Underlying risks are lurking in the increasing supply glut of Bangkok condos.
The Bank of Thailand will soon hold a consultation to discuss the "search for yield" behaviour prevalent in the property sector with relevant parties, as it could lead to a higher risk of default in mortgage loans.
The central bank has found this behaviour widespread, especially in high-rise condominium projects, said governor Veerathai Santiprabhob.
Such behaviour reflects a condo oversupply in some areas, resulting in artificial demand and higher non-performing loans (NPLs) in the mortgage segment.
"There is a speculative bubble seen in low-end condo projects and those along mass transit lines, but such a bubble is not detected at an alarming level for the housing market," said Naris Sathapholdeja, head of TMB Analytics. "[The central bank's warning] could partly suggest that the policy interest rate will increase soon, but the main concern is rather about banks' policy abuse regarding kickbacks in mortgage transactions."
A kickback is an unearned fee between parties involved in a mortgage or real estate transaction.
But a higher loan-to-value (LTV) ratio does not mean that NPL ratio will coincidentally rise, Mr Naris said, noting that banks generally assess a borrower's debt-to-income ratio before approving a loan.
CLEAR AND PRESENT DANGER
The Bank of Thailand will talk to financial institutions and property developers about signs of higher risk in the property market and mortgage loans, particularly in some residential condo locations and the homebuyer segment, said Ronadol Numnonda, assistant governor of the central bank's supervision group.
Signs of higher risk in the property market have been found in several cases.
For mortgages, some banks have allowed higher LTV ratios for high-rise condo projects, particularly for second-home condos, Mr Ronadol said.
Certain banks also provide top-up loans for mortgage refinance, a practice he deems irresponsible. Normally, housing debt refinance would occur in the fourth year of loan maturity after the end of fixed-interest rate charged for the first three years.
"For instance, a homebuyer received 90-95% or even 100% LTV for a mortgage loan," Mr Ronadol said. "Upon refinancing with another bank, the homebuyer may get a top-up loan for home decoration, despite how that person still has an existing debt for only three years. With such practices in place, this means that the client receives a higher LTV ratio, which is not reasonable."
The central bank currently sets a lenient regulation for LTV ratio based on loan-loss reserves for the loan segment. LTV ratio is 95% for low-rise condo projects and 90% for high-rise projects. In the event that a bank offers an LTV higher than the stipulated levels, it must set higher housing loan-loss reserve to 75% from 35%. The practice should be used for those buying first homes.
For the property market, there are marketing campaigns, such as a cashback programme, in which some developers induce a higher loan amount and higher LTV ratio with no necessity for homebuyers.
For instance, a condo unit priced at 10 million baht would offer 2 million baht in cash back. The actual price is 8 million baht, but a homebuyer borrows at an appraisal price and receives LTV based on a price tag of 10 million.
When the central bank sets the exact LTV ratio, it fosters a clearer loan approval regulation and helps simplify loan analysis, said Nathapol Luepromchai, executive vice-president and head of the mortgage loan division at Bank of Ayudhya.
The financial regulator is expected to use both micro- and macro-prudential measures to supervise mortgage loans, Mr Nathapol said.
"We expect [the central bank] to ask for 'cooperation' from the private sector, which could be a measure of [banks'] marketing campaign clarification," he said. "The practice is the same as the previous requirement [to clarify] the zero-rate campaign for mortgage loans."
For instance, the central bank may need clarification about a residential campaign that promotes living for free for one year.
In practice, the property developer would subsidise the housing price or already include a subsidy in the price. Such a subsidy, which is a marketing gimmick, would delay debt instalments for the homebuyer.
Mortgage NPLs rose to 3.39% in the second quarter, up from 3.38% registered in the previous quarter, according to central bank data.
Housing loans rose to 6.2% between April and June, up from 5.8% logged in the first three months.
