The decision of the Hong Kong Mortgage Corp (HKMC) to widen the range of home loans it can buy will intensify the mortgage price war, according to a group of bankers representing smaller institutions. The HKMC last week decided it would expand its spectrum of possible purchases to mortgage loans taken out by companies and bank staff. The group, which requested anonymity, said the move would increase the supply of funds to the mortgage market, pushing mortgage rates lower and trimming banks' interest margins further. It pointed out the HKMC had been set up in response to an increase in outstanding mortgage loans in 1997, from 8 per cent of Hong Kong's gross domestic product in 1980 to 32 per cent in 1997. The corporation was established on a belief that the development of a secondary mortgage market could play an important role in channelling long-term funds to meet rising demand for long-term home financing. Property values have since shrunk and demand for mortgage loans has retreated, with the supply of mortgage loans now outstripping demand. 'The imbalance between supply and demand in mortgage loans has orchestrated the recent mortgage price war among commercial banks,' the group said. 'Therefore the expansion of scope of the HKMC mortgage-purchase programme at this point of time may push mortgage competition from bad to worse. 'The impact, to a lesser extent, will further shrink the interest spread of commercial banks and the HKMC and, to a greater extent, will have a negative impact on the fundamental strength of banks,' the group said. A group member said the HKMC's move was essentially creating an exit for mortgages lent to companies. This would encourage more banks to create assets of this kind in anticipation of selling them ultimately to the corporation. Mortgages to companies need particular attention because they make speculation easier, since the property's legal title can be transferred by selling the company. The member pointed out that mortgage assets of this kind were more risky than those borrowed by individuals, because it was difficult to monitor whether the underlying properties were owner-occupied - a principle on which the HKMC wants to insist. This concern, however, was dismissed by the HKMC. Chief executive Peter Pang Shing-tong, announcing the decision last week, said the HKMC required the ultimate owner of the company borrowing the mortgage to sign a personal indemnity against all the company's liabilities. 'The move will definitely not invite speculation,' Mr Pang said. Mortgages to bank staff are also seen as more risky. 'It is difficult for the HKMC to ensure bank staff actually occupy the mortgaged properties. 'Therefore it leaves room for bank staff to acquire loans through the HKMC at more favourable terms to fund property investment,' the group said.