|
Sub-prime mortgages Banks and regulators should be alert to developments in the US mortgage market. It is nice to know that the policies we pursue in the public interest are eventually proven right, particularly if they were the subject of considerable criticism when introduced. Residential mortgages represent the largest asset item on the balance sheet of Hong Kong¡¦s banking system. As banking supervisor with the statutory responsibility to provide a measure of protection to depositors, we have a keen interest in upholding the asset quality of the banks and preventing it from deteriorating to such an extent that it affects the confidence of depositors. I am glad that this important culture of depositor protection is shared by the banking community of Hong Kong. The banks have been very supportive of the residential mortgage guideline of keeping their exposure to not more than 70% of the value of the residential property and, indeed, of the many other supervisory measures promulgated by us. A valuable partnership has developed over the years between the banking supervisor and the banks, contributing greatly to the robustness of our banking system. While we have been successful in maintaining banking stability over the recent, rather extensive cycle in the Hong Kong property market, we should not become complacent. And while we observe with interest developments in the mortgage market in the United States and perhaps count our blessings that this did not happen in Hong Kong, we should try to learn from the lessons that the US market is presenting us with. We would all like to think that a sub-prime mortgage market does not exist in Hong Kong to any significant degree, at least not in the banking system, but we should not underestimate the financial market dynamics, which are changing all the time, accelerated by financial innovation and intense competition. If we are not careful, the protection to the banking system and depositors afforded by our supervisory policies on residential mortgages may erode. Readers will be aware of developments in the residential mortgage market in Hong Kong, particularly after the bottoming out of the market since 2003. While the exposure of the banks to the mortgage market has been capped at 70% of the value of the residential properties (at the time of originating the mortgages), the borrowers now have access to finance for well over 70% of the value. The additional finance is either provided outside of the banking system, or by the banks with their exposure above the 70% limit covered by mortgage insurance provided by the Hong Kong Mortgage Corporation (HKMC) or other insurers. It is now quite common for the banks to extend, say, 95% mortgages, but expose themselves to only 70% of the risks by off-loading the remaining 25% through mortgage insurance. The HKMC¡¦s underwriting standards for mortgage insurance are quite stringent, focussing on the ability of borrowers to service their mortgages. So, even though homebuyers make only a 5% down payment instead of 30%, the quality of these 95% mortgages is still good. In other words, these 95% mortgages are not sub-prime mortgages ¡V although unfortunately the English term might be misleading, since many mortgages in Hong Kong are priced at below the prime interest rate. The ¡§prime¡¨ in sub-prime refers to the credit-worthiness of the borrower, not the interest rate. I am confident that the banks are applying the same stringent underwriting standards when considering mortgage loans with second mortgages provided by lenders outside of the banking system. There is always the risk that a sub-prime mortgage market of the type we see in the US might develop in Hong Kong without the market noticing it, and, worse still, for it somehow to creep onto the balance sheet of the banking system, given the role of the banks as funding institutions, directly or indirectly. This is not to say that we do not want a sub-prime mortgage market in Hong Kong. As long as risks are accurately assessed, properly priced and prudently managed, the banks are free to lend. But as banking supervisor, we maintain a keen interest in how these tasks are performed by the banks during our risk-based supervision, now enshrined formally in Basel II, and we are acutely conscious of the possible effects of fierce competition in the mortgage market on credit underwriting standards and asset quality. Very much in the spirit of the partnership developed between the banking supervisor and the banks, we will continue to work with individual banks as well as the industry associations and the advisory committees to ensure the safety and stability of the banking system. Meanwhile, let us be humble enough to learn from developments in the US.
Joseph Yam Click here for previous articles in this column. ¡@ |
¡@
