A Friend Indeed

[Miks11]

Your expert comments, Kubes? Kind of makes sense that banks will accommodate, to the extent they can, to help home owners. Does not get into the tricky DPS area, though, where the question is not of repayments, but of loan disbursements at vastly lowered valuations.

A friend indeed
January 13, 2009 Tuesday, 10:31 AM
Goh Eng Yeow on DBS' move to help home-owners with their instalments.
LAST Monday, I wrote a Cai Jin column raising the possibility of banks bringing back interest-payment only loans for home borrowers who may have problems servicing their mortgages, as the economic gloom deepens.
In the column, I had recalled how DBS Bank came to the rescue of the rescue of cash-strapped Singaporeans by offering them a loan package which allowed them to pay only interest for the first three years.
To many people, the home is their most important asset – the nest where they spend their lives in matrimonial bliss and raised their families. It is not surprising to find the enormous sacrifice they are willing to make, in order to keep their home.
After so many years, I can still recall my parents saving a dollar here and a dollar there to ensure that they had sufficient money to pay off their monthly HDB instalments.
When it came to my turn to own a flat, I found myself doing the same thing. I did my sums to make sure that I had sufficient cash and CPF to pay the monthly housing instalment.
For much of last year, Singapore had been fortunate to escape the full fury of the global financial crisis that had inflicted heavy wounds on bigger economies such as the United States and Britain.
But since late last year, the business climate has turned noticeably chillier and the prospects of more job losses is mounting.
For the middle class, as writer Seah Chiang Nee described in an article last week, the biggest challenge is how to ride out the storm.
Unlike unemployed Indonesians or Thais who can leave for the countryside and live off the land, a jobless Singaporean, who has little or no financial safety net, has no hinterland to escape to.
It is against this grim backdrop of people tightening their belts and wondering where they can get the extra cash to put into their pockets that I got a call from DBS Bank late last week.
They would like to discuss the points raised in my Cai Jin column.
I met Mr Jeremy Soo, the head of consumer banking and Mr Koh Kar Siong, the head of secured lending from the bank yesterday.
Mr Koh assured me that the last thing DBS wants to do is to repossess the flats of home-owners who defaulted on their payments.
What is the point of taking the flat and trying to sell it? It would only dampen the property market further, he said.
The bank would like to help cash-short home-owners to vary the terms of their loan agreement to tide over this difficult period.
And the bank has a battery of options to help borrowers – interest-payment-only scheme for six to 18 months, extending the tenure of the loans for younger borrowers and etc.
The point is to communicate the bank’s desire to help its customers.
I suppose that this is a message which financially-strapped home-owners would like to hear. But no one will get to hear it, unless the bank specifically comes out to say so.
Many cash-strapped borrowers are probably in the dark as to what to do. Should they wait for the last drop of CPF money to dry up before they confess to their cashflow problems ? By then, it may be too late.
On its part, the bank will also have a trying time.
Because of the manner in which our monthly instalments are automatically deducted from our CPF and bank accounts, it has almost no contact with the borrower. There is no way it can tell if any home loan is in danger of defaulting, until the payments stop coming.
Imagine the shock it would have, if it suddenly gets a large number of defaults on monthly instalments, simply out of ignorance ?
I hope that other banks will take the cue from the DBS and encourage cash-strapped customers to open up as well. Don’t wait till the loan turns sour, before acting.
As I have noted many times, we will swim or sink in this financial crisis together.
What a bank can do is to make sure that the umbrella is extended to keep the borrower safe and dry, as the financial storm lashes our shores.
It will give a fresh meaning to the old saying: A friend in need is a friend indeed.

[Kubes.SG]

Really, don't think I am qualified to comment on SG banks as I only park my SG income with them, and get ripped off with low interest rates, high transfer charges, etc.

That said the whole concept of banks becoming charities, and using their shareholders assets and income to support Singaporeans who legitimately or illegitimately declare themselves to be financial stressed seems to be highly troublesome.  Sure we see Govt's everywhere donating taxpayer funds to help others (usually big biz, not the small-fry), but I have not heard of listed Companies diverting shareholder assets/wealth to their poor and incompetent customers.

