LOOKING FOR THE BEST MORTGAGE?

Shopping around for a home loan or mortgage will help you to get the best financing deal. A mortgage— whether it’s a home purchase, a refinancing, or a home equity loan—is a product, just like a car, so the price and terms may be negotiable. You’ll want to compare all the costs involved in obtaining a mortgage. Shopping, comparing, and negotiating may save you thousands of dollars.

Obtain Information from Several Lenders

Home loans are available from several types of lenders—thrift institutions, commercial banks, mortgage companies, and credit unions. Different lenders may quote you different prices, so you should contact several lenders to make sure you’re getting the best price. You can also get a home loan through a mortgage broker. Brokers arrange transactions rather than lending money directly; in other words, they find a lender for you. A broker’s access to several lenders can mean a wider selection of loan products and terms from which you can choose. Brokers will generally contact several lenders regarding your application, but they are not obligated to find the best deal for you unless they have contracted with you to act as your agent. Consequently, you should consider contacting more than one broker, just as you should with banks or thrift institutions.

Whether you are dealing with a lender or a broker may not always be clear. Some financial institutions operate as both lenders and brokers. And most brokers’ advertisements do not use the word “broker.” Therefore, be sure to ask whether a broker is involved. This information is important because brokers are usually paid a fee for their services that may be separate from and in addition to the lender’s origination or other fees. A broker’s compensation may be in the form of “points” paid at closing or as an add-on to your interest rate, or both. You should ask each broker you work with how he or she will be compensated so that you can compare the different fees. Be prepared to negotiate with the brokers as well as the lenders.

Obtain All Important Cost Information

Be sure to get information about mortgages from several lenders or brokers. Know how much of a down payment you can afford, and find out all the costs involved in the loan. Knowing just the amount of the monthly payment or the interest rate is not enough. Ask for information about the same loan amount, loan term, and type of loan so that you can compare the information. The following information is important to get from each lender and broker:

Rates

·         Ask each lender and broker for a list of its current mortgage interest rates and whether the rates being quoted are the lowest for that day or week.

·         Ask whether the rate is fixed or adjustable. Keep in mind that when interest rates for adjustable-rate loans go up, generally so does the monthly payment.

·     If the rate quoted is for an adjustable-rate loan, ask how your rate and loan payment will vary, including whether your loan payment will be reduced when rates go down.

·         Ask about the loan’s annual percentage rate (APR). The APR takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be require to pay, expressed as a yearly rate.

Points

Points are fees paid to the lender or broker for the loan and are often linked to the interest rate; usually the more points you pay, the lower the rate.

·         Check your local newspaper for information about rates and points currently being offered.

·         Ask for points to be quoted to you as a dollar amount—rather than just as the number of points—so that you will actually know how much you will have to pay.

Fees

A home loan often involves many fees, such as loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs. Every lender or broker should be able to give you an estimate of its fees. Many of these fees are negotiable.

Some fees are paid when you apply for a loan (such as application and appraisal fees), and others are paid at closing. In some cases, you can borrow the money needed to pay these fees, but doing so will increase your loan amount and total costs. “No cost” loans are sometimes available, but they usually involve higher rates.

·         Ask what each fee includes. Several items may be lumped into one fee.

·         Ask for an explanation of any fee you do not understand. Some common fees associated with home loan closing are listed on the Mortgage Shopping Worksheet.

Down Payments and Private Mortgage Insurance Some lenders require 20 percent of the home’s purchase price as a down payment. However, many lenders now offer loans that require less than 20 percent down—sometimes as little as 5 percent on conventional loans. If a 20 percent down payment is not made, lenders usually require the home buyer to purchase private mortgage insurance (PMI) to protect the lender in case the home buyer fails to pay. When government-assisted programs such as FHA (Federal Housing Administration), VA (Veterans Administration), or Rural Development Services are available, the down payment requirements may be substantially smaller.

·         Ask about the lender’s requirements for a down payment, including what you need to do to verify that funds for your down payment are available.

·         Ask your lender about special programs it may offer. If PMI is required for your loan,

·         Ask what the total cost of the insurance will be.

·         Ask how much your monthly payment will be when including the PMI premium.

·         Ask how long you will be required to carry PMI.

Obtain the Best Deal

That you can once you know what each lender has to offer, negotiate for the best deal that you can. On any given day, lenders and brokers may offer different prices for the same loan terms to different consumers, even if those consumers have the same loan qualifications. The most likely reason for this difference in price is that loan officers and brokers are often allowed to keep some or all of this difference as extra compensation.

Generally, the difference between the lowest available price for a loan product and any higher price that the borrower agrees to pay is an overage. When overages occur, they are built into the prices quoted to consumers.

