MORATORIUM: A housing loan repayment holiday is among the medicines prescribed for our ailing market, says Dr Ernest
In my previous article (NST RED 10th August 2012), I concluded that there are measures that Prime Minister Datuk Seri Najib Tun Razak and the government of Malaysia and all Malaysians working together can take to avoid a “crash landing” of the troubled Malaysian property market and more importantly save the generation of Malaysians between 25 years and 40 years old from financial ruin.
I also cautioned that the measures I intend to propose may prove to be unpalatable and unacceptable. What are the “bitter medicines” that we Malaysians collectively may have to take to save our country and our people?
How sick is the patient?
Let us look at the example of our friend, Ahmad bin Abdullah. When he first felt the pain in his stomach, Ahmad dismissed it as indigestion pain. When the pain grew worse, he realised he needed to see a doctor to find out the cause of the pain. It was only after he recognised that the pain in his stomach may be symptoms of a more severe sickness did Ahmad decide to seek medical advice and treatment.
Like Ahmad, does the Malaysian property market consider itself to be sick? Does the Malaysian property market consider the soaring property prices to be just the activities of property speculators or symptoms of more severe and onerous problems to come?
Is the patient in denial?
Even today, there are players in the property market advising the public to continue to buy properties “provided they are prepared to pay higher down payments”. There are others who suggested that “the Malaysian property market is not a bubble yet largely because certain segments (of the market) have sufficient income to absorb those kind of (high-priced) houses” .
Is the patient in denial? Are the players in the Malaysian property market in denial? Are these players refusing to acknowledge that the already high property prices cannot continue to soar and the rocket will soon run out of fuel and plummet to earth?
What is the stand of the Malaysian government?
With the players in the Malaysian property market in denial, what is the stand of the Malaysian government? I sincerely hope the Malaysian government is not in denial.
Urgent actions needed: In my previous articles (NST RED 27th July 2012 and NST RED 10th August 2012), I showed that many high-income and middle-income families really cannot afford to continue to pay their banks the monthly housing loan instalments as evidenced in the following charts:
See Table 1
Bank Negara Malaysia’s mandatory rule on non-performing loans: I am informed there is a mandatory rule of Bank Negara Malaysia that when a borrower fails to pay the lending bank the monthly housing loan instalment for four consecutive months, he would be considered a loan defaulter and his housing loan would be deemed a “Non-Performing Loan” (NPL).
I am also informed when a housing loan has become an NPL, the lending Bank is required to take actions against the defaulting borrower including foreclosure proceedings to ultimately sell the mortgaged property through public auction for recovery of the NPL. From that point on, the hapless borrower and his family are at the mercy of the bank’s lawyers.
The human costs of foreclosures: An individual borrower who is about to default or who may have already defaulted on his housing loan is no different from the situation faced by a corporate borrower facing difficulty repaying its loan.
When the lending bank takes action against a defaulting company, the shareholders would have lost their investments and the directors and employees of the defaulting company would have lost their jobs. These people can always find new employment elsewhere.
However, when the lending bank takes action against a defaulting individual borrower, due to circumstances beyond their control, the borrower’s family is put through a period of emotional and mental stress, from which they may never recover. They will have to face the very real possibility of losing their home and the possibility the children may have to stop or interrupt their university education that will adversely affect their future.
Malaysian attitude towards public auctions: In Malaysia, there is unfortunately an expectation and perception that properties bought at public auctions should be purchased for less than their “market prices/market values”. Many public auctions were abortive (unsuccessful) with potential bidders refusing to pay “market price/market value” for a property. They will wait for the reserve price to be reduced to a sufficiently “low level” before they would consider participating in the bidding process.
Given the attitude of Malaysians towards public auction sales, actions taken by the lending bank to foreclose on the borrower’s property and attempts to sell the property through a public auction in most cases are doomed to failure.
After the abortive public auction, not only has the lending bank failed to sell the borrower’s property, it has further exacerbated the borrower’s pains and sufferings by adding the costs of their abortive attempts onto the borrower’s already ballooning outstanding loan amount that he eventually will have to pay.
What the lending bank has done to the hapless and distressed borrower is very aptly expressed in the Malay idiom “sudah jatuh di timpa tangga”, translated into English as “after you have fallen, you are then crushed by the ladder”.
