How eager are banks to 'call' mortgage loans and what are your options if they do?

Relations between banks and homeowners in Hong Kong have been tense against the backdrop of a sluggish property market and a slow economic recovery in the aftermath of the Covid-19 pandemic.

Incidents and rumours of banks calling loans - demanding immediate payment - have increased as the value of property collateral has dwindled, prompting regulators to step in with relief measures for borrowers.

Distress in the market, especially in the luxury and commercial segments, has crept into the banking system, as lenders grapple with valuations that have yet to bottom out and concerns that troubled homeowners may be unable to repay their loans amid elevated interest rates.

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Next year, close to US$34 billion of bank loans in Hong Kong's property sector will come due, and only 12 per cent of them have been refinanced or repaid, according to estimates by the London Stock Exchange Group.

Here is what you need to know about when and why a bank might - or might not - decide to call your loan, what you can do in that case and why falling interest rates are creating more options for strapped borrowers.

Calling a mortgage loan means that the bank demands immediate repayment of the loan. According to the loan contract, the lender has the right to request early repayment from the borrower at any time.

The city's declining home prices have dragged a record number of mortgage borrowers into negative equity, in which the current market value of a property is lower than the outstanding balance of the mortgage loan.

The number of such cases tripled to 32,073 in the first quarter of this year from the previous quarter, according to data from the Hong Kong Monetary Authority (HKMA). That was a 20-year high, dating back to the severe acute respiratory syndrome outbreak. The number stabilised as of the end of June, with the so-called upside-down loans falling 5.5 per cent to 30,288.

A real estate agency in Tai Koo shows discounted home prices. Photo: Eugene Lee alt=A real estate agency in Tai Koo shows discounted home prices. Photo: Eugene Lee>

When valuations drop, it affects the loan-to-value (LTV) ratio set out in the loan agreement, creating potential for default.

In addition to the LTV ratio, banks deciding whether to call a loan also consider the borrower's credit demand, overall financial position and repayment ability, as well as whether there are sponsors who can inject equity or pump in more money.

As property values slid, the HKMA sought to reassure borrowers that banks will not demand early repayment even if the underlying property's value declines - as long as the borrower continues to make mortgage payments on schedule.

Banks hesitate to exercise their right to call loans because it may affect goodwill, according to industry experts. Also, if borrowers are unable to repay early, it creates bad debt that hurts the banks' balance sheets. The latter situation will come at the expense of depositors' money.

Even if a property is seized for a bank auction, the proceeds may not be enough to cover the loan amount and the additional administrative fees.

"The bank is trying not to call loans from the owner if the owner doesn't default on interest payments," said Reeves Yan, executive director and head of capital markets at CBRE Hong Kong. But "extreme cases" happen when borrowers go into default, liquidation or bankruptcy, leaving limited potential for the bank to recover the loan, he added.

While some banks intend to recover some of their non-performing loans, the general sentiment is that they do not want to push clients too hard, because that would risk damaging the relationship and jeopardising future business opportunities, according to Foreky Wong, a founding partner at Fortune Ark Restructuring.

This is especially true for commercial property.

"Banks with strong local exposure would typically want to give the city's long-established enterprises more time, provided that they are still making interest payments and are willing to solve the liquidity issue," Wong said.

Property above Kowloon Station in West Kowloon, pictured on February 27, 2024. Photo: Jelly Tse alt=Property above Kowloon Station in West Kowloon, pictured on February 27, 2024. Photo: Jelly Tse>

For example, HSBC's exposure to defaulted commercial property loans increased nearly 500 per cent to US$3.2 billion in the first half of the year compared with the end of 2023. But Hong Kong's largest lender recorded a nearly 13 per cent decrease in its expected credit loss (ECL) allowance to US$258 million.

"Although the level of defaults increased in other commercial real estate exposures booked in Hong Kong during the period, there was no significant impact on ECL charges due to high collateralisation, with room for depreciation," the bank said in its interim report.

Upon receiving notification that a bank is calling a loan, the borrower should weigh all financial options. Is it possible to sell the property to repay the loan? Or could the loan be refinanced with another bank?

Switching to another bank could make the borrower eligible for cash rebates. Major commercial banks in Hong Kong have started to offer these again in anticipation of an increase in mortgage transactions after the Federal Reserve cut interest rates for the first time in four years last week.

Last month, the city's banks recorded 463 mortgage refinancing registrations, an 18.4 per cent decrease compared with the previous month and the lowest since January 2017, according to Centaline Mortgage Broker. However, refinancing applications are expected to surge now that banks have returned to "normal" mortgage approval processes and launched not only cash rebates but also new low-interest, fixed-rate mortgages, the broker said.

Last month, six of the biggest banks, with a combined 80 per cent share of the city's mortgages, signed a pledge to approve all eligible applications within two weeks, answering a call from the HKMA to cut red tape and provide funding help to small-and-medium enterprises and mortgage borrowers. The banks are HSBC, Standard Chartered, Bank of China (Hong Kong), Bank of East Asia, Hang Seng Bank and ICBC Asia.

"Banks speeding up the mortgage approval process does not mean they will relax mortgage approval conditions," said Eric Tso Tak-ming, the chief vice-president of mortgage broker mReferral. Mortgage borrowers are advised to shop around with various banks, he said.

While banks may have different appetites for real estate loans, the numbers show that they have not been interested in increasing their exposure. Total loans for property development and investment started to decline in the second quarter of last year, and loan levels in the second quarter this year were the lowest seen since 2020 at HK$1.56 trillion (US$200 billion), according to the HKMA.

Some loan bankers believe that declining interest rates following the Fed's move will help relieve some of the burden on borrowers. However, an economic recovery in the city and mainland China will remain a critical factor in boosting the property market.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2024. South China Morning Post Publishers Ltd. All rights reserved.