They can occur in both fixed and variable-rate loans and can be in the form of points, fees, or the interest rate. Whether quoted to you by a loan officer or a broker, the price of any loan may contain overages. Have the lender or broker write down all the costs associated with the loan. Then ask if the lender or broker will waive or reduce one or more of its fees or agree to a lower rate or fewer points. You’ll want to make sure that the lender or broker is not agreeing to lower one fee while raising another or to lower the rate while raising points. There’s no harm in asking lenders or brokers if they can give better terms than the original ones they quoted or than those you have found elsewhere. Once you are satisfied with the terms you have negotiated, you may want to obtain a written lock-in from the lender or broker. The lock-in should include the rate that you have agreed upon, the period the lock-in lasts, and the number of points to be paid. A fee may be charged for locking in the loan rate. This fee may be refundable at closing. Lock-ins can protect you from rate increases while your loan is being processed; if rates fall, however, you could end up with a less favorable rate. Should that happen, try to negotiate a compromise with the lender or broker.

Remember: Shop, Compare, Negotiate

When buying a home, remember to shop around, to compare costs and terms, and to negotiate for the best deal. Your local newspaper and the Internet are good places to start shopping for a loan. You can usually find information both on interest rates and on points for several lenders.

Since rates and points can change daily, you’ll want to check your newspaper often when shopping for a home loan. But the newspaper does not list the fees, so be sure to ask the lenders about them. Don’t be afraid to make lenders and brokers compete with each other for your business by letting them know that you are shopping for the best deal.

Fair Lending Is Required by Law

The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, age, whether all or part of the applicant’s income comes from a public assistance program, or whether the applicant has in good faith exercised a right under the Consumer Credit Protection Act.

The Fair Housing Act prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin.

Under these laws, a consumer cannot be refused a loan based on these characteristics nor be charged more for a loan or offered less favorable terms based on such characteristics.

Credit Problems? Still Shop, Compare, and Negotiate

Don’t assume that minor credit problems or difficulties stemming from unique circumstances, such as illness or temporary loss of income, will limit your loan choices to only high-cost lenders.

If your credit report contains negative information that is accurate, but there are good reasons for trusting you to repay a loan, be sure to explain your situation to the lender or broker. If your credit problems cannot be explained, you will probably have to pay more than borrowers who have good credit histories. But don’t assume that the only way to get credit is to pay a high price. Ask how your past credit history affects the price of your loan and what you would need to do to get a better price. Take the time to shop around and negotiate the best deal that you can.

Whether you have credit problems or not, it’s a good idea to review your credit report for accuracy and completeness before you apply for a loan.

To order a copy of your credit report, just one click http://www.extramortgages.com/category/mortgage-broker/

Mortgage finance in sub-Saharan mortgage

A growing acceptance of personal debt as a way of meeting spiraling aspirations is driving the penetration of retail financial services into sub-Saharan markets.

For decades, the only way to fulfill the dream of home ownership in much of Africa has been to buy a house outright, making it a luxury reserved for the very rich. Most people build their houses incrementally, buying a component if and when they have enough cash to do so. Acquiring a plot of land and laying the foundation alone can take years and many houses exist in a perpetually unfinished state.

Excepting South Africa, the sub-Saharan mortgage market has been virtually non-existent up to a few years ago. Increasingly, populations in a number of sub-Saharan countries are being introduced to the concept of funding their lifestyles through debt. As formal personal financial services become more widely accepted on the continent, mortgages are now becoming an attainable reality for growing numbers of Africans. Yet despite optimism about the transformational potential of home ownership, few of these products truly extend below the well-heeled segment of society.

Scarcely discussed outside of South Africa a decade ago, mortgage products are now being aggressively rolled out in an attempt to capitalise on pent-up demand for financial services. Uganda and Kenya have proven to be fertile ground, where Standard Bank’s home loan services are accessible through their subsidiary, Stanbic. Barclays Kenya and Standard Chartered are also active across the region. The latter now offers mortgage products in Ghana, Uganda, Tanzania, Zimbabwe and Botswana. The eagerness to lend to consumers is shared by local banks, such as Skye Bank and Diamond Bank in Nigeria, which marks an evolution from their historical role, which amounted to little more than the recycling of deposits into short-term government bonds.

“If you look at the banking industry, whether it is in Kenya, Morocco or Nigeria, the next big thing is really consumer lending,” says Stephane Bwakira, portfolio manager at Stanlib, Standard Bank’s asset management arm. The modernisation and reform that has re-invigorated Africa’s banking sector in recent years is forcing banks to find alternative ways to deploy their capital, he argues. “The loan books are 80-85 percent commercial, versus 10-15 percent on the retail side. Obviously, with highly capitalised banks in a lot of countries, such as Nigeria, all fighting for the same business in the corporate space, the only place where they will actually maintain a good net interest margin and make good money is with the consumer.”

