Mortgagee Sale, Crisis or Opportunity?

I was monitoring the mortgagee sales in Singapore since last year as I believed the number of such sales will see sharp increase.

True enough, it was reported by Straits Times yesterday “Mortgagee sales spike as property curbs bite”. According to the article, there were 54 homes put up for auction in the first quarter as mortgagee sales.

auction-propertyYou may think this is small number, but this was a 22.7% increase over the last quarter of last year and a 200% increase compared with the same period last year when there were just 18 such listings.

What is Mortgagee Sale?

When the owner fails to make the mortgage payment on the property, the lender (the “mortgagee”, usually the bank) has the right to recoup the loan amount through exercising the powers contained in the mortgage contract.

Usually this is done through the power to sell the property. The bank will typically put the property in auction sale and sell it to the highest bidder, on the condition that the offer is above the “reserve price”.

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How many billionaires are there in Singapore?

According to Wealth-X and UBS Billionaire Consensus 2013, Singapore has 27 billionaires, which makes it the fifth biggest billionaire population in Asia and 18th in the world.

The typical Singapore billionaire is said to be mainly from the “finance, banking and investments sector” (I think they probably put real estate in investment because most of the billionaires here are in real estate), has at least a degree and is above 60 years old.

The study also shows that as of 2013, the total number of billionaires in the world has reached a record of 2,170, with Asia being the fastest growing region.

Interestingly, if you look at the Forbes List of Billionaires, you will notice most of the billionaires from other countries own some real business, be it telecom, software, supermarket, etc. Of course, you still have your stock genius Warren Buffett and some hedge fund managers.

forbes billionaire-list

This really makes wonder what are supporting the wealth of our society. In my recent article Why is the ease of Total Debt Servicing Ratio (TDSR) restriction disappointing, I said that people have started to forget the virtue of hard work in pursuing fast money.

They cannot be blamed because if we look around and try to identify the “wealthy people” in this small island, we see real estate, real estate and real estate.

Don’t believe me? Take a look at the Singapore billionaires below:


Unfortunately, the success of Singaporean billionaires gives people the false impression that property is the only way to go.

If you are trying to mimic the success path of these rich, you have to understand that the rich always guard their secrets tight, they amass their fortune not simply by flipping a property from one person’s hand to another like what most people believe, and they move their money fast.

Just keep an eye on what Li Ka-Shing is doing. ^_^

Why is the ease of Total Debt Servicing Ratio (TDSR) restriction disappointing

On Feb 10, 2014, The Monetary Authority of Singapore (MAS) announced to ease the restrictive Total Debt Servicing Ratio (TDSR) on certain property buyers.

What it says is that some of whose who bought a residential property before the TDSR measure (introduced on June 29, 2013) will be exempted from the TDSR threshold of 60% so they can refinance their house.

Why is this important to the home owners?

Mortgages in Singapore typically have a lower spread to the Singapore interbank offer rate (Sibor) in the first two or three years. Rates tend to spike from the fourth year dramatically. Due to the years of Quantitative Easing (QE) and low interest rate environment, refinancing is the lifeline for many property speculators. If they had to pay the high interest rate starting from the 4th year, many cannot afford the loan.

Under the original TDSR structure, home owners with debt levels close to the 60% TDSR threshold would be unable to refinance. Even if they can, mortgagees aged above 35 would be forced to refinance at a shorter loan tenor (cannot extend beyond age 65)

How bad is the situation?

Just google Total Debt Servicing Ratio, or check any financial textbook, you will know that if a personal’s Debt Servicing Ratio is more than 40%, the amount of debt is deemed to be excessive.

However, high debt servicing ratio in Singapore in a norm. In the December 2013 Financial Stability Review, MAS notes that 5% to 10% of households have a debt servicing repayment burden of more than 60% of monthly household income, and the number could increase to 10% to 15% if mortgage rates rise 3%.

In addition to the 20% borrowers whose TDSR of 40% to 60%, 25% to 30% of existing borrowers may already have TDSR more than 40% at current low interest rate environment!

Why is this disappointing?

If anything we can learn from US Subprime crisis and Euro debt crisis, is that bail out the bubble makers never solve the problem, it just encourages the bail out mentality. The let-go of Lehman Broker and the “unofficial default” of Greece may well be the reason of global recovery in the past couple of years.

