Sunday, August 17, 2008

Home loan borrowers look panic-stricken now

Life comes full circle. 3 years ago people will buying flats like bread and cake. Now the same people are panicking and paying off debt by their bonuses and whichever means they can. The wide-grin of leverage is now bleeding them every month. Singh is King Manmmomhan anmd Montek should be congratulated for allowing the transfer of wealth from the consumers to the builders and banks.

Home loan borrowers look panic-stricken now
ET Bureau[ Aman Dhall & Raja Awasthi ]

NEW DELHI: The fear is palpable. Indian home loan borrowers, who till recently were fuelling a growth story across banking, real estate and other allied sectors, look panic-stricken now. In fact, just two weeks after the Reserve Bank of India hiked the cash reserve ratio (CRR) from 8.75% to 9%, there has been a quantum jump in the number of home loan borrowers approaching banks for foreclosures and partial repayments.

According to industry estimates, the number of home loan borrowers making foreclosures and partial repayments has almost shot up by 20-25% during the past few weeks.

In the last two months since the home loan rates started their northbound journey, all home loan financing companies’ repayments and foreclosures teams have been actively engaged in counselling their customers, making them understand the pros and cons of the decision to forego or go for partial repayment of loans. It may be mentioned that the Central bank’s latest CRR hike has sucked out about Rs 8,500 crore from the banking system.

Uday Sareen, country head, retail banking, ING Vysya Bank, told SundayET that the bank has seen a considerable increase in the number of queries for foreclosures and partial repayments. “In fact, the foreclosures have seen an increase of almost 10% over the previous quarter.

One, however, needs to understand that it’s not a simple black and white decision. Over the last 60 days, our teams have been continuously engaged with customers to explain them the merits and demerits of their decision. We are educating them how it can hurt their liquidity in the short to medium term, if they decide to foreclose their home loan accounts or make partial repayments,” he said.

Deepak Parekh, chairman of HDFC, the country’s largest housing finance company agrees. According to Mr Parekh, they too have witnessed a rush by home loan borrowers to make partial repayments.

“They are trying to reduce the term of their loans, which have increased due to recent interest rate hikes. These borrowers are typically the ones who have taken floating loans in the last 12-18 months and are now trying to make balloon payments through their salary bonuses,” he said. Floating rates account for 90 % of the bank’s home loan portfolio.

Developers across the board too confirmed to SundayET that there has been a spurt in home buyers returning or off-loading some of their home loan. With interest rates on home loans rising in the last one year, consumers are now looking at other options to acquire funds for their investments. Many also feel this will deter speculators from the real estate market.

Says Rohtas Goel, CMD, Omaxe Group: “The hike in repo and CRR rate hasn’t been a good news for the real estate sector and the home loan market. It is certainly a matter of concern for consumers, as even small upward changes in the monthly EMIs can play havoc with their personal finances.

The interest rate trend over the next few months is expected to be northwards, across industry. On the flip side, this may actually prove beneficial for actual users as it will deter speculators from over leveraging themselves and cornering and hoarding housing flats for speculative gains.”


Anonymous said...

I think if people with huge loans are finding it difficult to make monthly payments due to variable interest rates, they should immediately sell their properties. Otherwise neither would they be able to make the payments later nor would they get the money they paid for to buy the house.

Moreover, it is never a wise idea to tap into retirement savings to pay the interest to banks.

Prashant said...

I think there are no financial implications of a foreclosure other than losing the flat itself. So, I would recommend that such people completely stop paying their hard earned money towards repaying their loan. The flat would be foreclosed. It just doesn't make any sense to put money behind a losing proposition. Simply walk away from the loan - that's what people are doing here in the US. The banks will lose money, and the prices will be depressed because the banks will be desparate to get rid of these flats. In the end, it will contribute in getting the prices down. Anyway, these are not my hopes. Based on what I have observed of human beings, they will exactly do as I stated stated above.

Anonymous said...


Even if such forclosures mean loss of some already paid money. Its better to lose out some than putting entire life's income in jeopardy.

In most case today, current flat value is much lower than remaining loan and forclosure may save you some money actually in the end.

S.Rajagopalan said...

Why not all the people who got housing loan join together and fight with the Banks, Reserve Bank and the Government.After all all the loans were old and comitted. The banks can raise the interest rate for the new loans.If the bank goes on increase the interest rate all the employees will become mad. No bank is incurring losses nowadays. They advance huge sums to many companies and write off later at the cost of loyal customers. Whether it is the housing loan interest or the Incometax, the government and the banks are able to collect from the employees at the lowest cost of collection and nearly 99% success.
Whenever Mr. Chidambaram takes the finance portfolio the employeers suffer.

Anonymous said...

Why blame banks ?

It is the people who are to blame for such fiasco.

Interest rates were always high and loan takers were always a few in last few decades as people believed to earn first and then buy, whcih was very right. Today rates r going back to they were always. No new thing in it.

So, again I repeat, it is the people who are to blame for such fiasco.

Just to lure people into debts and in race to increase market share, these banks started lowering the rates. Still very few customers came in. So rates were made to fall again to very low levels.

Precisely, here the illogical boom took off. Due to low interests, people borrowed heavily. Buidlers jacked up prices for no reason just out of greed, people borrowed higher n higher to buy homes without giving a thought whether prices are justified and whether they have full financial capacity to pay EMIs.