Sustained economic growth

Sub-Saharan Africa’s nascent personal finance markets are being fuelled by the sustained economic growth that underpins the development of the rest of the banking sector. High commodity prices, relative political stability and economic reform in the region have seen average annual growth rates in excess of 6 percent, and the International Monetary Fund expects the region to grow at an average rate of 6.4 percent in 2008. Economic success has manifested itself in the emergence of a middle class and increasing numbers of educated professionals from the diaspora returning to the continent. As more people enter the formal economy, the market for personal finance is seeing ever greater demand.

“It’s all about better economies,” exclaims Dominic Adu, the CEO of Ghana Home Loans. “The story is the same across Africa. Incomes are growing and…people feel a lot more confident to take on loans to buy their homes.” Ghana Home Loans operates under the supervision of the Bank of Ghana and its shareholders include South Africa’s Standard Bank. Mr Adu has high hopes for consumer borrowing in sub-Saharan Africa, and says that changing peoples’ perception of debt is an important step. “That is the first barrier. They perceive debt as a negative thing because they don’t understand the product. Once they become comfortable that debt is not something to be ashamed of, debt does not mean you’re going to be jailed, that you lose your livelihood, and that these institutions are there to help you overcome these concerns, they are happy to borrow.”

He is convinced that personal finance has the potential to transform African society. “It is still in its infancy but there is no doubt about it. We are seeing people who didn’t have any loans suddenly having a car loan, a television loan, a fridge loan and so on.”

Cross-selling potential

Friedemann Roy, director of the International Finance Corporation’s Africa Housing Programme, points to the broader potential of mortgage lending. “When you have a borrower, he stays with you for a couple of years. That allows you to not just give a housing loan but to sell life insurance, a current account and other savings products.”

According to Mr Roy, mortgage lending in Ghana increased from $2.4m in 2002 to $44.1m in June 2008, and there are signs that the customer base is widening. Since its inception in 2006, Ghana Home Loan’s average loan cost has dropped from $150,000 to $35,000. Yet even at these prices, mortgages remain out of reach for much of the country’s population. A $35,000 home loan is still around 35 times Ghana’s average household income.

by By Lanre Akinola

 

How to get a cheap personal loan

Do you know you can bargain with your bank to get a cheaper personal loans? Do you know what factors banks consider before they actually give you the money?

What are the charges you pay when you try to pay off your loan before the due date? Is the prepayment fee imposed on the balance outstanding or on the entire loan amount?

Is there a maximum rate beyond which banks cannot charge you on that personal loan?

What should the gap between disbursement of money and the date on which you make your first EMI payment be?  

Mortgage Markets in Asia

Over the past decades, mortgage markets have developed from a fairly primitive form to a rich and complex institution. Mortgage markets are no longer only a place in which borrowers meet lenders for the purpose of financing real estate transactions, but an arena in which innovative financial instruments exchange hands in huge masses on a daily basis, where banks are compelled to tightly manage the associated risk, where governments are often highly involved and use the ground for implementing and promoting their social and economic policies, etc. Moreover, frequently, the economic development of a local mortgage market is often a seismograph for the level of institutional development of the entire local economy.

While the mortgage markets in the United States and Europe have been studied extensively by academics and other researchers around the world, markets outside the U.S. and Europe generally gain much less attention. Particularly, the structure and other institutional aspects of the mortgage markets outside the U.S. and Europe attained a very limited focus.

Introduction

Asia as the largest continent accommodates 61% of the world’s population according to the 2005 World Development Indicators database, World Bank. The East Asia and Pacific (including China, Indonesia, Malaysia, Thailand) is the largest of the World Bank’s six developing regions and the fastest growing region in the world. However, the rapid economic growth does not see a commensurate development in infrastructure. South Asia (including Bangladesh, India, Pakistan and Sri Lanka) has the lowest GNI per capita (US$510) and economic growth in recent years is underpinned by growth in India.

It is widely recognized that the Asian region has made significant economic progress over the past decades (e.g. the four Asian tigers in the 1980s; China and India in the 1990s).  However, the transformation of a predominantly rural region into an urbanized dwelling form is equally remarkable. It is estimated that 31% of the population in Asian countries currently resides in urban regions. This percentage is estimated to increase to more than 50% by 2030 (CIA World Factbook 2003-4; see Exhibit 1). This transition brings into sharp focus the issue of housing finance for low and middle-income families. The Asian Development Bank (ADB) fully recognizes the issues surrounding housing finance. In fact, one of the key ADB initiatives is to promote affordable housing for low and middle-income families. This is part of several new initiatives formulated by ADB in response to the needs of the private sector in developing member countries. See Bestani and Klein (2004) for a good exposition of the housing crisis in Asia.

