KL housing scheme: Birth of subprime crisis?

The news of Employees Provident Fund providing funds for a home loan scheme for those not qualified for commercial loans in Kuala Lumpur, Malaysians have started voicing concern for the pension funds.

But, according to Ratings Agency Malaysia chief economist Yeah Kim Leng, the critical questions to ask are whether or not the debtors will service their home loans, and what happens if they do not.

EPF explanations so far, said Yeah, reveal that the venture is both profitable and safe for the Fund and its contributors.

He said that at 5.5 percent profit, the loan has a yield of higher than government bonds and is guaranteed by the government, with the entire risk borne by a special purpose vehicle (SPV).

Defaults, he said are not unlikely seeing that tenants in DBKL public housing already now face issues paying rent, with many unable to take up offers to purchase even though the units are priced below market rate.

"If the debtors default, the SPV won't be able to expand its operations... and will need capital injection to service its operational expenses which will come from a bail out from the government," he said.

The bail out, it seems will come from the Kuala Lumpur City Council, which EPF said will buy the houses to provide the SPV-Federal Territories Foundation set up under the ministry-the cash to service its EPF loan.

"It's still taxpayers' money and DBKL's mayor does not have the electoral mandate to spend taxpayers' money," said Institute of Demoracy and Economic Affairs chief executive Wan Saiful Wan Jan (right).

Good for polls, but short-lived

According to Wan Saiful, extending loans to those who failed to qualify for commercial loans "ignores the US experience".

"It will not happen in two or three years, but in 10 or 15 years way after the current administration has left office.

"It's absolutely rubbish. If banks don't want to give out loans what is the SPV doing? The SPV has no experience in loaning money," he said.

He added that in the short term, the venture is a win-win situation for all, but people were also happy when the US scheme was introduced in 1938.

"The immediate effect is positive for the government, people who buy the property and for EPF," he said it will also be favourable for the Barisan Nasional in the lead up to the general election.

He added that Federal Territories and Urban Well-being Minister Raja Nong Chik Zainal Abidin was also not being truthful when he said that the government is using EPF money out of choice.

"It's because the government doesn't have money. If it did then why are we in deficit. It should stop all the lies. It is scrambling everywhere to fund welfare projects because an election is coming up," he said.

Yeah agrees that the EPF-backed scheme is an off-balance sheet expense which the government is forced to adopt as it is rapidly heading towards its debt and deficit ceiling.

"It is a social issue, and good policy is to provide subsidy for housing but it must only be a bridging fund...with hopes that the government's balance sheet will improve over time," he said.

Would transparency ensure low defaults?
Yeah is also optimistic that a subprime crisis can be averted so long as the Federal Territories Foundation is kept transparent and accountable, and has in place strict penalties for defaults and incentives for payment.

The government, too, has assured that it will do due diligence before doling out the loans, targeting groups who have steady income, but fail to get commercial loans for lack of salary slips, for instance.

He added that a subprime crisis is also "unlikely" as long as the Malaysian economy holds up and house prices continue to rise annually at 3-4 percent. .

"Ultimately, you want to raise income through assets, rather than encouraging renting which will not raise income level.

"Subprime crisis happens when home value is lower than loan value, where the negative net worth means home owners will walk away from payment. This will happen in a prolonged slump of house prices, which is unlikely," he said.

But Yeah ,too , is quick to agree that economists can only so far down the line.

"When someone buys a house, they're in it for 30 years. House prices don't rise forever," said former international banker Michael Lim.

Playing with dynamite
Lim, who served for 20 years in banks like Credit Suisse First Boston, Deutsche Bank, Standard Chartered Bank and the Asian Development Bank, said extending loans to those unqualified is "playing with dynamite".

He said that Malaysia's property prices are artificially propped due to purchases by foreigners and the Malaysian diaspora, and is currently hovering at three to four times the average household income.

The US crash, he said, was brought on in parts by rapid escalation of home prices up to 5.5 times of average household incomes.

He said that Canada had averted a subprime crisis, thanks to its strict laws requiring 20 percent equity for every home purchase, which acted as a "buffer" when home prices drop below loan value.

"In Malaysia, we are giving out to 100 percent loans and an extra 5 percent for the poor. This is ridiculous. When equity is wiped out people will walk away (from the loans)," he said.