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Homeowners must fulfil obligations
2006-08-08
China Daily
In the course of editing a four-part property series last month, I was shocked to read how recklessly mainland homebuyers, especially those in Shanghai, could talk about their mortgage commitments. They seem to believe that a drop in price of the properties they bought is justification for them to renege on their loan obligations.
This is the mentality of a "wu lai," or dishonourable person.
In Shanghai, a group of homebuyers are threatening to stop paying back their mortgage loans after they lost a court case seeking compensation from the developer for the fall in price of the properties in a project they bought a year ago. Some other recent homebuyers interviewed by our reporters in Shanghai have made similar threats, wrongly believing that they could simply walk away from their debt obligations with total impunity when the market turns against them.
More worrying is that most of the homebuyers our reporters talked to are well-educated white collar workers in the twenties and thirties, earning salaries that are way above average. They are the backbone of China's rising middle class. And yet they talk and behave like a bunch of spoilt brats who are too immature to take responsibility of their own actions.
Their contempt for fiscal integrity is in sharp contrast to the stoic attitude of Hong Kong homeowners who have endured the real threat of financial ruin for nearly seven long years after the property collapse in 1997. At that time, many property owners in Hong Kong watched helplessly while the value of their assets sank below the outstanding balance on their mortgage loans.
With property prices plunging an average of 60 per cent from their peak, the nightmare of negative equity became a horrifying reality to nearly half of all property owners in Hong Kong. Despite a lot of moaning and groaning, the vast majority never considered, or talked about, defaulting on their mortgage loans as an option.
Indeed, the bad loan ratio in mortgage financing never exceeded 3 per cent, even when the economic recession was at its worst. Other than speculators, the majority of the homeowners who defaulted on their mortgage loans were victims of the economic recession. They were unable, rather than unwilling, to make the monthly repayments, mainly because they had lost their jobs.
In Hong Kong, the consequence of walking away from a debt obligation can be serious indeed. The liability of the borrower doesn't stop at foreclosure. He would still be liable to paying the bank any shortfall arising from selling the foreclosed property. Failure to pay could lead to bankruptcy proceedings against the borrower.
There were those who decided to cut their losses by selling their apartments and paying off the remaining balance on their mortgage loans with their savings. But many more chose debt rescheduling.
In most cases, it is in the benefit to both the lender and the borrower to negotiate a mutually acceptable arrangement, either by lengthening the terms of the loan or refinancing part or all of the loan with new borrowings at lower interest rates. But any negotiation toward a satisfactory arrangement can proceed only if the borrower is fully committed to repaying the loan and keeping his property even though its value has depreciated.
Financial responsibility has its rewards, as it has been proven again and again in Hong Kong. Now that the economy is firmly set on the course of sustained recovery and property prices are moving on a steady upward trend, the many property owners who have remained unfazed by the apparent black hole of negative equity should feel justifiably proud of their perseverance and steadfastness in face of economic adversity.
The integrity of mortgage borrowers has long been recognized by bankers in Hong Kong. It is not a surprise that the interest rates for mortgage loans have remained for years at levels that are lower even than the best lending rate, the benchmark at which banks lend to their most credit-worthy customers.
Part of the reason is that bankers in Hong Kong are confident that property prices will continue to rise in the long term, despite occasional faltering. But the quality of the mortgage borrowers, as demonstrated during the prolonged slump in the seven years since 1997, must have earned the trust and respect of the banking community.
Property prices in Shanghai have only dropped an average of no more than 6 per cent in the first six months of this year. To be sure, the rate of decline is much steeper for some properties, especially those in the suburbs. But the property market, underlined by brisk economic growth, is expected to remain firm.
Negative equity, a bane of mortgage borrowers, is far from being a threat to Shanghai homeowners.
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