When US government keeps raising their debt ceilings so they don’t have to default, do the debtors, who keep on borrowing money and enjoy their life, suffer? No, it is those who were prudently saving their nested eggs seeing their purchasing powers drop every day. Just take a look at the stock markets. The US equity has hit all time high but our Asian equities were still sluggish for the past few years.

In my article “How much Cash-Over-Valuation (COV) should you pay for your HDB flat?” in Jan 2012, I said

Singaporeans are lucky that the tragedy of US subprime did not happen here. However, that is not because Singapore property owners are more prudent. In October 2008, some 33,000 flat owners owed HDB arrears of three months or more. They make up less than 8 per cent of the 420,000 households with outstanding HDB loans, nearly reached US housing default rate of 9% at that time.

Fortunately, HDB is much more lenient than the banks and they did not force sell those houses; but unfortunately, the lesson was never learnt. Why blaming the government where you could be the person who paid the high COV just because it was asked for? How many people have been living beyond their means?

True enough, not people become less prudent, but more greedy and demanding. High property price becomes acceptable and a new norm. People were willing to pay $900,000 for a executive condominium and yet blaming the government for “subsidy not enough”.

The chart below shows the Singapore private property index since 1975. When Asia financial crisis struck in 1997, the property bubble was burst. The government did not, or might not have the ability to “bail out” the property speculators. the property markets crashed for more than a decade, but guess what? Singapore stock market, indicating Singapore’s economy and represented by the Straits Times Index, has hit all time high.

What happened after Global Financial Crisis 2008? The property markets were saved (you did not hear often that people were chased out of their house because they could not pay the loan right?), the stock market and economy are still  struggling.


Why? Because people started to ask themselves, why should I work when flipping property is the fastest way of making money? Just like the Sure Win Scheme investing in Gold, people started to play the greater fool’s game.  After all, how bad can it be by investing in property since Singapore is always short of land?

How bad can it be? Well, the new rich generation may have to ask their grand parents who have gone through Asian Financial Crisis. But even so, they may not fully accept  it. If you never eat a lemon, you won’t know how sour it is.

Clearly, the regulators are also concern a sharp correction of property market and the spiral effect. Balancing the interest of the minority and keep the health economy for the nation is indeed challenging on the road ahead.

Below is the full statement from MAS:

The Monetary Authority of Singapore (MAS) has received feedback from borrowers who face challenges refinancing loans for owner-occupied properties which were bought before the introduction of the Total Debt Servicing Ratio (TDSR) rules. MAS has decided to broaden the existing exemption from the TDSR threshold of 60 percent for such loans to ease the debt servicing burden of these borrowers.

Refinancing of owner-occupied property loans

2. Under the revised rules, a borrower who bought a residential property before the TDSR rules were introduced – i.e. the Option to Purchase (OTP) of the residential property was granted before 29 June 2013 – will be exempted from the TDSR threshold as long as he occupies the residential property that is being refinanced. This is a concession compared to the current rules, which also require that he does not own any other property, or have any other outstanding property loan.

3. The Mortgage Servicing Ratio (MSR) will also not apply to the refinancing of loans for HDB flats and Executive Condominiums (ECs) that are owner-occupied and were purchased before their respective MSR implementation dates.

4. A similar concession will apply with regard to loan tenures, for residential properties purchased before the respective implementation dates for the loan tenure limits. In such cases, borrowers whose loan tenures for their owner-occupied residential properties exceed the current regulatory limits will be allowed to maintain the remaining tenures of their loans at the point of refinancing.

Refinancing of investment property loans

5. The TDSR threshold of 60 percent will continue to apply to the refinancing of all investment property loans. This is to encourage borrowers to right-size their loans and thereby reduce their vulnerability to adverse economic conditions or changes in interest rates. However, MAS recognises that some borrowers may face challenges in right-sizing their debt obligations in the short term; the starting level of debt may be too high and there may be significant costs involved if they had to sell their properties to reduce their leverage.

6. Therefore, MAS will allow a transition period until 30 June 2017, during which a borrower may refinance his investment property loans above the 60 percent threshold, provided he meets the following conditions:

(a) the OTP of the property was granted before 29 June 2013;

(b) the borrower commits to a debt reduction plan with the financial institution (FI) at the point of refinancing; and

(c) the borrower fulfils the FI’s credit assessment.