Now that things started to hurt, eyes are opening. People have to think themselves about worst times before making bg financial commitments. It is only themselves to blame.

Good that now people are resisting high prices a bit. Lets hope prices come down back to reasonalble and lower levels and let the market be volume driven instead of greed amd nonsense driven.

mallapottell said...

Khyati Dharamsi/DNA

Mumbai, Aug 18: Even banks are bracing for a possible correction in the real estate market and it’s the prospective home loan borrowers who will be hit. Expecting a fall in property rates, lenders have either increased or are planning to increase the borrower’s share in the actual cost of a home — generally referred to as down payment.

Until recently, some banks had been financing up to 90-95% of the home purchase value while the conservative ones had been giving out 85-90% of the actual price as loan. But a DNA survey has found that some banks have now started increasing margins on home loans, which means borrowers will have to shell out more while buying that dream house.

Margin is a cushion that a bank leaves between the actual value of the house and the amount of loan granted. In effect, the bank doesn’t give out 100% of the price a buyer would have to pay. This is done to ensure that the bank is protected in case the value of the house turns out to be wrong or falls significantly.

Banks usually recover the loan amount by auctioning flats of the borrowers who default on repayment. When the price of a house falls below the amount the borrower is yet to repay, the bank might fetch a low value in the auction and suffer losses. Higher margins ensure minimal losses for lenders.

Kamlesh Rao, vice-president and business head of personal finance at Kotak Mahindra Bank, says, “The instances where 85-90% of the price of the property was given as loan have drastically reduced and the average is around 75-80% now for home loans. We have always been keeping our LTV’s (loan to value) below these current average levels.”

Even the public sector banks, which are already stricter with their margins, are also likely to increase the borrower’s share. An Indian Bank official told DNA, “We had been financing 85% [of the actual value] and continue to do so. But we may look at increasing the margin levels.”

Sujan Sinha, senior vice-president of retail assets at Axis Bank, says, “We try to maintain our margin higher at about 15-25% of the house value.

“In some good cases we have been financing up to 90%. But people do not want to borrow more. Our average loan to value is less than 60%.”

There was a time when banks used to finance 115% of the home value to also provide for furnishings, etc. If the property prices fall, such banks would be hit badly, say bankers.

However, the largest home financer in the country, ICICI Bank, which provides loans under its subsidiary ICICI Home Finance, plans to stick to current margin levels. Rajiv Sabharwal, senior general manager, retail assets at ICICI Bank, says: “We have been giving out 85% of the value for the past two years. We have never given 90-97%. As long as the valuation is done well, 85% is a good figure. We have an in-house valuation expert and we are comfortable with 85%. A genuine buyer would need that kind of financing to buy a house.”

But logic tells us that the higher rate of financing would only be for borrowers with a good track record and others might have to save more before deciding to buy that dream house.

Anonymous said...

Foreclosure, as practiced in the US, may not hold true in India. One would have to check the actual loan terms for each respective bank to determine the liability in case of default.

Most mortgage loans in the US are non-recourse, an artifact of Depression-era banking changes, where the home buyer can just walk away from the house without having to pay the bank the difference between the sale price of the house and the loan amount.
The bank can of course seize the property, and also keep the principal that has already been paid. But they cannot come after the buyer for any further payments.

In India, it is not clear if mortgage loans in general are non-recourse. If not, then the home buyer in India may not be able to simply walk away. The bank may be able to attach the wages, and any other assets of the defaulted home buyer, and make up the difference between the value of the property and the loan amount. One should read the loan document very carefully, and spend the few thousand rupees to show it to a lawyer and have it explained before signing the document. Buyer beware.


Anonymous said...

If banks are over leveraged they will be bankrupt, if consumers are over leveraged, they will be bankrupt too.

600 years back Kabir said Jitni Chadar ho utne hi per phalane chahiye. Greed kills the basic common sense of many people.

Realty Rider said...

The rising bad loans are set to pose a huge challenge in the next few years for the banking and finance industry. Banks have already stopped or tightened lending norms for consumer finance and auto loans for fear of higher defaults. Rising interest rates have increased the possibilities of defaults, particularly among customers holding credit cards.Analysts say bad loans will be a major challenge for domestic banks even as regulators prepare to ease restrictions on foreign banks operating in India in 2009.Reserve Bank of India has no choice but to hike rates if inflation is at 12% and that will be a problem because if people have taken a loan of Rs 50 lakhs and paying 7% interest two years ago, now they are paying 14% which means paying double the interest now. This in turn, would lead to lesser number of people defaulting on their home loans in India because, unlike the US, the home-loans market in India is a “user’s market.For more view-

Anonymous said...

Realty Rider: When you don't understand economics, why do you have to open your mouth. I think you are one of those paid RE idiots who could never pass college and have started educating people in Finance and Economics.

Please explain how higher rate of 14% would lead to "lesser" number of defaults?

Anonymous said...

I dont understand either how come doubling of interest rates will decrease the foreclosures.
More pinch to owner by higher interest rates and more he will be forced to foreclose.

Anonymous said...

Realty Rider, I didn't quite understand how doubling interest rate on a loan from 7% to 14% would lead to less number of people defaulting on their loan.....
But you do look cute in that photo though ;)