The focus of this study is not on financing for low income housing, but on mortgage financing for middle-income housing that is market-driven rather than government-subsidized. The heterogeneity of Asian countries derives from cultural, historical and religious underpinnings. The scope of this blog is defined more narrowly to focus only on the following countries: China, Hong Kong, India, Korea, Malaysia, Singapore and Vietnam. By so doing, we hope to provide a good representation of the political, historical and religious differences for readers to appreciate the diversity of mortgage markets in Asia. In addition, Hong Kong as a special administrative region of China and Singapore are included since these two countries are among the top four countries (including small countries) by density according to the CIA World Factbook (2003-4).

We will focus on the types of mortgages available in these countries, size of the mortgage markets (if available), interest rates comparison, origination requirements, and perhaps most interestingly, the unique features relating to these mortgage markets. In addition, only residential mortgages will be examined. This paper will also highlight experiences in as well as the potential for mortgage securitization.

At this juncture, it is worth noting that there exist many useful sources of information on the internet. A Yahoo search using key words Asia housing finance mortgage yielded 278,000 hits.

2.         Overview of Mortgage Markets in Asia

2.1         Size of Mortgage Markets

Exhibit 2 shows the size of the mortgage markets in selected Asian countries. It is clear that China, being the largest country in Asia, has the largest mortgage market, estimated at US$1670.7 billion (13,800 billion RMB) as of June 2004. Japan, being a developed country, has the second largest mortgage market among the selected Asian countries. Yet, the size of the Chinese and Japanese mortgage markets are small in comparison with the US and UK mortgage markets. In addition, we see that the mortgage market in China is relatively small compared to the population size, and in comparison with the mortgage market in Hong Kong. This can be attributed to the emerging status of the mortgage market in China. As we will see later, the China residential property market was liberalized only very recently. Nonetheless, the potential for growth in Asian mortgage markets, especially for China and South Korea, is immense. This implication is underscored in Exhibit 3 where we see that the mortgage markets expressed as a percentage of GDP, are relatively small, especially for South Korea and China.

2.2         Origination Requirements

The most common types of mortgages in the selected Asian countries are adjustable rate mortgages (ARMs) and fixed rate mortgages (FRMs). However, only ARMs exit in China. The typical origination requirements for mortgages (Exhibit 4) show that the maximum loan to value ratio (LVR) ranges from 70% to 80%. Vietnam has a lower LVR of 50% while the LVR can be extended to 85% in India. The requirement for an appraisal evaluation is normal practice, except for Vietnam where there is no clear distinction between personal and mortgage loans. In China, an appraisal report is also a norm these days.

The maximum mortgage term ranges from 20 years in India, Indonesia and South Korea to 30 years in China, Japan, Malaysia and Vietnam. The term can be extended to 32 years in Singapore. See Exhibit 5.

Banks also impose a payment-to-income ratio in mortgage evaluation. The range is very wide, from as low as 33% for Indonesia to as high as 75% in Vietnam (see Exhibit 6). As we will see, the banking practice for Malaysia and Indonesia follows Islamic banking regulations. Vietnam is interesting in that although the maximum LVR is only 50% (or at most 60% in some cases), the payment-to-income ratio is very high. This is not surprising given the relatively low income levels in the country. The payment-to-income ratio for Singapore is relatively low 40%, but this does not include payment from compulsory pension-fund contributions.

Prepayment penalties are typically imposed by banks, although there is a wide variation in practice.

2.3         Mortgage Rates

As expected, the interest rates for FRMs are usually higher than that for ARMs. Exhibit 7 shows the ARM interest rates for the selected Asian countries. The mortgage rate for Vietnam is the highest at 9.5% (India has the second highest rate of 8.5%) while Japan has a very low mortgage rate of 2.375%. Such extremes are not surprising given the different economic environments in these countries. The short term rate in Vietnam is 4.80%. In contrast, the short term rate for Japan is only 0.011%.

A more interesting study will be to examine the mortgage yield spread, defined as the difference between mortgage and short term interest rate. As evident in Exhibit 7, Hong Kong has a very low mortgage yield spread. This is because of the relatively stable interest rates due to the currency peg, as well as a competitive mortgage market. The mortgage rate in Hong Kong is currently about 2.5% lower than the prime lending rate. Interestingly, the mortgage yield spread in Japan, South Korea and Singapore are higher compared to Hong Kong. We also note that the mortgage yield spread in Vietnam, India and Malaysia are relatively high at more than 3%. A study of the mortgage yield spread and relating that to country and currency risks, liquidity premiums, cost of funds and institutional differences would be an interesting follow-up. For the more developed markets, the mortgage yield spread provides the necessary yield enhancement to promote mortgage securitization.

