HDB borrowers should stay "molly-cuddled" by HDB
By Mano Sabnani, Business and Financial Consultant
First published in TODAY
18-19 Jan 2003

National Development Minister Mah Bow Tan offered sound advice to HDB existing and prospective homeowners on Monday when he urged them to exercise prudence in purchasing their flats or in re-financing their HDB loans via the banks.

The $63 billion battle for HDB loans has driven some banks to slash first and second-year rates even below HDB's concessionary rate of 2.6 per cent, not to mention its market rate loans at a higher 3.75 per cent.

Asked if the government or HDB would step in if HDB homeowners default on bank loans and run the risk of foreclosure, Mr Mah's response was in the negative. "You cannot say 'I want more choice, I don't want to be mollycuddled' and then say 'Oh, when I run into difficulty, the government has got to help me and bail me out'."

This is timely, well spoken advice which comes before the current rush by some HDB homeowners to switch their loans to banks becomes a broad stampede, So far, only a handful of those who qualify for concessionary loans have migrated to banks. However, as the HDB has stopped giving fresh market-rate loans from January 1, the banks have taken over the function and the numbers are probably much bigger for this category.

This group includes new buyers of HDB new or resale flats who do not qualify for concessionary loans as well as the current pool of about 90,000 households with
outstanding HDB market-rate mortgages. HDB has been charging the existing large group of borrowers a so-called market rate of 3.75 per cent since April 2001 even as financial institutions kept nudging home loan rates to historic lows.

According to wealth management firm DollarDEX, the average commercial rate over the same period was 2.5 per cent. Its calculations show that a family with a 15-year market-rate loan of $200,000 with the HDB would have paid an extra $2,420 up to now, because of the differential.

The HDB is on record as saying that its market rate is pegged to that charged by DBS Bank to former Credit POSB mortgagers. The problem is DBS acquired POSB in late 1998 and Credit POSB ceased to exist as a legal entity thereafter, with the loans transferred to DBS Bank's consumer credit division.

DBS has clarified that the majority of its ex-Credit POSB customers have re-priced their loans and are enjoying the current competitive rates. But thatis not the case for most of 90,000 market-rate HDB mortgagers, many of whom willnot be able to take advantage of the commercial refinancing available from January. This is because their loan quantum may be too small or their credit background may disqualify them with the banks.

Responding to queries on this issue, Mr Mah said on Monday that the 3.75 per cent HDB market rate for non-concessionary loans will not be cut. This is despite public housing mortgage rates offered by private banks having plunged since the sector was liberalised on January 1, with first year rates hitting as low as 1.38 per cent.

Mr Mah's argument is that HDB borrowed the money from the government with a long-term view and its 3.75 per cent rate has to be seen in that context. This rate is only 0.1 percent above the rate that the HDB pays the government for the money it then lends to home buyers. Mr Mah went on to assert that only short term commercial rates have fallen (meaning up to a maximum of three years) whereas long-term rates have not fallen much.

However, not everyone buys this argument in its entirety. The counterpoint is that if DBS could do a re-pricing for ex-Credit POSB customers, HDB can also do it. If logistics is a problem, given the complexity and scale of the operation, HDB could seek the help of commercial lenders to work out a scheme to re-price the 90,000 mortgagers on an en-bloc basis. This should be possible, given the current low interest rate environment and the lending market's hunger for higher-yielding instruments.

If the HDB sticks to what Mr Mah has said and makes no move to lower its non-concessionary rate, it could be construed as offering the mortgagers no alternative but to migrate their loans to commercial banks. That will be good for the banks, which are hungry for business and see the public housing sector as a growth area in the next few years as more and more HDB mortgagers migrate to them. But for many of the 90,000 mortgagers being wooed by the banks, there are clear pitfalls.

For one, they might sorely miss the compassionate umbrella of the HDB, especially during difficult times. Under the law, HDB can forcibly acquire a flat if mortgage payments have lapsed by more than three months. But in practice, defaulting borrowers are presented with a number of options to restructure repayments. These may include payment deferment, extending the mortgage period or the inclusion of more family members to help out with repayments.

The fact is HDB did not repossess a single flat last year, although about 4 per cent of borrowers or some 21,800 families had failed to pay mortgage instalments for three months or more, as at the end of last year. These statistics from HDB provide the clearest indication yet that homeowners with mortgages from the HDB run a lower risk of losing the roofs over their heads if they face difficulty meeting repayments.

In contrast to the HDB's record, most private sector lenders have chosen to remain tight-lipped over their policies regarding home repossessions, especially over the point at which they would pull the plug on a loan. One can only surmise that the banks will treat HDB homeowners' loans on the same basis as their private property loans, meaning they will have to comply with their bank-wide loan-categorisation and risk management policies.

This means we could, in the next economic and property cycle, see loan defaulters' HDB homes being put up for sale on the open market or in public auctions. And if home prices are depressed at that time, the banks could get all the proceeds and HDB heartlanders could end up with no homes and big losses in their CPF accounts. This is because the banks hold the first charge on HDB flats secured with commercial loans.

There are other pitfalls for HDB heartlanders venturing into the commercial arena to finance their loans. For instance, the interest rates of the packages offered by various banks are generally variable from the third year onwards. HDB's rates can vary too, but historically they have been two to three percentage points below that of the banks. Also, once a household refinances its HDB loan with a bank, there is no turning back to the HDB, as reiterated by Mr Mah himself. Borrowers will have to live with possibly higher lending rates and terms and conditions imposed by the banks.

All said, the bottomline on the whole issue of HDB home financing is that first time buyers and others who qualify for the concessionary rate of 2.6 per cent should stay with the HDB. This lending rate is only 0.1 per cent above the interest rate for Central Provident Fund members with balances in their Ordinary Account. HDB basically borrows the CPF money through the government and lends it out to home purchasers, imposing an administrative charge of only 0.1 per cent. The 2.6 per cent current rate is not the lowest in town at the moment but over the long term, this HDB lending rate will probably be attractive relative to commercial rates. In addition, one is dealing with a compassionate HDB.

On the other hand, most of HDB's 90,000 market-rate mortgagers can only hope that the HDB will relent and look at how it can peg its current 3.75 per cent lending rate more closely to market rates. En bloc migration of the loans to the private sector is not possible but an en bloc re-pricing scheme is certainly possible. The individual brave borrowers who find commercial lending schemes attractive and prefer to migrate their loans independently should move at their convenience.

For the vast majority of HDB mortgagers, however, the most practical option is still to stay "mollycuddled" by the HDB. It is , after all, the best bet in ensuring that the roof over their heads remains and that that their CPF savings are not lost as a result of property market gyrations.