BEIJING - With
the Chinese government enforcing its
belt-tightening measures to rein in the overheated
real estate market, banks in many major cities are
being forced to reassess what has been one of
their most profitable businesses - residential
mortgages.
This is creating a dilemma for
many banks. Concerned government officials have
pointed to, among other things, the potential risk
for lenders in a liquidity-driven property boom,
which can turn to bust when the cost of capital,
or opportunity cost, begins to swing in the other
direction.
But many bankers, who have no
doubt been aware of such risks for quite some
time, have been reluctant to take the initiative
in curtailing their mortgage business because
doing so could make
an
immediate and considerable dent in their
performance.
Confronted by the
government's show of resolve in its latest
measures introduced last month, banks are running
out of excuses to continue dragging their feet.
Some of the larger city banks that have been most
active in the mortgage market, which provides the
major impetus for profit growth, are taking steps
to tighten their loan policies.
Most of
these measures introduced by the banks are seen to
be minor adjustments, which will be unlikely to
result in any appreciable tightening of credit.
But taken together, they represent a fundamental
departure in the lending policies pursued by banks
since the property boom began to take off several
years ago.
More important, perhaps, is
these initiatives from the banks could dampen the
speculation widely considered to have contributed
greatly to the surge in property prices in some
cities, taking them to levels that fewer and fewer
people can afford. Rampant speculation poses the
greatest risk to the stability of the property
market because highly leveraged speculators could
be forced to unload their purchases in a stampede
at the first sign of a price reversal.
For
that reason the move taken by the Bank of
Communications (BoCom) in Shanghai earlier this
month, to offer better terms to genuine homebuyers
and cut back on lending to speculators, was
considered to have set an example for other banks
that are seeking to draw a similar line. The bank
said it would offer homebuyers 30-year mortgages
of up to 80% of the value of properties of no more
than 90 square meters at preferential interest
rates that are at least 10% lower than the average
for other borrowers.
Ni Erkang, head of
BoCom's policy department, said these terms could
help qualified applicants, mostly first-time
homebuyers, to save 30,000 to 40,000 yuan in total
interest on a loan of one million yuan
(US$125,000).
"Our proposal complies with
the government's measures to clamp down on
excessive speculation and answers the central
bank's call to be more selective about borrowers,"
Ni said.
It is good for BoCom too, Ni
added. "The attractive terms we offer to genuine
homebuyers can increase our mortgage loan
portfolio and, at the same time, reduce risks."
Profit from housing mortgages accounts for an
estimated 10% of BoCom's total profits.
Meanwhile, BoCom has introduced other
measures that will make it easier and cheaper for
homebuyers to obtain mortgage financing. These
measures include preferential interest rates,
flexible repayment terms and reduced, or in some
cases exemption of, handling charges.
Credit-worthy customers can borrow up to 500,000
yuan in unsecured loans.
But speculators
need not apply, unless they are willing to advance
a down payment of at least 40% of the value of the
property and pay higher rates ranging from 20% to
30% above the average.
BoCom is becoming
increasing stringent in processing mortgage loan
applications, Ni said. "Our assessment staff has
been instructed to pay greater attention and apply
a stricter criteria to the location of the
property, the age and condition of the building
and the price of the property when it was new."
Banks around the nation are taking a much
more cautious approach to mortgage lending. Huaxia
Bank in Beijing, for instance, is more "critical"
in approving loans for investment purposes, said
Zheng Jing, manager of Huaxia's personal loans
center.
"Our approach is to raise the down
payment percentage and increase the interest rates
for loans to investors and speculators," she said.
Like many other banks, Huaxia requires a
minimum down payment of 30% for property with a
total area bigger than 90 square meters, compared
with 20% for smaller apartments. For villas, the
down payment can be as high as 50%.
Higher
down payments are required for larger apartments
and villas because they are more popular with
investors and speculators than smaller apartments.
The mortgage interest for what bankers
consider "investment-oriented" properties and
villas is now set by most banks at about 1
percentage point above the average rate of 5.751%
a year.
"We generally discourage loans to
people buying properties for investment purposes,"
Zheng said. "We'll either require a higher down
payment or flatly reject the application from
investors and speculators."
Yao Libao,
manager of Shenzhen Development Bank's individual
loans center, said his bank is also shying away
from lending to property speculators. His bank
applies the same criteria in assessing the credit
worthiness of all applicants, he said. But "we are
less inclined to lend to buyers of high-end or
investment-oriented properties."
Unlike
its many counterparts in Beijing and Shanghai,
Guangdong Development Bank in Guangzhou has no
plan to take action on mortgage financing.
"Many prospective homebuyers and investors
are sitting on the sideline as the full impact of
the government measures unfolds," said Liu
Xiangdong, an executive in the bank's consumer
banking department. "Demand for mortgage loans has
been on the decline."
But bankers in
Shenzhen seem less sanguine. Wang Jian, manager of
Shenzhen Development Bank's housing and consumer
credit department, said his bank set "very strict"
approval criteria for mortgage loans to the
second-hand housing market even before the
introduction of the government measures.
Now, "we are paying more attention to the
credit-worthiness of the borrowers," Wang said. In
doing so, "we look beyond the income of the
applicant and the value of the property."
For example, if a Shenzhen resident
applies for a mortgage loan to buy a property
outside the city, "we know that he is not a
homebuyer," Wang said. "We would either reject the
application or charge him a much higher interest
rate."
