Banks should show more compassion in light of a sharp rise in the number of negative equity homeowners, the chief banking regulator said yesterday. The Hong Kong Monetary Authority's deputy chief executive, David Carse, issued a letter to banks urging them to work with homeowners to restructure their loans. The number of mortgages in negative equity has surged in recent months as Hong Kong grapples with near-record unemployment, more than three years of deflation and record personal bankruptcies. Residential mortgage loans in negative equity increased 9.38 per cent to a record 76,686, valued at $127 billion, during the fourth quarter, from 70,112, valued at $118 billion, at the end of September, according to the HKMA. The number of homeowners holding negative equity accounted for 16 per cent of mortgage borrowers, up from 15 per cent in the previous quarter. During the fourth quarter, property prices fell an average 8 per cent, the HKMA said. Its figures were based on a survey covering only 98 per cent of the banks, meaning the actual figure was likely to be 77,935 loans, valued at $129 billion. Because the delinquency ratio on loans in negative equity is more than double the rate on the mortgage portfolio as a whole, the HKMA is encouraging banks to find ways to tackle the problem. The delinquency ratio stood at 2.62 per cent at the end of December, compared with 1.06 per cent on all mortgages. 'In light of the rising number of negative equity loans and the continued weak economic conditions, we would encourage institutions to continue to be sympathetic towards negative equity homeowners in financial difficulties seeking loan restructuring,' Mr Carse's letter said. Banks could lengthen the term of the loan or offer lower rates to reduce the monthly payment, an HKMA spokesman said. While the banks may earn less on the restructured loans, it would be better than seeing bad loans pile up as the bankruptcy rate climbed. Last year a record 25,328 people declared personal bankruptcy, more than double the 2001 figure.