Mortgage loans of commercial banks registered in Thailand grew by an average of 9.4% between 2012 and this year's first half, with loan growth of 10 financial institutions examined by Asia Plus Securities (ASP) averaging 7.6%.
Upon analysing NPLs of the 10 banks, ASP found that mortgage NPLs and special-mention loans, defined as 30-90 days overdue, rose by 14.4%.
Three banks that recorded a substantial rise in mortgage NPLs and special-mention loans were Krungthai Bank (KTB), Kasikornbank (KBank), and Siam Commercial Bank (SCB).
From year-end 2012 to this year's first half, KTB's mortgage bad debts grew to 7.01% from 2.94%, while those of KBank and SCB rose to 6.75% and 5.2% from 2.62% and 3.89%, respectively.
RISE OF CASHBACK CONDOS
The practice of buying a condo unit via a mortgage loan and getting cash back -- the difference between the credit line and the price paid to the property sellers -- emerged last year, attracting both credit card debtors and opportunistic investors.
"They saw a lot of advertisements online about cashback condos, saying 'debt settlement with property' posted by individual agencies," said Phattarachai Taweewong, senior manager in property consultant Colliers International Thailand's research department.
Mr Phattarachai said cashback condos are mostly found in projects where construction has been completed but a lot of unsold units remain.
These units are either unsold in the beginning or have been returned from buyers who refuse to get a unit transfer after making a down payment, most likely because either they changed their mind or they could not resell it. Some units are returned by those unable to obtain a mortgage loan.
As a developer of this kind of project wants to close sales as fast as possible, the developer will offer heavy discounts for unsold units. This is a loophole in the making of cashback condos.
Some agencies see this as an opportunity and approach property developers while asking for a commission fee in return. Without the developer's acknowledgement, cashback condos would not have been available to buyers.
"If the project is owned by a major developer, financial institutions will approve a credit line for a mortgage loan based on the price stated in the sales contract," Mr Phattarachai said. "It can be as high as 100% of the stated price."
For projects by small property developers, the credit line for a mortgage loan will be based on an appraised price from the Treasury Department; the maximum amount will be 80% of such a price. In some cases, financial institutions will consider a sales contract in a similar manner to how they deal with big firms.
To create a cashback condo, a developer will state a price in a sales contract that is higher than the actual amount it will collect from the buyer. This sales contract will be presented to a financial institution for credit line approval.
Some developers will offer a discount to the buyer but state a pre-discounted price in the sales contract. When a housing loan is approved, there will be two cheques paid to developer and buyer separately.
"This is a normal process in which the bank gives one cheque to the developer and another to the borrower, just like it does with a usual condo buyer," Mr Phattarachai said. "When a general condo buyer gets a unit transfer, that buyer will get some money, which is the difference between the credit line that bank approves, with the remaining amount being to the developer."
The remaining amount is an amount that a buyer will pay on a transfer date after making a down payment during a certain period. Down payment is usually 10-15% of the unit price.
The difference between the credit line of a mortgage loan and the actual amount being paid to the developer is mainly the down payment money for general condo buyers, but an extra gain for cashback condo buyers.
"For credit card debtors that jump into cashback condos, the housing loan interest rate is much lower than the interest rate for credit cards," Mr Phattarachai said. "The former is lower than 4% during the first three years, while the latter is higher than 20%."
Additionally, cashback condo buyers can rent out the unit and resell it in the future to reap a capital gain.
To be a successful cashback condo buyer, an individual needs to obtain a mortgage loan approval, meaning his or her credit score should be strong enough.
"One of my friends has credit card debt and found a cashback condo in Hua Hin district online last year," Mr Phattarachai said. "He bought a unit priced at 1.4 million baht for rent and used the money remaining from a mortgage loan, with a credit line of 1.8 million baht, to repay his credit card debt."
The friend, who is a frozen food sales person, would not let himself become a borrower with bad credit. He now has more money to invest in a second condo unit.
There are also opportunists buying cashback condo and intending to obtain the difference in credit line without regard to debt-servicing ability.