The cynical side of me wonders how a journalist can create this momentum.  He has the idea, writes about it, bank calls him in so he can explain to them how to do it, and they decide to become a charity.  What an effing joke.  If this is for real, who is pulling the strings?

Finally, this seems to be to protect HDB flat buyers, rather than those who over-committed on borrowings to play in the SG 2007 prime property bubble.  I thought that it was generally HDB who made most loans to HDB buyers, so I am not sure how significant DBS' is at risk.  But hey, why not use the journo to get some positive PR spin.

[two points]

In a normal country banks don't become charities, Singapore is not a normal country and it wouldn't be hugely surprising if they were being leant on.

Second the point about further depressing prices is not unreasonable.  If the scale of the issue is very large and in low volume re-possessing and unloading properties could significantly move prices further down and that is not in the banks interest.

[Kubes.SG]

Yeah.  In a normal country people actually get to own property, rather than rent it from the Govt for 99 or 999 years.  So these poor people are not really owners anyway.

[Hey]

Kubes, the journo is not creating the idea nor is he the one that came up with the concept.  As he mentioned in the article, it was a scheme that was previously available.  My guess is that the bank was already toying with the idea of re-introducing an interest payment only scheme and, like you mentioned, since the papaers wrote about it, might as well use the opp for free publicity.  In the current economic climate, this scheme does seem to work in the interests of everyone... definitely not a case of charity.

[Vulcanl]

“…this seems to be to protect HDB flat buyers, rather than those who over-committed on borrowings to play in the SG 2007 prime property bubble.  I thought that it was generally HDB who made most loans to HDB buyers, so I am not sure how significant DBS' is at risk…”

HDB lends (at very favorable terms) to first time buyers, the resale HDB market is servived by all the other banks

This is all very consistent with what I have stated, namely that the gov't will not let the HDB market collapse

[.....]

So what exactly is the difference between 999year leasehold property and freehold property?

[Charity Indeed?]

An interest-only loan is hardly a charity.  The principal remains unaffected so the "normal" loan repayment has to happen at some later time.  I would think banks would be very keen on this!

[Got to ask!]

Comeon la, even in good times they offer interest only. You just got to ask!

Now instead of you asking, they tell you upfront!

The charity part is perhaps lowering the bar for approving loans. Nothing to do with interest only scheme.

[Vulcanl]

“So what exactly is the difference between 999year leasehold property and freehold property?”

Leasehold:   Theoretically you are renting it for 999 years
Freehold:   You own the property outright

Your next logical question is, what exactly happens after 999 years (or 99 years for that matter); Does the gov’t simply take over ownership of the property?  Are you compensated? 

I have asked this question of more than one RE agent here and no one ever gives me a straight answers (instead I get a lot of hemming and hawing).  Since the current iteration of Singapore is only 43.5 years old, no has ever been presented with the situation.

In practice, transacted prices of comparable private lease or free hold property do not differ very much

[.....]

Vulcanl,

To actually answer my own question, there is very little practical difference between freehold and 999 yr lease. Technically you do not own freehold land outright.  It is a form of tenure given by the state, though again, for practical purposes, you own the land outright.  This is also really the same for 999 yr leases.

The real difference between freehold and 999 yr lease is that it is easier for covenants, both positive and negative to be passed from purchaser to purchaser for leasehold land.  For freeholdf land the ability of restrive covenants to attach and follow a conveyance is more difficult.

And in answer to your question, at the end of the lease period, be ut 99 yr or 999 yr, the property will revert back to the lessor.

[Vulcanl]

Thanks for that.  When you the property reverts back to the lessor, is the lessee compensated in any way?

[....]

No compensation, the property simply reverts to the lessor.  Probably not something you need to build into a lease which will revert in the year 3007.  It does have an impact on 99 year leases, though in some countries, eg UK, there can be rights for leaseholders to buy the freehold.

99 yr lease does not necessarily mean cheap - the Grosvener estate land in London is all 99 yr lease and that is not a part of London that would be described as cheap.

[MrHttp]

The problem is also that until now it has never happened that the 99y lease has expired so nobody really knows what will happen. Some said it will be possible to extend the lease but all just guesses. In other words SG gov has pretty much free hands when the lease expires.