Understand The Property Market In The Context Of Mortgage Risks Management

Following the financial crises in the past decade, the mortgage business has a higher risk but lower profit margin. A series of control measures were also introduced recently to try to tighten mortgage lending. However, mortgage remains a significant portion in banks’ loan books. It may be worthwhile for us to take a closer look at the reasons behind.

In a professional seminar organised by HKU SPACE College of Business and Finance, Mr. Desmond Cheng, Senior Vice President (Risk) at Hong Kong Mortgage Corporation Limited, was invited to deliver a speech on the topic of "Mortgage and Property Risks".

The Mortgage Business Under Siege

With more than 20 years of experience in the financial services industry, Desmond oversees the mortgage insurance business, actuarial and quantitative risk, and risk management functions. His areas of expertise include risk management framework, risk modeling, risk policies and actuarial risk. In the first section of the seminar, Desmond analysed the mortgage business from the perspective of bankers. He stated that mortgage is an important element within our economic structure, and gave us a review of the changes in interest rate during the past 10 years. Desmond said, "For banks and institutions in the mortgage business, the downward trend of historical mortgage spread, which fell from 0% to a sub-zero level, was quite a threat."

The main reasons attributed to the descent are the fierce competition for market share in the post-Asian Financial crisis era. But as the mortgage interest margin was squeezed and the US subprime mortgage was brought to a risky level, the financial tsunami took place in 2008 finally sounded an alarm in the industry.

The Questions Of Why And How

Under this situation, one of the the key questions is: Should banks continue building mortgage books? Participants were invited to share their views interactively. Many of them supported the notion and stated that banks still get a steady flow of interest income due to a stable demand in the property market. Some of them also pointed out that banks would like to retain their client base so as to develop other business opportunities through cross-selling.

Desmond then proceeded to the second question: How to manage the mortgage book? He said, "To answer the question, we need to understand the mortgage products and risks involved first. Different types of interest rates, repayment structures and underwriting standards should be taken into consideration in mortgage management." In the discussion of the key risks involved in mortgage lending, Desmond showed us a statistical analysis of delinquency rate during the year 1998 to 2010, in which we witnessed the highest level of more than 1.4% appeared in June 2001 gradually stepped down to a present near-zero level.

Correlation Between Property Value And Mortgage Default

The second part of the seminar attracted even more feedbacks from the floor, as Desmond explained his views on the correlation between property value and mortgage default. An estimated model by the Hong Kong Monetary Authority was employed to analyse influence of factors like transaction volume, price-to-income ratio and buy-rent gap, etc. on the mass market as well as the luxury market.

As a conclusion, Desmond reiterated that even though the effect of regulating measures from the government may not be imminent as expected, we should understand that property value is in fact affected by a complex composition of various market forces.