Distress worldwide headlines: Malaysia is not alone when it comes to facing the prospect of housing loan repayment defaults by the growing number of distressed borrowers in financial hardship, as evidenced in the following headlines from around the world:
“Helping home borrowers in financial hardship” (Australian Securities & Investment Commission)
“Freeze on debt repayments could boost small companies” (Microsoft Business Newsletter, USA)
“Can a loan moratorium save owner from foreclosure if behind on payments” (City Data Forum)
“Economic analysis of a mortgage foreclosure moratorium” (CSR Report for Congress, USA)
The bitter medicines: A hitherto tabooed and unspeakable word among the global banking community is increasingly finding its way into the vocabulary of politicians and policy makers in countries from America to Europe to Asia. That word is “moratorium”.
Loan repayment holiday: Oxford English Dictionary defines “moratorium” as “Legal authorisation to delay payment of debts”.
2012 Answers Corporation describes “moratorium” as “Basically, a moratorium on loan repayments is a loan repayment holiday. The borrower is not required to make loan repayments or pay dues/fees for non-payment for a required period. Loan repayment moratorium is usually granted to borrowers in financial hardship”.
Housing loan repayment moratorium: A housing loan repayment moratorium is the bitter medicine that Malaysian banks will have to take to save the Malaysian banking Industry, our country and Malaysians.
Asking banks in Malaysia to participate in the actual implementation of a “Housing loan foreclosure moratorium” will likely prove to be unpalatable and unacceptable!
Will Malaysian banks agree to implement a Malaysia-wide housing loan repayment moratorium for an initial three-year period to be extended to five years if the economic recession were to continue beyond the initial three-year period?
Alternative to taking the bitter medicines: Do Malaysian banks have a choice? Or do they have a “Hobson’s Choice”?
I remember watching the movie “War Horse”. This movie is about a horse that was sent by the British Army to France to fight in the Battle of the Somme during the First World War. The German Army was in their trenches facing the British Army in their own trenches across a heavily mined and barb-wired no-man’s land.
Behind the German trenches was a range of low hills. The Germans wanted to position heavy artillery at the peak of these hills to bombard the British troops in their trenches below. There was however a problem: How to bring these heavy guns up the steep slopes to the top of the hills? (During the time of the First World War, from 1914 to 1918, there were no heavy equipments to pull these heavy guns up the slopes. All the Germans had to pull these guns were horses.)
In the movie, I saw five pairs of horses tied together one pair after another pulling a gun carriage on wheels with a huge cannon mounted on top. The slope appears to be steep like a 30-degree to 35-degree incline.
The 10 horses were struggling to pull the heavy gun carriage with the mounted cannon up the slope. They huffed and puffed. Close-up shots showed some horses with their knees bent towards the ground, they could go no further. German soldiers continued whipping them to get them to continue climbing the slopes.
Soon after, one horse collapsed and died to be replaced by a fresh horse. After a short distance, another horse collapsed and died to be replaced by yet another fresh horse. This inhumane mistreatment of the horses continued until the 10 horses (original and replacement horses) reached the top of the hill. The German soldiers removed the 10 horses from the gun carriage and led them downhill to pull another gun carriage with the mounted gun up the hill.
Beating the dead horse: The German soldiers in the movie were “beating the horses dead” and after the horses had collapsed on the ground and died, the German soldiers continued to “beat the dead horses”.
Let us now leave the movie “War Horse” and return to reality.
Drowning Malaysian families: Thousands of Malaysian families are drowning in their housing loan debts or barely keeping their heads and noses above water. Their situation may be likened to the situation of the horses pulling the gun carriage and the mounted gun up the steep slope in the movie “War Horse”.
These thousands of Malaysian families are drowning in their housing loan debts, they are tired and like the exhausted horses in the movie, they could go no further in meeting their obligations to the banks.
Malaysian banks have the Law on their side and they have the right to take whatever actions necessary to enforce their rights under the terms and conditions of the respective Loan Agreements, Charge Documents and other legally enforceable documents signed by their hapless borrowers.
With the Law on their side, what do Malaysian banks want from their hapless borrowers? Do they want to be like the German soldiers in the movie? Do they want to continue to pursue their borrowers until they collapse and then make them bankrupts? Is this the outcome Malaysian banks want, to make all their borrowers bankrupts?
The alternative to moratorium is “The Armageddon”.
The Armageddon: Let me now take us through a very ridiculous and yet surreal scenario. Malaysian banks, on the advice of their Lawyers, decide to enforce their rights against their hapless borrowers. On the advice of their Lawyers, Malaysian banks pursued their borrowers through Malaysian Courts all the way until they obtained thousands of enforceable “Orders for Sale” issued by the Malaysian Courts.
