Tighter screening of loans

THE local property sector is expected to see some “cooling down” in the number of transactions this year following the implementation of the responsible lending guidelines by Bank Negara on Jan 1.

According to Real Estate and Housing Developers Association (Rehda)president Datuk Seri Michael Yam, transactions are now taking a longer time to crystallise as banks are grappling with more data required for processing loan applications.

Yam says transactions are taking a longer time to crystallise.

“Buyers are also not committing to purchases until they get clearance from banks that they will be offered the loan applied for, which may or may not be sufficient for them to purchase the property they desire.

“The first segment to be affected is obviously the residential component. For the non-residential, especially commercial properties which may be bought by companies or partnerships, we understand the new formula is not applicable,” he tellsStarBizWeek.

Yam feels that the new ruling will have a huge impact on the middle-income segment.

“However, it is common for this group to actually have double (or even) triple incomes from their second and third jobs, but may not have documents to support higher loan eligibility. While prudent risk management is good, financial institutions must also play a facilitative role in the home ownership agenda by assessing each application on its own merit and not blanket applications across the board.”

He adds that the affordable housing segment will probably be the most affected segment as borrowers are likely to be less affluent, with lower income and disproportionately higher expenditure.

“We predict headwinds for sales in this critical segment, which is contradictory to the wish of the Government to encourage home ownership,” Yam says.

Chang says the entry level market will be the most affected.

In light of this situation, Federation of Malaysian Consumers Association (Fomca)chief executive officer Datuk Paul Selvarajis urging the central bank to perhaps ease the loan application process, such as making it easier for consumers to switch banks if necessary.

“Consumers, if they feel that they can get a better deal with another bank for their housing or car loan, should be able to do so with ease and at minimum costs. Consumers often feel overwhelmed at the procedures for changing banks. The process should be simplified. The ease of bank switching would promote better quality of services from the banks through competition.

“There should be greater emphasis not only on policy measures but on financial education. Not enough is being done to provide appropriate financial knowledge and skills to consumers,” he says.

One industry observer concurred that the responsible lending guidelines will have the biggest impact on the lower income group.

“This group of people are already earning a low salary and with stricter lending rules, getting loans could be made more difficult.”

National Housebuyers Association (HBA) secretary-general Chang Kim Loong says the responsible lending guidelines will have an impact on the local property sector, especially in the entry level market where aspiring job seekers purchase their first home and for married couples hoping to be able to purchase or upgrade their homes.

Selvaraj urges the central bank to ease the loan application process.

“Depending on location and from state to state, the price ranges from RM150,000 to RM500,000. This is the price range that speculators have been targeting in the past and have artificially inflated such property prices, but it's still too early to gauge the effectiveness or effects of the responsible lending guidelines.

“It is hoped that as property speculators are denied financing to purchase such homes and with only real demand in the picture, the prices of such properties will gradually decline to more realistic prices.”

According to reports, applications for loans for the purpose of purchasing residential properties contracted 6.3% in January from a growth of 11.3% in December 2011.

Yam says Rehda understands that the implementation of the rationale for responsible lending guidelines was due to the large household debts and the 40% increase in transaction value (from RM100bil to RM140bil) between 2010 and 2011.

“On the short to medium term, this restriction would ultimately cause a slowdown in borrowing which is the intended effect, and it will cause a negative effect on home ownership.

“The mixed signal arising from this new lending rule is that while on the one hand the Government is encouraging the building of more affordable medium-cost housing by introducing “My First Home Scheme” and “PR1MA” homes to stimulate demand, on the other we have this Bank Negara announcement,” he says.

Yam feels that the central bank's new lending criteria seems to be in contradiction to the earlier Budget announcement in October last year.

“This does not sit well with developers who are taking the cue and feel positive about home-buyers being offered greater opportunity and various incentives to own homes only to be somewhat dampened by this new requirement,” he says.

Positive measure?

Khong & Jaafar Sdn Bhd managing director Elvin Fernandez says he is supportive of Bank Negara's responsible lending guidelines.

“The new rulings are good because they are pre-emptive measures to prevent a housing bubble. The measures are making themselves felt as price increases in some hot spots that were a cause for concern have now stalled and also the trend from it spreading down the line or to other areas have also been curtailed.

Fernandez supports the guidelines as they prevent a housing bubble.

“House prices rising are not good. Prices rising with fundamentals such as household income and rental returns are good,” he says.

Chang also applauds Bank Negara's responsible lending guidelines.

“The guideline requires the financial services providers (FSPs) to provide assessment of individual affordability and provide suitable and responsible advice to customers on their capacity to take on additional financing,” he says.

According to Chang, the FSPs or banks will be required to undertake a comprehensive assessment on borrowers' sources of income and verify against independent sources to ensure that they have the ability to repay the loans throughout the tenure of the loan.

Income assessment shall be based on the borrowers' net income, which is the gross salary minus the statutory deductions such as Employees Provident Fund contributions and tax deductions.

“HBA has been advocating for a very long time for FSPs to exercise prudence and good judgment when disbursing loans. Due to stiff competition and key performance indicators set by the board and senior management, (FSPs) have been too lenient and aggressive in providing financing, resulting in artificially inflated property prices and many young adults being declared bankrupt due to their inability to repay their debt obligations,” says Chang.

Chang says that as part of the responsible lending guidelines, Bank Negara has repealed its requirement of a maximum debt service ratio (DSR). For the uninitiated, the DSR means that the debt repayments are divided by the borrower's income.

According to him, prior to the responsible lending guidelines, the maximum DSR was set at one-third (or 33%) of gross income for single loan repayments and half (or 50%) of gross income for all loan repayments combined.

The exception was given to civil servants who could borrow from the cooperatives with a DSR of up to 60% of their gross income.

“Hence, if the borrower's gross income is RM3,000, the maximum single loan repayment is RM990 and maximum aggregate of all loan repayments cannot exceed RM1,500 per month,” Chang says.

Under the responsible lending guidelines, the DSR based on gross income has been repealed and FSPs are now free to set their own DSR based on the net income of the borrower.

Chang says the issue now will be that prospective borrowers do not know if they would qualify for a loan as different FSPs have different DSR guidelines.

“There is a shock-effect with FSPs being told to totally disregard all forms of variable income such as discretionary bonuses, commissions and overtime and prospective borrowers that are dependent on these types of income are adversely affected.

“Based on our market sources, some FSPs are willing to consider these types of income but at a discounted rate and this causes great confusion to prospective borrowers as they attempt to shop around for loans,” he says.

Rehda feels the affordable housing segment will probably be the most affected.

Chang says HBA is urging the central bank to retain its “maximum DSR” requirement “to set a cap” as guidance for FSPs to follow.

“As it is, even with the previous guidelines on one-third and half, many FSPs have openly flouted the guidelines with reckless financing, resulting in artificially-inflated property prices and many young adults being declared bankrupt due to unmanageable debt levels.

“With the caps removed and FSPs being free to set their own lending policies, the situation of reckless financing may get even worse. Although HBA agrees that market forces are the best form of regulation, it has been shown that we operate in an imperfect market and hence the need to retain DSR limits for FSPs to follow,” he says.

As a means to improve lending, the HBA is also calling on the central bank to issue additional guidelines on the recognition of variable income, where the borrower can show a good track record for such income.

“This is because certain industries such as in the sales and manufacturing sectors, the basic income is often very low and the discretionary income serves as an incentive for employees to perform.

“If such discretionary income is to be totally disregarded, it is feared that such employees may never qualify for any sort of loan from legal channels and end up resorting to loan sharks.” - The Star