Mortgage market

‘So much in interest income is lost by transferring the mortgage to another lender. The bank gets back the loan but sacrifices future interest income.’ 

It is not the lesson from the collapse of the home mortgage market in the United States in 2008 that might have prevented the creation of a secondary home mortgage market in the Philippines.

There is no reason not to have a thriving secondary home mortgage market in the Philippines. If there is any at all, it may well be the low-interest-rate regime that has ruled the local financial world over the years.
Interest rates are low only in short-tenor investments. They are not that low for home mortgages with banks. The redemption period could be as long as 15 or so years.

One way of looking at it is the bank that lends the money to a borrower to buy a home sits on the mortgage that long and, in fact, waits for maturity. Instead of lending long, the banks could very well find other investments that may produce the same yields over a shorter period, shorter than the tenor of home loans.
This is more in the mind than in the market place. The simple fact is that, this time learning from the US experience, the danger of a mortgaged home being foreclosed by the lending bank has become minimal.
While there is a “rat” race especially for property developers to find buyers for their apartments, there is at the same time a caveat before loans are given to borrowers. The banks today are remarkably more careful in lending money not only to property but practically to all types of borrowers.

It is now relatively easier to get a loan to buy a car than to get a bank to agree to finance the construction of a home. Car loans have shorter tenors, the longest being about five to seven years.

Loans for apartments (or condominiums as they are called only in the Philippines) are paid over a longer period. The capacity of borrowers to pay is minutely scrutinized before the borrower is given a loan.

That must be the reason the default rate in the property sector is said to be less than 3 percent or thereabouts. If this is so, why do the banks seem to be rather indifferent in moving towards having an organized secondary mortgage market? Such a market would move money much faster and consequently attract more borrowers.

My answer or guess is the fact that in the present regime of low interest rates, it is not easy to find investments that produce at least 5 percent in fixed-income securities, not in sovereign liabilities.
On the other hand, yields on longer-term loans to the property sector can produce interest income of 10 percent or more, compounded annually. The rate is still reasonably low to the borrower but is considered high by the lending banks considering, as said above, that fixed income securities hardly produce 5 percent a year.

Given this situation, why would a bank transfer a home mortgage to another institution to lay its hands on more money? There seems to be no rhyme or reason to do so. The system is extremely liquid.

The lending banks do not have a penchant to transfer home mortgages to a competing bank because they want to keep the profits from interest on the loans.

Banks, particularly those with universal status, have come up with so many non-bank products precisely because loan demand is relatively low. They must come up with products that produce profits with “maximum” yields with minimum risks.

Property loans are such investments. It is for this reason that a bank would sit on a home loan and make interest income rather than transfer the borrower’s obligation to another institution for more money.
There is better sense to sit on the loan and wait for higher interest income compared with other just as risky or less risky lending.

Without the benefit of solid information, I would guess that the banks are reasonably comfortable with their home loan clients. They must be amortizing their obligations on time and paying more in interest compared with shorter tenor loans.

There is no reason to transfer the risk to another institution. So much in interest income is lost by transferring the mortgage to another lender. The bank gets back the loan but sacrifices future interest income. Of course, there is the comfort of averting a possible default, which hardly happens at present.

The bank must look for an instrument using the money produced by transferring the mortgage. Why do so when the mortgage a bank is sitting on is doing relatively well in terms of higher yields and hardly defaulting amortization?

There are clear indications that the market for property has the capability to pay. One of the better signs is the way DMCI Homes sells its apartments. The company practically gets the money for construction from its buyers. It pre-sells the apartments before it even breaks ground. It makes an income or revenue from prepayments.

DMCI Homes has one simple trick very few property developers are able to perform. When DMCI Homes promises the prepaid buyer his home on a specified date, the company actually makes sure the unit or apartment is ready for occupancy three months before the promised delivery date.