Opinion / Liang Hongfu
Homeowners must fulfil obligations
By Hong Liang (China Daily)
Updated: 2006-08-08 06:29
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.
Email: jamesleung@chinadaily.com.cn
(China Daily 08/08/2006 page4)
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