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Louis Beckerling

The lender is being pushed to join the agency's mortgage coverage scheme

Insurance provider Hong Kong Mortgage Corp has gatecrashed a 'beauty parade' of reinsurers to entice Standard Chartered into its fold and establish a monopoly for its mortgage insurance programme.

Standard Chartered is the only bank in Hong Kong that  has not used the HKMC's insurance programme to buy cover for home loans that exceed the 70 per cent loan-valuation ratio imposed on lenders by the Hong Kong Monetary Authority.

The programme allows banks to offer home loans of up to 95 per cent of a property's value to qualified customers by providing insurance cover for up to 25 per cent more than the 70 per cent  maximum.

But the private-sector insurer that provides cover for Standard Chartered - Zurich Financial Services subsidiary Centre Solutions - is withdrawing from the business.

'The HKMC got wind of this and put pressure on Standard Chartered to accept a bid, even though the deadline for its 'request for proposals' invitation to the industry had passed,' said a source familiar with the events.

'It was motivated by concern that continued independence from Standard Chartered and a new contract signed at possibly cheaper rates could open a Pandora's box.

'Once that news got out into the industry, all the other major mortgage lenders, it feared, would also want to cut out the middleman role that the HKMC plays, and deal directly with insurers.'

Neither the HKMC nor Standard Chartered would comment.

Several insurers responded to the bank's request for coverage proposals, including United Guarantee Corp, a subsidiary of America's AIG Group, the world's largest insurance firm by market value.

But insiders say that the HKMC put a lot of pressure on Standard Chartered to 'come in from the cold' once its existing insurer pulled out.

Caught in the middle of the tussle was Andy Hon Hak-keung, the general manager, mortgages and vehicle  business, for Standard Chartered, and also a director of the HKMC.

During the intense behind-the-scenes lobbying that followed, HKMC engaged Standard Chartered as a co-underwriter with HSBC for the institutional tranche of its latest mortgage-backed note issue, now open for subscription and closing on October 29.

The underwriting mandate was a first for Standard Chartered under the HKMC's US$3 billion Bauhinia mortgage-backed securitisation programme.

Standard Chartered is due to make a decision 'soon' on whether to engage another private-sector insurer or join the HKMC's scheme. It must weigh the benefits of remaining in the official insurer's good books against the prospect of passing on lower costs to its customers if it remains independent.

Mortgages of up to 90 per cent were first made available through  insurance provided by  private-sector start-up Pan Asian Mortgage Co (Pamco), and later by HKMC. When Pamco  offered insurance to cover 95 per cent mortgages, HKMC followed suit.

On a more customary mortgage of 90 per cent, however, the insurance premium currently charged by HKMC is 2.98 per cent, which the borrower pays on the full mortgage value.

For example, the purchase of a $1 million home would require a buyer to put down a minimum of $100,000 in cash, and borrow $900,000 (hence a 90 per cent mortgage).

A premium of 2.98 per cent of $900,000 works out to $26,820. Typically this would be added to the mortgage, allowing the buyer to pay the premium in instalments added to the loan repayment.

Industry guesstimates are that the HKMC - as the middleman between the reinsurers which take on the insurance risk of its programme - could add about 10 per cent to the reinsurers' premium.

Take that margin away, and a bank dealing directly with a reinsurer may pay only 2.7 per cent, resulting in a premium on the same example of $24,300. That is an upfront saving to the buyer - assuming Standard Chartered refrained from adding an intermediation fee to the reinsurer's premium - of some $2,500.

Financed over 20 years, however, the total savings would be $3,120.

In the hands of the homebuyer, such sums may appear insignificant, but aggregated over the pool of mortgages insured by the HKMC, the effective add-on commissions to the premium it pays to a reinsurer could add up to a considerable amount.

Applying the sum of HK$3,120 to half the 23,218 mortgages HKMC had insured at the last count produces a potential commission of about $36 million.



StanChart faces HKMC pressure on insurance