3.         Unique features

It has often been said that institutional differences are particularly important when studying Asian countries. This is true for mortgage markets as well. In this part of the paper, we highlight some unique features of the markets to highlight the cultural, historical, religious and institutional differences. An in-depth examination of the unique features is, however, beyond the scope of this paper.

 

3.1      China

Prior to 1999, most of China's urban populace lived under the welfare housing system in which the government provided essentially free housing for urban residents. Employees from government agencies, academic and public institutions, state owned companies, received allocated housing from the government or their work units.

A series of housing reforms were introduced in March 1998 to stimulate the domestic economy. Subsidized housing traditionally available to Chinese workers would be phased out and that workers would be encouraged to buy their own homes or pay rent closer to real market prices. The reforms provide for employees to use their savings, along with the one-time housing subsidies they receive, to purchase their own houses. In addition, all vacant residential housing units built after January 1999 were for sale rather than for allocation. These policy changes turned out to be watershed events for the private housing market in China.

China-Window.com reports that “China's real estate development in 1999 was estimated at RMB $401 billion (about U.S. $48.43 billion), up 10% from a year ago. The total investment in the real estate sector hit 374.4 billion RMB (about U.S. $45 billion) by the end of 2000. In terms of floor area, 410 million square meters (4.41 billion square feet) of residential housing were built in 1999, an increase of 19.6 percent YOY.” According to China Securities, an estimated 486 million to 549 million square meters (5.23 billion to 5.91 billion square feet) of new residential houses will be built every year over the next two decades. 2000 witnessed a 17% YOY increase in housing construction, a 44.5%increase in housing purchases.

Xie Jiajin, the director-general of the Department of Housing and Real Estate in the Ministry of Construction, reported in the January 2001 National Housing Reform Conference, that over 80 percent of the allocated public housing in China have already been sold to workers or employees. A new property ownership structure dominated by the private ownership along with other types of ownership forms has taken root in China.

More recently, Liu Tinghuan, Deputy Governor of the People’s Bank of China noted that “the outstanding balance of property development loans rose to RMB665.74 billion yuan in 2003, or 3.2 times of 202.89 billion yuan in 1998. Personal housing consumption (mortgage) loans grew rapidly likewise, by RMB1135.36 billion yuan or 26.64 times during 1998-2003, accounting for as high as 75-97 percent of consumer credit.”

A study completed by the Sino monitor and the British Market Research Bureau (BMB), indicated that “from 1999 to 2000 the percentage of homeowners in China urban areas rose nearly 10 percent, from 49.9 percent to 59 percent. As such, it is evident that the housing reform in recent years has boosted home purchase and construction in China.”

A consequence of the rapid development in the 1990s is the diminishing role of State-Owned Enterprises (SOEs). In 1994, all the top 100 Chinese developers were SOEs. However, only 40% of top 100 Chinese developers are SOEs in 2004. Private real estate developers account for 42% of the firms; and Sino-foreign joint ventures, 18% (Business Weekly).

Another interesting feature of the housing market in China is the provident fund scheme in some cities. The public reserve fund management department (also called as Provident Fund Management Centre) is quite similar as CPF in Singapore. It does not have a long history. The detailed regulations (eg. the required percentage) vary across Chinese cities.

Home buyers can take housing loans on authorization granted by the bank on the authorization of the public reserve fund management department, according to the prescribed requirements, and with the public reserve deposits as the source of funds (Bank of China). Employees may take loans from the housing provident funds (Zufang Gongjijing) if their companies or work units are participants of the funds. The fund allows employees to contribute four to eight percent of their salaries into the fund. The employers then pay a matching five percent of payroll. The interest rate in the provident funds is usually lower than those offered by banks (Ye, 2004).

As a consequence of the recent developments, a recent survey shows that about 59% of the urban residents in China now own their own homes (China Economic Times, 2000).

The growth in the mortgage market in China mirrors that for construction. In 1998, the total value of outstanding mortgages is about 427 billion RMB (US$51.7 billion). By the end of 2003, the value is more than 1,2000 billion RMB (US$1,452.8 billion). Up till end June 2004, the total value of outstanding mortgages increased to 13,800 billion RMB (US$1,670.7 billion). The year-on-year rate of increase from 1999 to 2003 is 218.6%、148.72%、65.77%、47.71& and 42.46% respectively.

3.2      Hong Kong

The mortgage market in Hong Kong is one of the most developed in Asia and Hong Kong has a strong British heritage. There are two interesting features.

