Banks welcome negative equity trap scheme

PUBLISHED : Saturday, 15 June, 2002, 12:00am
UPDATED : Saturday, 15 June, 2002, 12:00am

Banks have welcomed the introduction of a Hong Kong Mortgage Corp scheme enabling them to lend up to 140 per cent of a property's market value to help home owners caught in negative equity traps.

Through the Home Owner Mortgage Enhancement programme, the HKMC will provide insurance to cover a bank's credit exposure above 90 per cent and up to 140 per cent of the value of a property at the time of refinancing.

The HKMC said the mortgage refinancing scheme could reduce monthly repayments by between 30 and 39 per cent for property owners caught in negative equity. The programme also provided an effective tool for banks to reduce the credit risk of mortgage loans with current loan-to-value ratios of more than 100 per cent.

A Hang Seng Bank spokesman said: 'We will study the scheme in detail and will actively consider the possibility of launching the refinancing scheme.'

Wing Lung Bank's head of business development David Lau also said the bank would look into the scheme before making its next move.

HKMC chief executive Peter Pang Sing-tong said some banks had agreed to take part in the scheme when approached several weeks ago.

He said the programme could be launched as early as next month on a pilot basis.

Merrill Lynch has been appointed as exclusive arranger of the programme.

Wong Kwai-lam, Merrill Lynch's vice-chairman of corporate finance for the Asia-Pacific region, said the investment banker would underwrite HK$234 million in the initial stage.

Mr Wong expected the size of the underwriting would increase in the future, anticipating strong responses would be generated from banks.

According to figures from the Hong Kong Monetary Authority, there were 67,500 residential mortgage loans in negative equity worth HK$115 billion (not including loans with co-financing arrangements) as of March 31.

About 38 per cent were still maintained at rates at or above the prime rate.

Under the HKMC scheme, eligible borrowers can enjoy mortgage rates ranging from 0.5 per cent to 1.75 per cent below prime to match those of similar products being offered in the market.

However, borrowers need to pay an upfront premium ranging from 2 per cent to 2.15 per cent of the outstanding principal balance of the loan, while the additional continuing premium would be borne by the lending banks.

Mr Pang said the corporation would disperse the credit exposure of the programme through reinsurance arrangements and the issuance of credit-linked notes.