What next for Malaysian banks? Again on the advice of their lawyers, Malaysian banks decide to execute on these thousands of enforceable “Orders for Sale” and appointed Auctioneers to sell the foreclosed properties through public auction.
Flooding the market with foreclosed properties: Malaysian banks’ decision to execute on these thousands of enforceable “Orders for Sale” effectively floods the Malaysian property market with thousands of foreclosed properties that they are now trying to sell through public auctions
Malaysian banks induce collapse of the market: When Malaysian banks flood the Malaysian property market with thousands of foreclosed properties and then attempts to sell these properties through public auctions, they will create a very dangerous oversupply situation. With thousands of foreclosed properties flooding the property market, the forces of “supply” and “demand” will take over. Property prices will nose dive, possibly leading to the collapse of the Malaysian property market.
Knowing the prevalent attitudes of Malaysians toward public auctions, Malaysian banks’ actions to flood the property market with thousands of foreclosed properties and their attempts to sell these properties through public auctions are akin to the actions of the German soldiers we see in the movie “War Horse” when after “beating the horses dead” they continued to “beat the dead horses”.
Mutual destruction— the unthinkable consequence: When Malaysian banks through their unrelenting foreclosure actions flood the property market with thousands of foreclosed properties and then subsequently attempt to sell these properties through public auctions, thereby causing property prices to nose dive thus precipitating the collapse of the Malaysian property market, they would have succeeded in ensuring their own mutual destruction with their borrowers.
Malaysians, are we prepared for this surreal Armageddon scenario?
Tell-tale signs of impending recession: I have been through at least three recessions: the 1985/86 recession, the 1997/1998 Asian Financial Crisis and the 2008 Global Banking Crisis. Before the start of every recession, there are tell-tale signs like before an earthquake is about to happen. The shopping malls will be empty except during the last weekend of the month when shoppers get paid, visitors to the malls are not buying, they are just window shopping, there are less cars on the roads, the restaurants are having less diners. I am beginning to see these tell-tale signs in the Klang Valley.
These signs tell us Malaysians are having less money to spend. Most of their monthly take-home pay goes to pay housing loan and car loan instalments. The 2012 recession is just round the corner if it is not already here.
Can we ignore these signs and continue to spend as if the good times will never end?: I remember watching the movie “The Towering Inferno”. This movie is about a group of rich Americans having a party at the Penthouse of a tall office building. A fire started in a store room in an office many floors below them. The host of the party was informed of the fire and advised to stop the party and send his guests home. He decided to ignore the advice and reasoned that the City Fire Department will put out the fire in no time.
While the guests continued to party in the Penthouse, the fire was spreading below them until it was too late for the guests to be evacuated via the emergency staircases. An aerial evacuation was arranged. A helicopter flew by to shoot one end of a rope to a nearby building and the other end of the rope would be shot at the Penthouse. Both ends of the rope were secured and an airlift chair was then hooked onto the rope to transport the guests from the Penthouse to the nearby safe building one at a time.
Women guests were first evacuated. After the women guests were evacuated and it was the men’s turn, the men began to fight to get onto the chair. There was one scene when as the chair was being pulled away from the Penthouse with one man on it, two other men rushed to the chair and tried to get onto it. There was a scuffle. Overwhelmed by the weight of the three men, the rope snapped causing all three men to fall to their death.
The host then attempted a very dangerous and last ditch plan i.e. blast the water tanks above the Penthouse in the hope that the gush of millions of gallons of water will put out the fire below.
The host authorised the attempt to blast the water tanks. There was the scene that showed the gush of water rushing and inundating the Penthouse after the tanks were blasted. The fire was finally put out and the guests were saved.
Do we wait for a full blown crisis like “the Towering Inferno”?: Malaysians, do we want to wait for a full blown economic crisis like “the Towering Inferno” to arrive before we act? When the economic “Towering Inferno” arrives, it may be too late for us to avert a disaster. By then Malaysian banks would have succeeded in making all their defaulting borrowers bankrupts and in the process they would have precipitated a crash of the Malaysian property market with dire consequences for all Malaysians.
Many readers will disagree with me and reject my above analysis. These readers will likely brand me “an alarmist and fearmonger”.
In response to readers branding me as “an alarmist and fear monger”, I have one question for Malaysian banks: “Can Malaysian banks be relied upon to self-regulate and to act with caution and compassion and not to commence with wholesale foreclosure proceedings against their defaulting borrowers that would not only cause the economic destruction of their borrowers but also would precipitate a crash of the Malaysian poperty market with dire consequences for all Malaysians?”