Mortgage Insurance Program

If a mortgage loan amount exceeds 70% of the appraised property value or the current market value (whichever lower), a borrower would be required to join the Mortgage Insurance Program (MIP). This allows banks to offer up to 95% financing. 

In March 1999, HKMC launched MIP to promote home ownership in Hong Kong. The MIP aims to reduce the down payment of homebuyers without exposing the authorized financial institutions to additional credit risks. Under the MIP, the HKMC provides mortgage insurance coverage at a fee to the financial institution for an amount up to 25% of the property value. Thus, this allows banks to offer advance mortgage loans of up to 95% without taking additional risk.  The HKMC is able to do so by taking out reinsurance with approved reinsurers.

Top-up mortgage provision

Mortgage documents in some Asian countries (Hong Kong, Japan and Singapore) are commonly written with a provision to cushion the default risks by allowing banks a wide leeway to request for a top-up when they are uncomfortable with the security margin in relation to the outstanding loan. However, banks in Hong Kong and Singapore exercise this top-up clause very sparingly.  Interestingly, banks rarely take action when the value of the property falls below the mortgage outstanding as long as the mortgagor continues to service the loan. This suboptimal exercise of the option is motivated by the fear that the bank’s action of demanding for the mortgage top-up may lead to borrower’s default on the mortgage. On the other hand, a lack of action actually exacerbates the negative equity problem when property prices continue to fall. When a default occurs subsequently, the losses for mortgagors and mortgagees could be higher. A recent paper by Lai, Ong and Sing (2004) examines this issue in some depth.

3.3      Korea

The Korean housing market has a very unique system, called chonsei, whose literal meaning is ‘total rent.’ In the chonsei system, the tenant pays an upfront lump-sum amount of deposit (currently 30 to 70 percent of house sales prices) to the owner for the use of the property with no additional requirement for periodic rent payments. The interest earned on this lump-sum deposit, therefore, provides income to the owner during the contract period (typically two years). The deposit is then returned to the tenant when the contract expires, otherwise the owner is in breached of contract and the Korean legal system grants the tenant a right of full control over the property until the owner returns the deposit. That is, the deposit money of tenant is legally protected as an asset that can be claimed against the collateral value of the property.

It was during the Korean conflict, when many of the national housing stock and economic infrastructure are being destroyed, had caused the Korean government to make restrictions to the housing finance market so as to channel credit into the industrial sector for several decades. Hence, only until the mid-1990s, homeownership opportunities financed via mortgage loans was possible to most households in Korea. This chonsei system has been widely spread in Korea, with the rapid urbanization for the last few decades. According to the Population and Housing Census Report (2000), the total number of households in Korea is 14.31 million, out of which 7.75 million (54%) are homeowners and 4.04 million (28%) are under chonsei contracts (the remaining households are under monthly rents).

The chonsei system works in a way that effectively allows owners to leverage their investments by pulling out significant deposits that are then used to purchase additional properties. It also allows owners to skirt government rental price controls and ownership restrictions. The chonsei contract wipes out the likelihood of tenant’s default on the rental payment as the deposit is maximized till periodic rents are zero. Generally, chonsei is a popular housing system for middle-class households as it meets the financial needs for both landlords and tenants.

In the view of the landlords

• The chonsei is regarded as an informal financial instrument which satisfies many household credit demands.
• Able to use the chonsei deposits to fund other investments e.g. real estate purchases or capital for businesses.

In the view of the tenants

• As long term mortgage loans are not widely available in Korea, chonsei becomes the tool of building equity for buying a house.
• They can gather small amount of chonsei deposits to large amount of chonsei deposits until the accumulated deposits are enough for procurement of home.

3.4      Malaysia

Islamic banking is a banking activity that is based on Syariah principles. Under the Syariah principles, the payment and receiving of interest is not allowed. Instead, it encourages profit sharing when conducting banking related business. The financing of home mortgages are usually based on Bai' Bithaman Ajil (Deferred Payment Sale). This refers to the sale of goods (property in this case) at a price that includes a profit margin. This profit margin would have to be agreed upon by the parties involved.

Housing Financing-i

Housing-Financing-i is a Syariah-based financing package to finance the purchase of all types of residential properties including houses, flats, apartments or condominiums. The following discussion will look at the differences between Housing Financing-i and a typical conventional financing package.

Islamic Banking Institutions focus on profit margin while Commercial Banks focus on interest-rate. Profit margin is not subjected to fluctuations in interest rates while interest rate usually comprises of a Base-Lending Rate (BLR) and adjusted accordingly by different banks.

