HDB valuation

[Thriftville]

Hi buddies,

Will HDB drop the valuation price, if the economy is bad? If valuation drop, will it affect the bank's balance sheet? Will there be margin call?

Hope to hear your views!

[CityFarmer]

Hi buddies,

Will HDB drop the valuation price, if the economy is bad? If valuation drop, will it affect the bank's balance sheet? Will there be margin call?

Hope to hear your views!

Base on my experience, during the low in 1999 and 2009, none of the people i knew did experience a margin call from bank. There are all paying promptly for bank installment, the properties includes HDB and private properties, both for self-occupied and investment.

Rationally, bank should not do margin call, if installment are paid promptly. The principal of the loan is reducing i.e. the Loan-to-Value is improving, and the interest income is continuing.

Any buddies ever experience a margin call from bank?

[etan]

Hi buddies,

Will HDB drop the valuation price, if the economy is bad? If valuation drop, will it affect the bank's balance sheet? Will there be margin call?

Hope to hear your views!

Thriftville,

1) Not so sure what is your major concern… ((looks like some of us are getting ready for the downturn?)

2) Unless you buy bank shares, if not why bother about bank’s balance sheet. If market dips, we, as consumers, are more concern with our own affairs.

3) Yes, if stock market tank too deeply, those using margin will be badly affected.

Anyway, my idle thoughts are: (not necessary correct, pls share your experience, and experts pls help to advise)

HDB loan is different from private property loan.

For HDB loan:
I think this is a bit tricky.

In the very past, we buy flats using only HDB loan.

Since quite a few years back, we can also opt for commercial loan to pay for HDB flat.

The question now is: if HDB price goes down, how will commercial bank react???

For private property:

If price drops, and you are able to continue to service the loan instalment, they will not bother you.

If you had pledge your property for some mortgage loan or draw an OD line, yes, they may recall the loan amount or ask you to top up some money. (Remember the saying: the bank will lend you an umbrella if it is a sunny day; but will withdraw the umbrella when it rains? Heartless!

If you have some collateral loan in exchange for some margin a/c, and if the market dips, banks are quite likely to react.

Definition of collateral loan:
A collateral loan is a loan secured by some asset you own. You promise to hand the asset over to the lender if you cannot repay the loan as agreed. By using a collateral loan, the lender takes less risk, and it may be easier for you to get funding. Make sure you know the essentials of collateral loans before you use one. Collateral loans are used when the lender wants some assurance that they won’t lose all their money. If you pledge an asset as collateral, they can take the asset, sell it, and get their money back.

HDB flat cannot be used as collateral.

[nsengkia]

Extract from CPF website is below (http://www.cpf.gov.sg/cpf_info/benefits/...hg_rps.asp). This protects the banks at the expense of the individual's retirement account. Coupled with a 20 to 30% downpayment, this encourages the bank to encourage the individual to borrow to the max hence the very low prevailing bank housing loan interest rate.

On the flip side, the CPF interest rate below inflation makes this course of action "sensible" to the individual as well. But when interest rate rise or inflation drops or property stops rising faster than CPF interest rate then the whole deck of cards come tumbling down and the individual is left to hold the can into his "golden years".

But the banks are protected

Q: Does the Board require a charge on the property bought under Residential Properties Scheme (RPS)?

A: Yes. The Board requires a charge on the property before the CPF savings can be released. The ranking of charge for private residential properties is shown in Table B.

Table B - RANKING OF CHARGE

1st charge Outstanding housing loan from your financier

2nd charge CPF principal sum up to 100% Valuation Limit plus CPF withdrawals used for the legal and stamp fees in the purchase

3rd charge Equal ranking (pari passu)

- CPF principal sum beyond the 100% Valuation Limit plus accrued interest

- Repayment of outstanding balance of the housing loan interests

4th charge Equal ranking (pari passu)

- CPF legal costs and expenses

- Financier's legal costs and expenses

[Thriftville]

Thanks a million for your replies!

I was trying to understand, if the Valuation price set by HDB has any precedence of dropping? during the 97 crisis, did the HDB valuation drop?

If valuation were to drop, does the bank need to write off as loses? I'm keen to invest into banks, so hope to understand how the crisis will affect their books.

[Coattails]

Thanks a million for your replies!

I was trying to understand, if the Valuation price set by HDB has any precedence of dropping? during the 97 crisis, did the HDB valuation drop?

If valuation were to drop, does the bank need to write off as loses? I'm keen to invest into banks, so hope to understand how the crisis will affect their books.

From my limited understanding, the banks carry the mortgages as assets on its balance sheet, and not the value of the house. Hence, only if the loan is impaired would they need to write it down. If the borrower is able to make his/her interest and principal payments, the loan should not be impaired. The margin call is more like a mechanism for the bank to manage its credit risk exposure, i.e. maintain a reasonable Loan-to-Valuation ratio.

However, remember that besides mortgages, banks give out business and trade finance loans, credit card loans, autoloans, etc as well, so you have to account for potential losses from these too. Banks' balance sheets are also highly leveraged (10x or more?), which magnifies their losses to capital in times of stress.

Lastly, local banks have also enjoyed relatively low levels of loan losses in recent years. That means they could be under-providing for loan losses in their current period income statements, thus making their reported earnings look better. Things could turn in a jiffy if the economy turns badly.