Canary in the Hong Kong housing market? Why one Mid-Levels mortgage default is a case study in financial engineering

An increasing number of jittery homebuyer are walking away from flats they have bought and the loans used to fund those purchases, as Hong Kong’s economic prospects become more uncertain.

Money lenders said mortgage loan defaults are now rising and they fear the uptrend will cause the closures of small players in a worst-case scenario.

Ego Finance chief executive Victor Wong said his firm has applied with the court to take possession of five mortgaged properties after their owners defaulted on the loans, worth a combined HK$4 million.

His firm, one of the five biggest providers of second mortgage loans, plans to auction off the flats.

“Every year, about eight to 10 properties are foreclosed. But I expect a jump in the number this year,” he said. “We normally seek a court order to repossess a mortgaged property after a borrower has missed the monthly loan payment for three to six months.”

Tse Pui-to, chief executive of Hong Kong Finance Group, said homebuyers who mortgaged properties to three or more lenders could find themselves in big trouble. His company has been engaged in property mortgage lending for 20 years.

Since home prices have fallen by more than 10 per cent from the peak in September, these investors could become insolvent,” he said.

Wong said money lenders like his firm have no choice but to take legal action, repossess mortgaged properties and sell them off to cover loans that borrowers will no longer repay.

Tsang Kit-chun, managing director of AA Property which is also focused in selling distressed assets, said there are about 120 foreclosed properties available for auction now, nearly double that a year ago.

“It is the highest seen after the global financial crisis in 2008,” he said.

There were 6,000 distressed properties available for sale during the Sars epidemic in 2003, said Tsang.

A current and very prominent default case involves United Sunrise Properties Development, which purchased a 2,476-square-foot luxury flat on the 39th floor of the prestigious 39 Conduit Road project in Mid-Levels.

Because of its failure to pay monthly mortgage instalments for the flat, the property was foreclosed and auctioned off on Thursday, fetching HK$108.3 million, or about 10.5 per cent higher than the HK$98 million reserve price.

United Sunrise, jointly owned by Yin Cong and Chan Wai-yun, purchased the property for HK$134.9 million in early 2014, but failed to meet the mortgage payments after the second monthly instalment.

Yin Cong, who holds 99 shares in United Sunrise, declared an address in the Heping district of Tianjin, a city in northern China, according to company registry records.

Yin’s registered address is the location of Tianjin Nanxi Industrial Group, an exporter of industrial chemicals.The firm, according to its website, is the authorised domestic trading agent and exporter of one of China biggest manufacturers of maleic anhydride, a chemical used in the manufacture of unsaturated polyester resins.

When contacted by telephone, an employee of the company said Yin was not in the office.

Asked if he heard that a company-owned luxury flat in Hong Kong was foreclosed by creditors, the employee told the South China Morning Post that he was unaware.

“But I heard that the boss has property investments in the mainland as well,” he said.

Chan, who holds one share in United Sunrise, registered her address at Chung Mei Village, Tsing Yi.

When reporters from the South China Morning Post visited Chan’s registered address on Friday, they were met by a middle-aged woman who said she had lived on the premises for more than 10 years, but did not know Chan.

“There is no such person. I have not heard of the name,” the woman said from behind a half open door.

The apartment, located on the ground floor of a three-storey village house in Tsing Yi, is vastly different from the upscale surroundings of the luxury development on 39 Conduit Road.

The alley leading to the village house was littered with rusting bicycles, broken chairs, a barbecue stove and assorted rubbish.

In a written reply to SCMP query, the Company Registry said: “It is not a statutory requirement for applicants to provide address proof but the Companies Registry will seek clarifications if irregularities are found in reported addresses.”

“A person commits an offence if the person knowingly or recklessly makes a misleading or false statement in any return required by or for the purposes of any provision of the Companies Ordinance, and is liable on summary conviction to a fine of HK$100,000 and to imprisonment for 6 months,” it said.

Wong of Ego Finance believed the owners of the luxury flat were an unusual case.

“The price they paid for the property probably seemed like a nightmare once the market downturn accelerated,” said Wong.

He added that small lenders were more aggressive than larger finance companies in providing property mortgage loans.

The Hong Kong Monetary Authority in September 2012 tightened mortgage lending restrictions for buyers of second homes. Loans to fund the purchase of second properties were limited to a duration of 30 years, while the mortgage-to-income ratio was cut to 40 per cent from 50 per cent.

For mortgage applicants whose principal income is derived outside Hong Kong, the maximum loan-to-value ratio was cut to 30 per cent from 40 per cent previously.

Intended to help rein in overheating property prices, some believe the measure drove homebuyers to tap other sources of financing. Scores of money lenders, particularly small operators, have mushroomed in the city since 2013.

The number of money lenders have more than doubled to 1,700, from 700 to 800 in 2013, said Wong.

“About 1,000 finance companies are now active in the market,” he said.

According to the HKMA, finance companies are governed by the Money Lender Ordinance, which is enforced by the Commissioner of Police.

Ego Finance benefited from tighter lending conditions in the wake of the HKMA decision. Wong said the company’s money lending business grew 30 per cent in the first half of 2015 from the prior six-month period.

The Hong Kong Monetary Authority further tightened restrictions on new mortgages in early 2015, as small flat prices rose to a record amid a frenzy of purchasing activity.

These restrictions included capping the loan-value ratio for residential properties of less than HK$7 million at 60 per cent, down from a range of 60 to 70 per cent. This meant that buyers had to come up with a higher down payment.

The Centa-City Leading Index, which tracks secondary home prices at 100 estates, showed prices have fallen 13 per cent from September’s peak.

According to the latest government statistics, unemployment was 3.4 per cent in the first quarter, up 0.1 percentage point from the prior quarter.

Wong said the number of finance companies dropped to 400 in the aftermath of the Sars epidemic in 2003, half the number prior to outbreak, amid a sharp downturn in the economy.

He said larger lenders were more cautious, capping loan-to-value ratios at 80 per cent for both first and second mortgages.

They also charged an interest rate of 10 to 20 per cent. The mortgage rate offered by leading banks is around 2.15 per cent.

“We don’t provide loans for those properties already amortised to three or four creditors. It is too risky,” he said.

Tse of Hong Kong Finance Group said his firm has shifted strategy to instead provide first mortgage loans in the wake of the higher lending risk.

“We mainly focus in providing short-term loans which will be more flexible in response to the market,” he said.