Takaful (Islamic insurance) coverage is offered only in Housing Financing-i. There are two types of Islamic insurance coverage, House owners Takaful Plan and Takaful MRTA (Mortgage Reducing Term Assurance). The former          provides coverage for your property against loss or damage caused by perils such as flood, fire, earthquake, hurricane and explosion and the latter provides for full settlement of your outstanding balance of the house financing-i with the Islamic banking institution, in the event of your total permanent disability or death. For most of the Housing Financing-i packages, Islamic Banking Institutions can arrange for the contributions to insurance be included in the monthly installments, reducing the hassle on the part of the borrowers to make separate payment.

3.5      Singapore

The unique feature for housing finance in Singapore is the role of the mandatory saving scheme, Central Provident Fund (CPF). The majority of the home purchases in Singapore is financed through the use of Central Provident Fund (CPF). CPF was introduced in 1 July 1955 as the national funded pension scheme by the Colonial British Government. While the CPF retains its primary role as a pension fund for the past 45 years, its functions have been expanded to include funding for medical expenses, as well as for financial and property investments. Since the relaxation of the CPF regulation to allow residential property purchase in mid 1970s for public housing and early 1980s for private property, the total amount of withdrawals for housing has increased by about 14 fold in its peak in 1999 as compared to 1981. The scheme is thus very successful in promoting home ownership whereby 92% of the Singaporeans own a home as at 2000 (Census, Singapore, 2000).

Over the two decades since its relaxation of the CPF regulation on home purchase, the amount of CPF withdrawn for housing has been the highest among the other withdrawal types, on the average of 61% over the total amount of withdrawal from all types from 1981 to 2001. As CPF is solely meant for retirement, the housing market in Singapore is heavily regulated by the government with such relaxation of the regulations on the usage of CPF. Thus, the regulations governing the usage of CPF funds are constantly fine-tuned to stabilize the housing market. Since CPF is the main source of property financing, the implementation of any new CPF measures and policies will likely affect the affordability and mobility of many potential home buyers (Neo, Lee and Ong, 2003).

Singapore home ownership is well segmented into private homeowners and public home owners. The public home ownership sector is the dominating sector accommodating 81.3 percent of total households from low income to upper middle income groups. The public housing is strictly under the authority of the Housing Development Board (HDB), which covers duties such as housing production, housing management, housing finance and formulation of housing policies. Over the past forty years, the public housing sector has been heavily subsidized, in terms of construction costs, financing costs and land costs. The public home ownership sector is divided into three sub-sectors: the public new housing sector, the HDB resale market and the HDB executive condominium market. In the new housing market, the dwellings are newly built and are sold at subsidized price. Accessibility to the sub sector is restricted by HDB regulations. In the resale market, the average dwelling age is 14 years, and the resale flats have higher selling prices as the prices are determined by market forces. The HDB executive condominium market was first developed in 1996 to provide high quality public condominium, and the price is determined by both the market and the government. Although the latter two markets are free markets, entrance to them is limited.

The private owner occupier housing market accommodates less than 10% of the total number of households. However, it is expected that the share of households will increase in the future.  This is indicated by the rising private housing stock, which increased from 14% in 1989 to 18.1% in 1999. The rising trend reflects the Government’s long-run planning embodied in the 1991 Concept Plan that aims at increasing the private housing stock to 30%. The private sector receives little subsidy from the government and thus is less regulated.

Similarly, there are two financing systems in Singapore: the HDB public finance sector and the commercial finance sector. HDB flats owners can enjoy the subsidized mortgage rates provided by HDB public financing system if they are eligible for the subsidized loans. Under the current regulations, HDB can grant a subsidized loan to first time homebuyers and also to second time homebuyers who upgrade to another HDB flats. The private home owners and homeowners who do not qualify for the subsidized loan will, however, have to secure their financing from banks and financial institutions. 

Besides borrowing from the banks and financial institutions and forking out cash to pay for the house, home buyers can also use the CPF to finance their purchase. The CPF is the Singaporean’s s social security system, providing pension, medical care as well as other schemes. It is mandatory for the employee and his employer to contribute monthly a certain fraction of the employee’s monthly salary to the fund. The homebuyer can draw from his accumulated monthly contributions in his/her CPF ordinary account allowable for home purchases to pay a lump sum upfront to finance the purchase and he can also draw his monthly CPF contributions to the ordinary account to finance the mortgage payments. In this paper, CPF saving is used to refer to the accumulated monthly contribution in CPF account that can be used for home financing.

As it turns out, changes in CPF rules for property financing have significant implications and effects on the property market and prices (Ong, 1998; Ong, 2000). Also, the financing for public HDB flats are now undertaken by commercial banks rather than provided by HDB, making the two segments increasingly integrated (Ong and Sing, 2002).