7. The changes are intended to help borrowers ease their immediate debt servicing burdens, while encouraging those who have taken on high leverage on their investment properties to right-size their loans as early as possible.

8. Borrowers should be aware that the current low interest rate environment will not persist indefinitely. When interest rates rise, borrowers will face higher mortgage repayments. Borrowers engaging in refinancing should therefore exercise prudence and review their debt commitments.

9. The revised rules will take immediate effect.

You can download MAS press release here.

HDB Cash Over Valuation lowest since January 2011

In Jan 2012, I wrote an article “How much Cash-Over-Valuation (COV) should you pay for your HDB flat?” I explained the worrying “greater fool” situation of HDB buyers trying to outbid each other by paying a higher cash over valuation.

In Apr this year, I told you HDB is going to “show hand” by just looking at the demand and supply of the market.

If you read today’s paper, it is reported that “Overall Housing Board cash-over-valuation (COV) continued a steady decline in July to $20,000, its lowest point since January 2011.

Overall HDB COV, or cash premiums over a flat’s valuation, has also dropped 43 per cent in the half a year since it peaked at $35,000 in January 2013. Overall HDB resale prices also dropped for the third consecutive month, slipping 0.5 per cent.

Who says property price will never come down? The Japanese have said, the Hong Kongese have said, but a simple chart will say it all


The five “suspected” asset bubbles in 2013

Most of the articles you read will try to tell you what to invest, but today will share with you what not to invest.

I am inspired by this twitter post. Though I cannot verify if it is indeed from UBS’s report, but I agree most of the points.

A consequence of ultra-loose monetary policy

By now we all know what the world has become. By pushing risk free rates to an unprecedented low level, central banks run the risk of creating a disorderly return for many assets around the world. The real danger will come when central banks start to “normalised” their policy.

Many people mistakenly take the bankers’ words for granted, mid 2014, end of 2016, whatever. It may just come much sooner than you can imagine.

The “Five Suspects”

#1 Risk Free Rate

Treasuries or Sovereign Debts have departed from fundamental value. To accept a deal to lock your money for 30 years and get a 2 to 3 percent interest may seems insane in the past, but is reality today.

As founder of US$21 billion Elliott Management hedge fund Singer pointed out, Fed’s monetary policies are distorting the prices of long-term bonds and the global recovery. “Everyone wants a safe haven. There is no such thing in today’s markets”.

Japan’s “to do whatever it takes” to get inflated policy just make a large sell-off in JGB (Japan Government Bond) a distinct possibility.

Collapse of Japanese Government Bond

#2 Credit

In desperation to search for yield, and thanks to all the brilliant bankers, junk bond is renamed as “high yield bond” and become a “essential asset allocation” to many investors.

The junk bonds are selling at record high. on May 7, Barclays US High Yield index closed at 4.97%, the first time in market history that the average junk-bond yield has fallen below 5%. That is lower than what the Treasury’s yield used to be!

In credit space validations do not look unreasonably stretched but the lack of liquidity in the market could engineer an adjustment that looks like a bubble bursting.

#3 Physical Real Estate in Asia

You and I know about this and the government knows it too. In Singapore, it takes 7 rounds of property cooling measures to sort of slowing down the market.

But the problem is, will you swallow the fact that you missed the boat when your neighbour has just made $1m selling his house? Will your neighbour goes on exploring other investment opportunities when he thinks he is a property guru now?

If the bubble does not burst but just leak. People will just patch it up and think everything is going to be ok. We will see the how the great rotation of gold will end.

#4 A number of Emerging Market Equity

Namely Indonesia, the Philippines, Thailand and Mexico. I do not fully agree this part but I admit the volatility will be high just like initial years of China’s stock markets.

I just do not think the markets have reached the hysterical level to call it a bubble.

Stock Index Indonesia vs Singapore vs Philippines

#5 Australian Banks

I do not have much comments of the banks per se, but in general, the recent collapse of commodity price put great pressure on Australia. Australia dollar has collapsed and below US$1 now. Australia was one the few countries survived the global financial crisis well but if you read Citibank’s 145 pages report “From Commodities Supercycle to Unicycles”, you may have to worry for the Australia’s business.

Last word, take note stock markets are nearly not mentioned here.