As.
1. How well does the HKMA know about the mortgage business of finance companies? Are there any latest statistics? What are the implications on the property market and banking system?
The HKMA requires banks to provide information about credit facilities provided to finance companies from time to time so as to understand the credit relationship between banks and these companies. According to information available to the HKMA, as at the end of December 2014, 45 banks1 offered credit facilities to 59 finance companies. 29 of these finance companies, including most of the relatively active players in the market, engaged in property-related lending business. The total amount of loans with property pledged as collateral (including mortgages and other loans to meet cash flow needs) was approximately HK$9.2 billion (HK$8.6 billion as at end-June last year), representing around 1% of the total outstanding residential mortgage loans of the banking sector in Hong Kong, which stood at HK$990 billion. This shows that the amount of mortgage loans provided by finance companies will not have implications on the development in the local property market.
The total amount of loans provided by banks in Hong Kong to these 59 finance companies was only $27 billion, or less than 0.4% of total loans in the banking sector. Of which, loans to the 29 finance companies involved in property-related lending amounted to HK$20 billion. Therefore, the soundness of finance companies will not have systemic implication on the banking sector.
2. Is it true that bank credit is the main source of funding of finance companies? How will banks address the problem if the mortgages offered by finance companies are not in compliance with the HKMA’s requirements?
Of the 59 finance companies that have a credit relationship with banks, nearly 30% of their aggregate equity and liabilities are made up of bank loans. As for those 29 companies engaged in property-related lending, about 40% of their aggregate equity and liabilities are made up of bank loans. This means that bank credit is one of the main funding sources of these finance companies. The HKMA requires banks to terminate their credit relationship with the relevant finance companies if the finance companies offer mortgages that are not in compliance with the HKMA’s requirements.
3. Will second mortgages offered by finance companies or property developers undermine the measures introduced by the HKMA?
There are clear supervisory requirements for banks in relation to property lending business involving second mortgages. Banks are required to take into account the total monthly repayment of second mortgages and other liabilities of the borrowers when calculating their debt-servicing ratio (DSR). If the total amount of mortgage loans is more than 20 percentage points over the normal permissible maximum LTV ratio imposed by the HKMA as a result of second mortgage or mortgage insurance, the borrower will be subject to more stringent DSR requirement (e.g. lowered to 45% from 50%).
4. How can banks tell if their borrowers have deliberately covered up their second mortgages?
When processing the first mortgage applications, banks will know whether their prospective borrowers have been involved in any second mortgages from the documents provided by solicitors’ firms.
5. So is it the case that banks will not be aware of the existence of any second mortgages if they are arranged only after the first mortgages are approved?
The HKMA encourages banks to regularly conduct spot checks on individual mortgage loans as a good risk management practice. Banks should take follow up actions if any second mortgages which have not been reported by the relevant borrowers to banks are discovered, such as considering terminating their credit relationship with the borrowers concerned or taking any other credit risk management measures as appropriate.
6. Some mortgage referral service providers claim that they are able to secure for their clients mortgage lending at as much as 100% LTV ratio. Does this go against the HKMA’s countercyclical measures?
The HKMA requires banks to strictly and fully comply with our countercyclical measures for property mortgage lending. Such claims run counter to the countercyclical measures, so borrowers must be very cautious. The Hong Kong Association of Banks has declared that these claims might be misleading, and stressed that member banks would not offer to homebuyers mortgage loans that exceed the HKMA’s cap on LTV ratio.
7. Does the HKMA consider it necessary to introduce more stringent regulation on finance companies?
The HKMA’s statutory functions include banking supervision and maintaining the stability of our banking system. Through our work on this front, we can have a proper understanding of banks’ clientele, including finance companies, and assess the potential impact of the related lending business on the property market and the banking system. Judging from the figures mentioned above, i.e. total property-related loans by the relatively active finance companies and their funding from banks, we believe that the potential implication on the property market or banking stability arising from these finance companies is minimal. That said, our focus here is on finance companies that have business relationship with banks, and thus excludes a vast number of other finance companies. As mentioned above, the existing figures have covered most of the relatively active finance companies in the market.
Looking at this industry as a whole, different views exist in the community as to their mode of operation and business practices. But one has to acknowledge that these companies can provide short-term liquidity to certain borrowers with special needs. Whether these companies should be subject to more stringent regulation is a matter of the relevant overall policy and we believe that the Government and public would consider carefully.
It has been three weeks since the seventh round of countercyclical measures was introduced. Public discussions mostly focus on the immediate impact on property prices and end-users. I would like to reiterate that the countercyclical measures aim to ensure adequate resilience of banks and the financial system in the event of a down turn in the property market. They are not meant to turn around the property cycle. We fully appreciate the potential impact of these measures on some prospective end-users, but it is our responsibility to take measures to safeguard banking stability and we cannot leave the risks of property bubble unattended. For this we appeal to the public’s understanding. With quantitative easing in many countries leading to a highly distorted interest rate environment and asset market, I wish to emphasise once again that, amid the turbulence in the macro environment, homebuyers must carefully assess their repayment ability and the risk they will be exposed to once the market turns and interest rate rises.
Deputy Chief Executive
Hong Kong Monetary Authority
20 March 2015