The Notorious 120% LTV Mortgage Is Back

Back at the height of the US housing bubble, when various subprime mortgage originators were glad to hand out NINJA mortgages, some went so far to give the debtor more money than they needed for a house purchase, with the assumption that any residual may go to help fixing up the house in advance of a flip. These were the infamous 100%+ LTV loans, where the bank would hand over more cash than the value of the actual property. This worked for a few years - as long as the value of the property was rising fast enough, and could be flipped promptly to willing buyers it wasn't a problem. However, once the housing bubble burst, this particular type of loans disappeared from the US landscape, and as a result of new mortgage guidelines it will unlikely be making a return any time soon.

However, with China desperate to reflate its once-burst housing bubble (as every other bubble including stocks, bonds, and yes - even rebar - has burst) and with no regulators to oversee the insanity in the local housing market, it means that the infamous 120% LTV mortgage has finally resurfaced. As SCMP reports, Sun Hung Kai Properties Ltd., Hong Kong’s largest developer surprised the market on Wednesday by offering an unprecedented home loan worth as much as 120% of the flat value without the need to submit income proof in order to woo buyers for its new project in Yuen Long.

Buyers of SHKP’s Park Yoho Venezia who opt for the “King’s Key 120” scheme will receive a three-year financing loan up to 120 per cent of the flat’s value, much higher than the standard bank mortgage ceiling of 60 per cent for flats below HK$10 million, and 50 per cent for those more than HK$10 million.

“Developers are basically lending money to buyers to purchase their units. It is an obvious sign that developers want to speed up sales. If they do not act fast now, they may have to sell at a price lower than today,” said Nicole Wong, CLSA regional head of property research. She said other developers with projects in nearby areas would be forced to follow suit to provide similar home loan packages in a fight to secure buyers.

A general view of Park Yoho Venezia at 18 Castle Peak Road, Yuen Long. Photo: Sam Tsang

“It is the most aggressive plan I’ve ever seen in the market,” said Sammy Po, chief executive at Midland Realty’s residential department. “During the last market doldrums more than 10 years ago, developers provided home loan of 110 per cent of the flat value, even to first home buyers.”

Now it is 120%. Do the math.

However, there is a small catch: the offer only applies to buyers who already own an apartment with value no less than 70% of the would-be purchase price of the Park Yoho Venezia flat. The loans would be provided by SHKP’s finance company which is not subject to regulatory supervision by the Hong Kong Monetary Authority (HKMA). Buyers are only required to pay interest in the first year but must begin repaying interest and principal from the second year.

In other words, to let the bank buy a new apartment for them, "buyers" must pledge another apartment. This however, will not be a problem, because the latest rage in Chinese asset rehypothecation is, drumroll, apartments!

According to an April story also by SCMP, the owners of a super-luxury Hong Kong flat that was recently foreclosed had used another flat on the same floor to use as collateral six times to raise money for more investments even as it stopped paying instalment on the first one.

“They used their properties like ATMs. Some didn’t think twice before remortgaging the properties at interest rates of 20 to 30 per cent,” said veteran property investor Jacinto Tong, who manages a property portfolio of HK$40 billion.

But now that the good times for the HK housing market are over, developers are scrambling to find new and innovative ways to keep the euphoria going.  Sun Hung Kai’s financing scheme is aimed at attracting buyers in a market that has seen a correction of more than 13 percent since prices peaked in September. It’s also a way to circumvent government cooling measures that restrict traditional bank mortgages on properties costing less than HK$10 million to 60 percent of their value.

"Overall property developers are very aggressive and trying to offload inventory because the outlook of the Hong Kong property market is not looking good," Raymond Yeung, a senior economist at Australia & New Zealand Banking Group Ltd., said by phone.

As Bloomberg adds, though it is not alone, Sun Hung Kai’s initiative is so far among the most generous offers from developers to entice buyers. Henderson Land Development Co., Kowloon Development Co. and Cheung Kong Property Holdings Ltd. started offering financing of up to 90 percent last year as prices started to decline. Shares of Sun Hung Kai fell 2 percent to HK$87.75, the lowest since May 26, as of 1:07 p.m. Hong Kong time. Developers had the second-biggest drop as a group on the benchmark Hang Seng Index, with all 10 constituents in the property gauge down. The Hang Seng Property Index declined 2.2 percent, the lowest in almost three weeks.

Louis Chan Wing-kit, Centaline Property Agency’s managing director for residential, said buyers opting for this financing scheme would gamble that home prices improve within three years. “If they bet on the wrong side, they will lose and the winner will be the developer who has divested the market risk to the purchasers,” he said.

Market watchers widely expect home prices to head for a downward adjustment, with some forecasting flat values to plunge by as much as 30 per cent by 2017. Hong Kong home prices have fallen 12 per cent from their peak in September last year.

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So how is this transaction legal? In a written reply to the South China Morning Post the HKMA said; “As a bank regulator, the HKMA has the responsibility for supervising banks to safeguard banking stability in Hong Kong. We do not comment on mortgage loans offered by individual developers.

Legislator Albert Ho Chun-yan, however, said such excessive lending could increase the number of negative equity owners once home prices fell more than 5 per cent. He said developers that provided bigger home loans through their finance companies would dilute the influence of HKMA’s tightening on mortgage lending to reduce the risk of a property bubble.

“What developers are doing is not breaching the law. But if the Lands Department intends to support the government to rein in home prices, it can hold back developers’ applications for pre-sale consent if they provide excessive lending,” he said. “We need time to study (SHKP) plan before taken any action.”

The ultimate outcome is clear: following a small dead cat bounce in HK housing price as even more mortgage debt floods the market, the collapse will be the much more violent. At that point the only question is who will find the bailout: taxpayers or, well... taxpayers.