Start-up aiming to help negative-equity homeowners finds itself fighting a giant
He was the Robin Hood of the mortgage industry who rode to the aid of homeowners in negative equity in 2002. Leland Sun Li Xun's thinking was simple: if the big banks would not give trapped borrowers the same repayment terms as new home loan customers, then he could find other, smaller banks willing to oblige.
Born in Hong Kong, Mr Sun only lived here until he was four. His Shanghainese father's job as a chemical engineer with Dupont took the family to the United States in 1965. He didn't come back until 1993, working for Goldman Sachs. Not that he really considers himself to be from Hong Kong: 'You are from where you grew up, you're a creature of your environment.'
His career took him first to New York and later San Francisco for Goldman Sachs after graduating from UCLA. Mr Sun forsook the booming Silicon Valley for Hong Kong where he helped set up the Hong Kong Mortgage Corporation and in 1997 became its first chief executive. The HKMC was charged with buying residential home mortgages from commercial banks and other institutions.
In 2000, with former Goldman colleagues Moses Tsang and Danny Yee, he started Pan Asian Mortgage, becoming its first chief executive. 'My vision was to create something that focused on structured financing and securitisation.' It grew into an innovative financial services company.
'We felt we could leverage on the tremendous liquidity sloshing around in the markets and banking community in Asia,' he said.
There would be no hedge funds or private equity; they would look for cheap assets and cheap cash flows. 'It was 2000 and we learned from the internet, you may have a great idea, but you must be commercially viable.'
So Pan Asian decided to help the one in two homeowners stuck in negative equity. People with existing loans were trapped, paying prime plus 1 percentage point, Mr Sun says. Banks were offering new borrowers rates of prime minus 2.5 percentage points for new loans. 'But if you had 130 per cent or even 150 per cent loan to value, the banks had no incentive to give them any help.'
So Pan Asian offered an alternative. But it first approached then financial secretary Anthony Leung and several Exco and Legco members to explain its proposed private-sector solution to what was becoming a major government headache. 'We said, 'you guys are feeling the heat, we're offering a solution. Just don't let the HKMC try to compete with us'.' Mr Leung told Mr Sun he believed the HKMC had no such plans, adding: 'If you can help Hong Kong out of the predicament, more power to you.'
Mr Sun consulted ratings agencies, the Inland Revenue Department and lawyers on regulations. It became the first private sector company to allow negative-equity homeowners to move their mortgage for better terms.
The Robin Hood programme was launched in May 2002, with Pan Asian offering homeowners lower monthly mortgage payments by switching their loans from the big banks to the small ones. Mr Sun got a chilly reception from the big banks. 'They wanted me to fail. To them I was a gnat or a mosquito.'
He thought relieving the big banks of a few negative equity mortgages would cause few ripples. But three months after the Robin Hood initiative, the HKMC launched a similar programme. Mr Sun feels it was a response to his perceived impudence. 'It was a case of 'How could this little start-up do this?' - especially when I had helped set up the HKMC.'
Once the HKMC joined the fray, all the big banks weighed in too by offering their negative-equity borrowers loans at lower rates.
'We were dismayed,' says Mr Sun, adding that it's an unusual situation for a private company to come into competition against a semi-government body. Mr Sun and his 30 local colleagues devoted all their energies to convincing Hong Kong homeowners they were a homegrown firm founded by entrepreneurs with local staff.
Coming up against the HKMC was like being 'assaulted by a 300-pound gorilla,' says Mr Sun. The tit-for-tat competition between them continues to this day, says Mr Sun. 'We can't undercut the government, they can always beat us,' he laments. 'We stay one step ahead with new products and innovations. It may sound like Marketing 101, but we can't compete on price though we can on service.' Their latest salvo is second mortgages, which challenges the 70 per cent bank mortgage lending limit.
'The banks we work with do 70 per cent, we provide the rest, up to 99.9 per cent of the property value.' HKMC is now also offering 'second mortgages' by providing insurance to enable certain banks to raise the lending limit, but not yet to 99.9 per cent, he adds.
Pan Asian's initial start-up capital came from the ex-Goldman Sachs partners, with two 'friends and family' equity-raising rounds since. Backers include MTR chairman Raymond Chien and Kader Industrial chairman Kenneth Ting, says Mr Sun. 'The last round of financing took us from $50 million to $100 million.'
But Mr Sun's eyes are now set on South Korea, where lending limits are just 60 per cent, and Thailand, where the more risk-averse banks lend up to 80 per cent. 'That leaves room to manoeuvre.' Pan Asian's top-up home loan strategy won't work in every market, but they can come up with other tailor-made innovative products, especially for China, he says. 'Banks in other countries are often sluggish.'
So, is Mr Sun glad he swapped investment banking to pitting his wits against the 300-pound gorilla? He pauses, stretches and sighs with satisfaction. 'I like being an entrepreneur here. My experience in other markets and models gave me just the experience I need.'