Can pay or can’t pay?

In 2022, mortgage rates have surged beyond our expectations. What if borrowers can’t pay?

On November 25, the Monetary Authority of Singapore (MAS) published the Financial Stability Review 2022. It stated that most households appear to be resilient to interest rate shocks. The proportion of non-performing mortgage loans is likely to remain low.

On the contrary, the OCBC Financial Wellness Index 2022 released on November 22 told us the exact opposite. It showed that 40 percent of Singaporeans are struggling to pay their mortgage loans.

One is from a government authority. Another is from Singapore’s top three mortgage bank. Which report should we trust?

40 percent Singaporeans have difficulty paying mortgage

The OCBC report is the results of the local bank’s annual online survey. It asked 2,182 working adults personal finance questions that we normally won’t ask. Below is the summary of the survey findings:

1) Singaporeans are strong savers, but they are not saving for crises. While majority of Singaporeans can afford basic expenses, half of Singaporeans are not ready for a crisis. In fact, only 53 percent have six months’ salary to tide through a crisis.

2) More Singaporeans have unsecured debt this year, especially the higher income groups with 38 percent have unsecured debt. 19 percent have some difficulty managing it. 35 percent are worried about not being able to pay off personal loans.

3) As interest rates continue to climb, stress level is mounting. 2 in 5 Singaporeans are facing mortgage stress.

4) 40 percent face difficulty in paying off mortgage loans. The percentage has jumped from 31 percent last year.

5) 17 percent are able to pay monthly instalments on time but with some problems. 14 percent sometimes miss paying on time due to financial constraints. 8 percent may be forced to sell off or downgrade due to incapability to sustain the loan.

Higher interest rates imply higher monthly instalments and a higher portion of the household budget spending on paying mortgage. This is especially stressful for lower income and low saving households when they are already struggling with higher cost of living under rising inflation.

Revenge rate hikes by the banks

According to the website of biggest home loan lender DBS, they are now offering “attractive home loan rates” of 4.25 percent for 2 to 5-year fixed rate packages. For floating rate, it is 3-month SORA + 1 percent. As of December 6, the 3-month SORA (which is rising every day) is 3.0247 percent. In other words, floating rate now starts from 4 percent.

Far from what the media has predicted, 2022 is not the year of revenge spending by the consumers, but the year of revenge rate hikes by the banks. When floating rate of home loans was only 1.16 percent a year ago in early December, who would have known that it could jump almost 3.5 times in 12 months’ time?

In response to the OCBC survey, Channel Newsasia came up with the article “Singapore banks say will do their best to help those with mortgage stress amid rising interest rates”. Property analysts told the reporter that “based on anecdotal conversations with agents, it is not very common to see individuals struggle with repaying their mortgage”. Are they saying that the 40 percent respondents struggling to pay their mortgage are “uncommon”?

OrangeTee commented that “TDSR computation and other property measures like ABSD and SSD may be effective as safeguards to prevent overleveraging in general. As long as the homeowners can pass the TDSR stress test, they should be able to pay their mortgages.”

Since TDSR was introduced in June 2013, the medium-term interest rate to compute a borrower’s TDSR has always been 3.5 percent. It was not until end of this September that it was revised up to 4 percent. When the current mortgage rate is 4 to 4.5 percent, what is the buffer between TDSR medium-term interest rate and the current or future mortgage rates?

The markets can’t understand simple English?

Last Wednesday (November 30) Federal Reserve’s chair Jerome Powell said the central bank “may” slow the pace of raising rate in December. He also warned us about the uncertain outlook for inflation. His exact words are as follows:

“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”

“It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.” He added.

The points in the Fed speech are straightforward: Fed “may” moderate pace of rate increase in December. But there won’t be premature loosening of policy but holding it restrictively for some time until the job to fight against inflation is done (reaching target of 2 percent inflation rate which is currently at 8 percent).

In one sentence: High rates are here to stay though the central bank may moderate the pace of rate hike.

Unfortunately, the markets didn’t read it that way. They interpreted Powel’s speech differently and concluded that Fed is going to slow the pace of rate increase this month. The markets totally ignored Fed’s continuing monetary tightening policy and warnings of uncertain market conditions ahead. They picked only the good news.

Markets rallied. Stock prices surged. Gold prices soared. Major currencies rose against the US dollar. Traders were happy to cash out before Christmas.

Did Powel have a communication problem or the markets have an interpretation problem (to their advantage)?

Zombie companies and zombie households

The total size of loans ballooned under low interest rates in the last decade. According to the Institute of International Finance, the world’s total debt from households, businesses and governments has reached $290 trillion. During the pandemic, countries and households alike are greedily sucking up cheap money as if they don’t have to pay back. Debts slowly pile up. And suddenly, they are all in our face.

There is a recent Bloomberg article titled “Global debt costs are soaring. Here’s where it will hurt most”. It mentioned that about one-fifth of listed corporations are “zombie companies” that barely earn enough money to cover their debts. With surging borrowing costs, more companies will be joining them and existing zombie companies may go bust. Furthermore, smaller US companies tend to borrow bank loans at floating rates. Next year these businesses will start to see the pain of higher rates. This will trigger a new wave of mass layoffs.

Besides companies and countries, individual borrowers can also be under high financial pressure. Regardless of their income, the paychecks of many households are used entirely to service their debts every month. These are modern zombies too.

When borrowers can’t pay

Interest rates have been rising fast and furious since early this year. Can borrowers in the real estate supply chain – the developers, builders, contractors and homeowners – make enough money to repay their debts before payment deadline?

