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Chinese Banks Lose a Mortgage Safety Net as Developers Slide Into Distress

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China is increasingly looking to banks to boost mortgage lending and boost a stagnant housing market. But there is a problem. Lenders are plagued with many mortgages that are at high risk of not being repaid during boom times.

Chinese property developers have created at least $300 billion in mortgage guarantees for pre-sold, partially constructed apartments in the past few years, according to regulatory filings. The real estate company has promised to cover interest and principal payments to the homebuyer’s bank if the borrower defaults before the apartment is completed and handed over.

What was seen as an invincible proposition now it’s a drag About Chinese banks. Dozens of real estate companies are in financial trouble, and mortgage guarantees are far from a sure thing. .

Mortgage originations in China dropped sharply this year. According to official Wind data, Chinese households took out $249 billion worth of medium- and long-term loans from January to July, down 55% from the same period last year. Mortgages make up the majority of such loans.

New home sales by China’s top 100 developers have fallen for the 14th straight month. It has fallen 47% in the first eight months of 2022, according to the China Real Estate Information Corporation, which provides industry data.

In August, China’s bank cut its mortgage benchmark lending rate by 0.15 percentage points to 4.3%, making it cheaper for homebuyers to take out loans.China was the second 5 year loan prime rate Cut this year.

Many developers struggle with liquidity issues and don’t have enough money to complete their real estate projects. Over the summer, a homebuyer who was dissatisfied with his more than 300 housing developments in cities across China stop paying mortgage If their apartment was not completed and handed over on time.

When a homebuyer defaults on a loan on an unfinished property, the developer who insured those mortgages is responsible for repaying the lender any unpaid interest and penalties on top of the outstanding mortgage.

“Banks are likely to be bigger creditors to developers than they were before,” analysts at debt research firm Creditsights said in a report in July.

China’s banks remain willing to extend mortgages, but homebuyers’ demand is weak and lenders are reluctant to take out loans from troubled developers, said Xujing Cheng, head of research at Jefferies’ China Financial Institutions Group. They say they don’t want to accept the warranty. “If developers are already in default on their public debt, they don’t have the funds to meet their guarantees,” she said.

About 80% of new home sales in the country over the last decade were partially built homes that developers promised to deliver in one to three years. The buyer typically pays his 30% of the purchase price of the property as a down payment and borrows the remaining 70% to start making mortgage payments immediately.

Chinese banks recently lowered the benchmark lending rate for home loans to 4.3%, making it cheaper for homebuyers to take out loans.


Photo:

Tingshu Wang/Reuters

Money from the down payment and mortgage was put into an escrow account that was supposed to pay for the construction of the building. This is made possible by the local government issuing pre-sale permits for projects that are only 25% of their planned construction completed.

Since the mortgages were initially not secured by the completed home, the Chinese developer provided a guarantee to the bank that would cover the interest and principal of the loan if the individual borrower defaulted while the building was in progress. I said I would pay. Many real estate firms describe this as industry practice in their regulatory filings, saying they are unlikely to incur any real financial obligations.

Once the home was completed and title transferred to the buyer, the warranty ended and the mortgage was secured by the completed home.

“The deal has been a long-standing problem simply because real estate is generally a good business and produces good returns for everyone,” said Rosealea Yao, senior analyst at Gavekal Dragonomics in Beijing. I couldn’t,” he said. “The bank facilitated the deal by not only providing loans to the homebuyers, but also by pre-funding the developers,” she added.

However, the lax enforcement of regulations on escrow accounts in China allowed Chinese developers to withdraw cash before the building was completed and use the funds to fund other activities.

Zou Linhua, a real estate researcher at the Chinese Academy of Social Sciences, said in an online post in July that homebuyers now risk not completing their apartments. In essence, the financing arrangement allowed developers to get free funding from homebuyers, he added.

There is a real risk that some housing developments will remain unfinished as the industry downturn has left some developers severely short on cash. In a worst-case scenario, about 50% of distressed developer projects could be stopped or delayed, and about 6.4% of China’s mortgage loans, equivalent to about $348 billion of loans, would be at risk of default. likely, S&P Global Ratings estimated in July. report.

S&P Director and Real Estate Analyst Edward Chan said:

write destination Rebecca Fenn [email protected]

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