For a possible answer to that question, let us go to America, Britain and Europe to examine the conduct and actions of global international banks and find out what the likes of HSBC, Barclays Bank PLC and Standard Chartered Bank have done in those countries:
1. In America and Britain, Barclays Bank PLC was found to have illegally manipulated the mechanism for fixing the daily London Interbank Offered Rate (LIBOR) interest rate. Barclays Bank PLC was fined by both the British and the US governments.
2. The British and US governments are investigating numerous European and British banks, many of which are international banks, for their involvement with Barclays Bank PLC to illegally manipulate the mechanism for fixing the daily LIBOR interest rate.
3. In America, HSBC was investigated and accused by the government of New York State to have allowed their New York branch office to be a channel for the laundering of illegal drug money from Mexico to the US through HSBC’s Mexico office.
4. In America, Standard Chartered Bank was investigated and accused by the US government of illegally helping Iran to move billions of US Dollars through the American banking system thereby violating American government and United Nations rules for the sanction of Iran.
With such charges of misconduct, even accusations of criminality by the US and British governments against such hitherto highly respected and reputable international banks, I will let readers form their own opinion and find their own answers to my above question.
Intervention by Najib: Dear Datuk Seri Najib, on behalf of the thousands of Malaysian families now drowning in their housing loan debts or barely keeping their heads and noses above water, I appeal to you to intervene to have Bank Negara Malaysia impose a Malaysia-wide housing loan repayment moratorium to be implemented by Malaysian banks for durations of between three to five years.
The benefits of the Housing loan repayment moratorium when implemented are:
1. The thousands of distressed borrowers and their families are spared the emotional and mental stress of having their homes foreclosed
2. The thousands of distressed borrowers and their families are spared the trauma of having to face the possibility of losing their homes and the possibility that their children may have to stop or interrupt their university education which will adversely affect their future.
3. With the Housing Loan Repayment Moratorium in place, there will be no wholesale foreclosure proceedings by Malaysian banks against their defaulting borrowers that would help to avert a crash of the Malaysian Property Market with ALL Malaysians spared the dire consequences.
4. With the Housing Loan Repayment Moratorium in place, the thousands of distressed borrowers and their families would have money in their pockets that they otherwise would not have that they can then spend on food and other essential consumer items.
5. The increase in consumer spending by these thousands of otherwise distressed borrowers would provide Malaysia’s consumer-based domestic economy including traders in the Shopping Malls and other small businesses with the customers that they badly need to survive the recession
6. The increase in consumer spending from these thousands of otherwise distressed borrowers would soften the impact of the global recession on the Malaysian economy that in turn would help to hasten its recovery
7. When the Malaysian economy recovers from the recession, the recovery of the Malaysian Property Market will then follow. Malaysian banks working with their borrowers can then sell the mortgaged properties at prices close to the then outstanding housing loan sum. Even if the final sale price is less than the outstanding amount, with their borrowers still solvent, Malaysian banks can then convert the balance unpaid loan sum into a Personal Loan to be repaid by the borrowers over an agreed time period.
8. An alternate solution to para 7 above, by that time the borrowers’ children would have graduated from universities and gainfully employed. With their children’s incomes added to their incomes, the borrowers, if they so wish, may then refinance their properties and apply for new “Generational Housing Loans” repayable in 40 years or 50 years’ time.
9. With the Malaysia-wide Housing Loan Repayment Moratorium in place, Malaysian banks do not lose their right to be repaid the Housing Loans granted to their borrowers. They only postponed and deferred the time for repayment. In the end, they will be repaid in full by their borrowers.
Datuk Seri Najib, to get through these perilous times with the looming global recession in the horizon, the Malaysia-wide Housing Loan Repayment Moratorium is a win-win solution for both Malaysian banks and their hapless and distressed borrowers.
Datuk Seri Najib, please help to make the Malaysia-wide Housing Loan Repayment Moratorium a reality.
Calling all distressed borrowers and their families: Please write to Datuk Seri Najib, The Prime Minister and Finance Minister of Malaysia and appeal to him to save you and your families from financial ruin. Please request him to intervene to have Bank Negara Malaysia impose a Malaysia-wide Housing Loan Repayment Moratorium to be implemented by Malaysian banks for durations of between three years to five years.
The Prime Minister’s address is: Datuk Seri Najib Tun Razak, Prime Minister’s Office, Blok Utama, Bangunan Perdana Putra, Pusat Pentadbiran Kerajaan Persekutuan, 62502 Putrajaya.
This column is endorsed by the National House Buyers Association of Malaysia (HBA) to educate, inform and empower house buyers in Malaysia.