"These people do not care about their credit profile or history," Mr Phattarachai said. "They are ready to let their loans become NPLs after getting money from a cashback condo. How did they get the mortgage loan? They asked their employer to certify their profile and salary."
STRINGENT APPROVALS
The state-owned GH Bank has capped its mortgage lending at 10-15% above the transferable price but not exceeding 80-90% of collateral value, in order to prevent borrowers from exploiting bank loans for property speculation, said president Chatchai Sirilai.
The borrower's debt-servicing ratio (DSR) is another criterion that the bank uses for housing loan scrutiny, Mr Chatchai said, adding that borrowers' debt repayment ability must not exceed 33% of monthly net income, well below the 40-50% required by some other banks, to ensure against too much leverage.
The bank's NPLs currently stand at 4.4% of total outstanding loans of 1.1 trillion baht.
Mr Chatchai said GH Bank's NPL ratio will likely reach 4.2% by year-end, falling short of the 4.06% target, as its plan to divest of bad loans must seek Finance Ministry's approval -- a time-consuming process.
Higher-than-expected loan growth this year has also contributed to the bank's failure to achieve its NPL target, he said.
Mr Chatchai insisted that GH Bank's loans are not used for speculative purposes, as such practices are always spotted at residential condo units with a price tag above 3 million baht.
Some 80% of the bank's loan portfolio consists of customers who borrow less than 3 million, he said.
Although Government Savings Bank's NPLs remain low at 2% of total outstanding loans, the ratio has been on the rise and this could partly be blamed on collusion by some property developers, said GSB president and chief executive Chatchai Payuhanaveechai.
Such practices have created artificial demand in homebuyers seeking loans from financial institutions, he said.
For example, a home is sold to a buyer at a price of 3 million baht, but the property developer states in the documents used for the loan application that the sold price is more than 3 million. The homebuyer obtains a 3-million-baht loan as the bank uses LTV of 90% to determine the loan amount.
To curtail this loophole, GSB has instructed its staff to tighten the loan approval process by checking whether the home price stated in the loan application is marked up more than it should be or whether it represents the price before a property developer offers any discount to the buyer.
NO BLANKET MEASURES
Mr Phattarachai said the Bank of Thailand's recent concern over rising NPLs comes as no surprise. But he said the central bank should not apply blanket preventive measures.
"Financial institutions should be more cautious about both supply and demand," he said. "[They should look into] condo projects with a large number of unsold units remaining for over a year and buyers whose documents and mortgage loan application are not strong enough."
Preventive measures could be applied on a case-by-case basis. For instance, a credit line for a second unit might be reduced to 60-70%.
"There was an investor buying 10 condo units in Phuket province priced at 2.2 million baht each through mortgage loans," Mr Phattarachai said. "And he got approval for all of the units despite how his salary could only afford one unit. This was because he applied all the mortgage loans at the same time, and banks could not find them because [the time frame of] the credit record update is six months."
Although some cashback condo buyers are prone to becoming future NPLs, they are unlikely to cause a property bubble and damage the market because the number of such buyers is insignificant.
Atip Bijanonda, president of the Housing Business Association, said the central bank should not use the current number of NPLs to evaluate new housing loans, as it's unfair.
"The central bank should find out about those mortgage NPLs and what are the real causes of those NPLs," he said. "Causes could arise from the first-time homebuyer scheme, property speculation or borrowers having first-time auto loans."
Mr Atip said artificial demand in the condo market derives from a large number of speculators and investors, which accounted for 30-35% of buyers three years ago. But today the number has decreased to 15%, all of them investment buyers.
At present, bank mortgage lending rules are stricter, resulting in mortgage rejection rates above 30%. Any preventive measure will dampen the market, Mr Atip said.
"If the central bank reduces LTV ratio, purchasing power in the residential market will decline across the board," he said. "It will have an impact on the overall economy in the end."