ALTHOUGH the just-released residential mortgage survey provides concrete date on the market, analysts suggest the survey result may be out-dated by the latest downturn in the property market and rising interest rates. Instead of relying on anecdotal evidence, the international credit rating agencies who rate the securitised papers issued by banks and property developers here will have a benchmark pool of mortgages on which to base their judgment. US-based Standard & Poor's (S & P) initially mapped out a benchmark pool of Hong Kong mortgage loans in its report published last year. The result of Hong Kong Monetary Authority's (HKMA) survey conforms mostly to the characteristics of the benchmark pool except in one aspect. While the S & P would like to see the debt service to gross household income reach a maximum of 40 per cent, the present ratio was 50 per cent as shown by the survey. 'It may not mean a lower credit-rating but issuers would be required to put up some credit enhancement features,' said Andrew Sheng, deputy chief executive of the HKMA. Another major factor affecting the credit rating of a securitised paper is the prepayment history of the mortgage loans. 'Regarding the pattern of prepayment, HK$2.8 billion and $27.3 billion, corresponding to one per cent and 10.3 per cent of total outstanding loans, were recorded for partial prepayment and complete prepayment respectively,' the survey revealed. The figures lacked a historical perspective as comparative figures in previous years were not available. The same held true for the ratios on delinquent loans which had only indicative value. Only three banks managed to report data back to early 1980s. 'It was difficult to ascertain precisely the performance of mortgage loans over the property cycle,' the survey said. Mr Sheng said that banks did not have the records and it would be too much of an administrative burden to request these figures. Besides, the figures were recorded in October last year when the property market started to make its U-turn. 'Falling property prices will certainly affect the prepayment behaviour of the borrowers,' said one analyst. He cited the experience in the US where the well-developed mortgage-backed securities market suffered a major sell-off when interest rates began to edge up. 'What was initially an eight-year paper turned out to be a 25-year one. Of course, investors would shy from the market,' he said. Mr Sheng admitted that the property market activities would have a direct bearing on the prepayment pattern and the maturity of the mortgage loans. Yet, the survey pointed to several important statistics of the domestic environment that will prove to be helpful for developing the secondary mortgage market. Apart from the much-talked-about loan-to-valuation ratio which stood at 53.3 per cent, the survey revealed the lifespan of the mortgage loans. About 68.2 per cent of the residential mortgage loans were of less than 10 years in maturity. Those between 10 and 20 years old accounted for 22.8 per cent, while property over 20 years old was only nine per cent. Regarding the contractual life of the outstanding mortgage loans, the average was about 183 months, or 15.2 years. The loans were on average seasoned for about 22.6 months or 1.9 years, and the remaining contractual life averaged 160.2 months, or 13.3 years. Seasoning means the length of period the loan has been on the bank's book or the period the borrower has been repaying. On the occupancy status, it is a relief that loans involving non-owner occupied property accounted for only 3.5 per cent. Reflecting a preponderance of lending to first-time buyers, about 94.5 per cent of total outstanding loans were to purchase of flats and only 5.5 per cent was for refinancing loans.
