Florence Mok, a new mother, thought she wouldn’t be able to get a mortgage for her HK$9 million ($1.1 million) dream apartment. When her family signed the papers, China Evergrande Group sales staff said not to worry. The developer’s financing arm offered them 90% leverage, no bank stress-test needed.

Now Mok’s suffering from the fallout of Evergrande’s debt crisis. With the cash-strapped company no longer willing to provide financing, her family can’t find a bank for a mortgage. They might lose the down payment and apartment.

The Moks are among 80 families who have protested and appealed to authorities for help. Their dilemma exposes a risky, yet common practice among Hong Kong developers: real estate companies often lend to buyers to boost sales, potentially letting them stretch beyond their ability to pay.

“It’s very disturbing,” said Mok, 39. “We were expecting a home for our family, now we may lose everything.”

Evergrande’s Hong Kong unit didn’t respond to requests for comment.

Risky Practice

Under normal circumstances, banks couldn’t have given Mok such a mortgage. The Hong Kong Monetary Authority requires them to ensure applicants meet income requirements and pass a stress test for rising interest rates. Until this year, a 90% loan-to-value ratio on a mortgage -- deemed risky -- was only available to first-time buyers for properties up to HK$8 million, a cap that recently rose to HK$10 million.

However, that stringent policy doesn’t apply to property developers’ financial units or affiliates. The practice has boosted sales, creating a group of homeowners vulnerable to negative equity -- when the value of the property falls below the outstanding balance on the mortgage -- and default.

“We don’t recommend people go for a 90% mortgage, because there are risks,” said Eric Tso, chief vice president at mortgage consultant company mReferral Mortgage Brokerage Services.

It’s not that uncommon for Hong Kong developers to extend loans to buyers. Henderson Land Development Co. and Kowloon Development Co. are offering mortgages to buyers for recent projects. Mortgages provided by developers accounted for 6.3% of the total in the first-hand residential market in the past year, according to mReferral.

The practice continues to exist despite authority concerns partly because most Hong Kong developers are financially healthy, with low leverage and abundant cash.

“This situation rarely happens,” said Ivy Wong, managing director of Centaline Mortgage Broker Ltd. adding that buyers should still be vigilant.

When The Vertex went on the market in 2019, property agents touted the ease of obtaining a mortgage from Evergrande’s financing arm. Mok says the only requirements from sales staff were proof of income and no record of bankruptcy.

Mok’s husband, who is the buyer on paper, makes about HK$700,000 a year. But that income isn’t sufficient to pass a stress test for a 90% bank mortgage.

The Evergrande mortgage plan promised to charge buyers nothing in the first two years, but the interest rate would rise to 8% after the third year. In comparison, mortgage rate from major banks now stands at about 1.5%.

That all turned south after China’s most indebted developer dumped assets to raise cash in face of a credit crisis. In October, ownership of the Vertex was transferred to co-developer VMS Group, according to Hong Kong Economic Times. Evergrande’s financial firm rejected Mok’s application for mortgage in March and the couple was forced to find another source to fund the loans.

Neither the new vendor nor any banks were willing to provide her 90% of the purchase price. One of the options offered by the current vendor was an 80% loan -- that means she needs another HK$900,000 for the down-payment.

The clock is ticking. She’s been told that if she doesn’t find financing within weeks, her family might lose the apartment and the 5% deposit -- HK$450,000 -- half of their savings.

Risky Practice

Meanwhile people are taking on more debt in order to own a home in the world’s least affordable city. Hong Kong’s average mortgage loan to property ratio rose to 57.2% in March, the highest in 11 months, according to mReferral.

Last Saturday Mok joined 30 other people carrying posters and banners at a press conference to voice their predicament, hoping the government could intervene.

They’ve yet to receive an answer. The Sales of First-Hand Residential Properties Authority said it is looking into the matter and would follow up if there is any suspected contravention of the law, according to an emailed reply.

“Our family is under a lot of pressure,” Mok said. “It’s a very emotional issue for us.”

Source:
courtesy of BLOOMBERG

by Shawna Kwan

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