3.6      Vietnam

Vietnam is a developing country and the mortgage market is very small as mortgage loans for homebuyers are not very common. There is no private ownership of land in Vietnam. In accordance with the “Constitution”, the “Land Law” states that all land is the property of the people, and is subject to exclusive administration by the state. The government would then grant the rights to use land to its people by allocation or by lease. Foreigners, on the other hand, are only entitled to lease a land for no longer than 50 years.

Mortgages are offered mainly by foreign commercial banks although VietComBank, a state-owned bank also offers mortgages. Because of the lack of land ownership, the property rights (for foreigners-the leasing rights) will be pledged to the bank.  While both ARMs and FRMs are offered, 87% of mortgages are ARMs. The maximum loan-to-value ratio commonly and presently applied is 50%. However, a rarely approved ratio of 60% may be applied on the conditions that there are extremely good and visible supporting financial conditions of the applicant. This ratio is relatively low when compared to ratios of 80 – 90% in developed countries. This is due to the fact that they are subjected to a higher degree of risk when lending to borrowers in Vietnam, as there are inadequate forms of security to protect their interests in the event the borrower defaults.

The applicant’s debt to income ratio must also not exceed 75%. This means that his debts, which will include monthly bills, leases, outstanding credit, can only amount to 75% of his monthly income or he/she will not be applicable to take up the loan.

Another interesting feature of mortgages in Vietnam is that there is an interest rate ceiling of 10.2% p.a. to protect borrowers.

4.         Mortgage Securitization

Mortgage securitization in Asia became the focus of attention in the aftermath of the Asian financial crisis. Real estate bubbles and excessive lending have been suggested as the contributing causes for the Asian financial crisis in 1997 by both the International Monetary Fund (IMF) (Collyns and Senhadji 2000) and by academic authors (Quigley, 2001, and Krugman, 1988). The high exposure of commercial banks and finance companies to real estate related loans appears to be connected to the financial and currency market crises in these Asian countries in 1997. When the price bubble burst in mid-1997, non-performing loans of financial institutions reached a critical level following a sharp decline in asset prices. The inability of the borrowing institutions to liquidate their long-term loan assets to meet bank calls of loan repayment seriously disrupted the financial stability of many East Asian countries in 1997.

The over reliance of households and corporations on bank loans for real estate purchases was one of the key factors underpinning the real estate bubble in the Asian markets. Various measures have been advocated to strengthen bank lending and to restrict the banks’ lending to the real estate markets. The creation of the Real Estate Investment Trust (REIT) vehicle is one policy recommendation intended to provide an alternative source of financing for the real estate sector (Collyns and Senhadji 2000). Securitizing mortgage loans has also been identified as a possible way to improve bank liquidity, and more importantly to enforce greater discipline on bank underwriting and lending evaluation standards (Quigley, 2001).

In Korea, the development of a secondary mortgage market has received the strong endorsement of the Korean government in the post crisis period. The Mortgage-Backed Securitization Company Act and the creation of the Korea Mortgage Corporation (KoMoCo) in 1999 have paved way for an active mortgage securitization market in Korea.

In Japan, the introduction of the MBS has also been a recent phenomenon. The Japanese secondary mortgage market commenced in the same year as Korea facilitated largely by the introduction of the Law on the Securitization of Specified Assets by a Special Purpose Company (SPC) laws, enacted in 1998 and amended in 2000. The first Residential Mortgage Backed Securities (RMBS) of US$450 million were originated by Sanwa Bank in May 1999. A more positive signal of the MBS growth potential was through the issue of the first AAA-rated MBS of US$470 million (JPY50 billion) by the Government Housing Loan Corporation (GHLC) in March 2001. The GHLC is the largest residential mortgage lender in Japan with a market share of 37%. It has planned to issue up to US$7.5 billion (JPY 1 trillion) of RMBS by year 2005 (Mizuho Securities, 2002). Strong growth potential in the securitization of the residential mortgages would come from the mortgage pools of commercial banks.

Active MBS market activities have also been observed in Hong Kong and Malaysia. Government sponsored agencies like Hong Kong Mortgage Corporation (HKMC) and National Mortgage Corporation (CAGAMAS) have been established to spearhead the development of MBS markets in Hong Kong and Malaysia respectively. In other Asian countries like Thailand, Indonesia and Singapore, the development of MBS has, however, been slow and lagging with no publicly traded MBS markets at this time.

 Conclusion

The mortgage markets in Asia provide interesting study – while on the one hand, many Asian countries face a daunting task of housing their underprivileged urban population, the lack of infrastructure development and high unemployment. On the other hand, rapid economic growth in some countries has transformed the urban landscape of many cities, and created huge growth in housing and mortgage markets.