Taiwan News, Staff Writer
2014-07-18 11:57 AM
Financial Supervision Commission (FSC) measures to reign in Taiwan’s surging real estate market was formally announced July 17.The FSC will take a retroactive approach by adjusting the risk weighting on non-owner occupied residential mortgages upwards to 100%, meaning every NT$1 banks lend is NT$1 added to banks’ reserve requirements.
After implementation, when a borrower who owns existing property applies for a bank mortgage, the bank will increase the interest rate to reflect costs. Currently, bank interest rates for mortgages on non-owner occupied properties in excess of borrowers’ first property are approximately 2% to 2.5%. Bankers estimate, once risk weighting is raised, interest will increase 25 basis points to reflect cost. Banks may even refuse to provide loans due to the added burden on reserve requirements.
Currently, the principle for owner occupied residential mortgages is “one property per person.” In principle, Banks will make determinations based on landowner property data provided by tax authorities. However, in order to strengthen determination procedures, landowner property data will be given priority with Joint Credit Information Center (JCIC) data as a supplement.
If landowner property data show that borrower already owns property, a 100% risk weighting will be applied to the new residential mortgage, unless borrower can present proof the existing property is non-owner occupied. If JCIC data confirms that borrower is indeed unencumbered by any mortgage on owner-occupied property, a 45% risk weighting will be applied to the new residential mortgage.
It is worth noting, if a married couple does not own property and both apply for separate mortgages, a 45% risk weighting will be applied to each of their respective mortgages.
The FSC stated, in 2011, a total of 17 banks possessed relatively high concentrations of mortgages. This year, this number has fallen to 7. As of May 2014 the mortgage balance of the aforementioned 17 banks has been reduced NT$142.9 billion from 2010.
FSC Banking Bureau Deputy Director-General Jean Chiu stated, only by having sufficient reserves for bad debt will banks be capable of sustaining the risk associated with real estate market fluctuations and economic downturns.
The retroactive upward adjustment of the risk weighting of non-owner occupied mortgages has elicited a strong reaction from bankers. A number of banks have stated, if this policy is retroactive, banks’ capital adequacy ratios will fall and increasing interest rates will impact customer relationships. Banks at the 8% capital adequacy ratio will increase capital or adjust asset structure to fulfill regulatory requirements. In addition, demanding customers accept interest rate hikes on loans that have already closed is highly irregular and will destroy the relationship between banks and customers.
A senior bank manager remarked, the key to high property prices is the proliferation of market capital. Raising interest rates does not affect large real estate speculators. Even if capital is forced into securities markets, profits will inevitably flow back into real estate which will only buoy property prices.