1) Canada

Under aggressive rate hike of the Bank of Canada, there is a sharp spike in non-performing loans. Romspen Investment is one of the country’s largest managers of private mortgage funds providing pre-development, construction and other loans for commercial and residential projects. In October, the real estate lender decided to close its mortgage business in Canada. The managing partner lamented that borrowers stopped making interest payments in recent months. Non-performing loans have shot up to 40 percent. In November, Romspen Investment temporarily ceased redemptions on its largest fund after a significant number of borrowers stopped repaying their loans.

2) US

Commercial properties are often highly leveraged. Recently, there is a growing concern over the long-term health of the commercial property market. Upon a surge in redemption requests from investors, last week Blackstone imposed a limit on withdrawals from its $125 billion real estate investment fund. In fact, the private equity group only approved 43 percent of redemption requests this November.

3) Malaysia

According to October statistics released by the National Housing Department, there are currently 387 “sick projects” in the country. A sick project is defined as a housing project that is delayed for over 30 percent of its schedule or the sale and purchase agreement has lapsed.

There are 2,444 launched projects and 387 sick projects. That means for every 100 projects launched, 16 percent are sick projects. Among them, Selangor and Johor have the highest number of sick high-rise strata projects. According to the National Association for Abandoned Property Owners (Victims), 52,000 homebuyers nationwide are affected by delayed, problematic or abandoned housing issues.

4) Singapore

The latest NUS SRPI (Singapore Residential Price Index) released on December 1 showed that Singapore private housing prices have started to drop. In October, private non-landed residential properties declined 0.7 percent month-on-month. Prices in the Central Region have dipped for two consecutive months, falling 0.8% in October and 0.4% in September month-on-month. Prices in the non-Central areas also suffered a 0.6 percent fall. Small units with a floor area of 506 sq ft or below decreased 0.6 percent.

The local media hasn’t widely covered the bad news yet. Developers still have over 40 new projects waiting to be launched. We didn’t see any new launch lately except the highly-subsidized ECs. With rising interest rates on their bank loans and fast-approaching ABSD deadlines, 2023 is going to be tough for many developers.

What if the banks recall your loans?

Imagine defaults gradually building up under incessant rate hikes. Suddenly, lenders decide to lower their financial risk and recall all the outstanding loans. They demand full repayment of the principal with interest from the borrowers.

What if your outstanding loans are recalled all at once? Can you pay or can’t pay?

This is exactly what buyers of TOP projects faced during the last Global Financial Crisis. Buyers bought their units at high prices in new launches. When the financial crisis spread to Singapore in 2009, that was exactly the time when these projects obtained TOP. Banks either offered lower loan-to-value or completely withdrew the originally approved loan. After valuation of their new home dropped, many buyers could not find a loan to match their purchase price.

– “How rate hikes hit developers and homebuyers”, PropertySoul.com

Can pay or can’t pay? Can’t pay? We’ll take it away!

Borrowings have shot up through the years. So have unpaid loans or bad debts. Repossessing assets becomes a booming business.

According to the UK government, repossessions in the 3rd quarter of 2022 increased 91 percent compared to the same quarter in 2021.

Can’t Pay? We’ll Take It Away! is a documentary series broadcasted in the UK. It follows the sheriffs hired by private finance companies. With writs from the High Court, they target those who fall behind repayments and repossessed their assets and homes. Their work involve eviction and seize of valuables or properties. They call themselves the recovering agents.

The episodes are filled with confrontations and violence. Surprisingly, the parties shouting and threatening the most are usually the debtors. When people are down and out, they are at a loss or in denial. They can be easily provoked and mad as a hornet. After all, when people can’t pay, they can either act poor or act fierce.

What to do if you can’t pay?

Any time you have difficulty paying the monthly instalment of your mortgage, you should approach your bank as soon as possible. Because if you miss your mortgage payment, the bank will send you an Originating Application (OA) from the court to order the surrender of your mortgaged property unless you pay the outstanding sum.

You should reply to the bank immediately and propose an alternative repayment scheme. If the bank agrees to your proposal, they will monitor your payment and may withdraw the OA from the court. If they disagree, you need to attend the hearing. The court will make an order for you to pay the outstanding loan with interest as well as the legal costs. If you can’t pay, the court will issue an order for repossession of your property.

In Singapore, the Minister of State for Trade and Industry said household debt as a whole remained healthy. The proportion of non-performing mortgages is now at 0.3 percent. The number of foreclosures is fewer than 30 so far this year.

However, the numbers can be misleading. Despite rising interest rates, borrowers under financial pressure won’t immediately default. It is only after prolonged delayed payment that they will receive a letter from the bank. The bank will only take action if they don’t receive any reply from the borrowers. Most of the time, the banks tend to work with the borrowers to restructure their loan to avoid foreclosure. The banks want their money back, not bad debts or repossessed homes.

– “Now it’s payback time”, PropertySoul.com

Food for thought

Let me end this post with something I learned over the years: We should first target to lower our debt level to zero and be debt-free. Then we can start building our wealth. When we have wealth, we have freedom. And that freedom comes from the choices we have in life. It is only with choices that we can live with dignity.

In a few property viewings, I was told that the owners were close to bankruptcy. It must be a big blow to them seeing the Official Assignee sell off their home against their will. The worst thing in life is to end up in a situation that you are not given any choice. When you are out of options, you will be forced to do something you don’t want to do. This is when you can no longer live with dignity. The pain and trauma are going to last for a long time.

– Vina Ip, Behind The Scenes of The Property Market

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