30 July 2006

Banks Avoid Red Light District

geylang


We learn from the article below that banks do not like to grant housing loans for residential properties located in red-light districts.

The banks are concerned about the market value of the property in the future, in the event that the borrower fails to pay his monthly instalments on time and the bank seeks to enforce the mortgage. Residential properties in red-light properties will command a lower market price and the bank may not be able, by selling the property, to fully recover the monies owed.

Sunday Times, July 30, 2006
Red blight district
Family forfeits $22,000 in booking fees for condos in Geylang red-light area after banks reject loan application

By Sarah Ng

PROPERTY experts will tell you that one of the most important considerations when buying a piece of property is - location, location, location.

If that property you are eyeing happens to be in a red-light area, this cannot be more true.

And for good reason: You may well be unable to get a bank loan for it

.....

Mr Lim, 30, his younger brother and their widowed father had intended to buy one unit each at the Atrium Residences condominium in Geylang Lorong 28 earlier this month.

To secure the three freehold units, they put down $91,000 collectively - or 5 per cent of the units' total selling price - as booking fees.

But Mr Lim started hitting brick walls when he approached banks for financing. He needed a 30-year loan of $400,000 on his unit but was turned down by no fewer than seven banks, including DBS Bank and Standard Chartered.

Only finance companies Hong Leong Finance and Sing Investments and Finance said yes.

This, despite Mr Lim earning more than $50,000 a year as a product manager with a publishing company and having a clean credit history, he said.

'I had no problem getting a car loan previously, so I didn't think that it would be a problem getting a housing loan from the banks. It never occurred to me that the location was the problem.'

He added that the condominium was located in the residential zone of Geylang, under the Urban Redevelopment Authority's Master Plan 2003.

.......

Banks contacted stopped short of admitting that they discriminate against any one location, saying only that the location of the property is among several factors they consider when reviewing mortgage loan applications.

The Monetary Authority of Singapore said it does not intervene in banks' commercial decisions on lending, which are based on their own range of internal credit evaluation criteria.

But industry experts note that banks may also have concerns about selling off such properties in the event of customers defaulting on the loan, resulting in repossession by the bank.

Said DBS Bank: 'We do not offer financing for properties that are of potentially higher credit risks to us as the current and future value of the properties are subject to several other factors like the condition, type of business and location of the property and its surroundings.'

........

Generally, banks do not finance properties located in the even-numbered lorongs between Geylang Lorong 2 and 28, which is known as the red-light district, said lawyer Lie Chin Chin of Lie Kee Pong Partnership and Ms Angeline Lim, senior marketing director of realtor ERA.


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18 comments:

hugewhaleshark said...

It's a stretch to take a $400k loan on a $50k salary. A $400k loan over 30 years will cost about $1850 per month on prevailing interest rates.

Say his monthly income is $3850 ($50k/13). CPF ordinary account contributions available for mortgage servicing is about $850 ($3850*22%). The remaining $1000 of the mortgage, which must be paid out of disposable income, is 33% of his take-home pay.

If he still has a car loan, more than half of his pay could be taken up by loan servicing obligations. Which is OK if you are making like $10k a month, but on $3850, he will be left with just $1500 or less for living expenses.

I might think twice too if I was the bank, regardless of whether the property was in Geylang or not.

Mr Wang Says So said...

Aha, I know who will be the expert to comment on this. Mr PC ...

PC said...

hmm.. did I just hear my name being called? :)

The banks generally use an affordability ratio. What they assume is a certain interest rate and they can calculate the monthly service amount. Use S$400,000 for 30years and (let's just say) an interest rate of 5%, the monthly instalment works to S$2,147.

HugeWhaleShark, the banks generally rework the income to a 12 monthly basis, so that makes the average monthly gross salary S$4,167. The Ordinary Account contribution will work out to S$834 (20% of S$4,167). That means the net cash contribution would be S$2,147 - S$834 = S$1,313. His net salary is 80% of S$4,167 or S$3,333.60. The housing loan servicing is 39.4% of his average net monthly income.

The newspaper article is silent about his other debts, but with many banks using a maximum loan-to-income ratio (known in the industry as the Debt Servicing Ratio or DSR) of 50%, Mr Lim only has a margin of only S$353.36. It is therefore reasonable to conclude that Mr Lim's applications were declined due to concerns about servicing ability, rather than location.

The article also talks of Mr Lim having a "clean credit history". What does that mean? Does it mean that one pays his car loan on time, or is the repayment a little eratic, but is currently regularized? Many people don't realize that when they choose to be tardy with ANY of their repayments for credit cards, car loans, personal loans and housing loans, they are in fact tarnishing their own credit reports. Not convinced? Go to the Credit Bureau and get a copy of your own report... this normally makes for very interesting reading...

Having said that, it is TRUE that certain banks avoid the Geylang red light district, and with good reason too. The article is right; there are concerns about difficulties in disposing of the collateral in the case of repossession.

However, some banks like UOB and OCBC will consider the Geylang properties... just take a look at mortgagee sales and you'll be able to confirm this... but to be turned down by 7 banks? Man... his DSR must be sky high...

John Riemann Soong said...

Pah, who wants a condo anyway [/sourgrapes].

John Riemann Soong said...

The thing that concerns me though is why such a grand forfeit of 22,000 dollars was made.

PC said...

John

Because when you first book a condo, the developers will issue a document known as an Option to Purchase. In return for this option, one would have to put a deposit equivalent to 5% of the purchase price, which as the article says, is S$91,000. If you choose not to exercise that, you will lose 25% of your deposit, which works to approximately S$22,000.

Mr Wang Says So said...

Heheh, as I said, PC is the man for this discussion ... :)

Anonymous said...

Calculations done here are informative. :)

I would have thought that any "negative neighbourhood" effect would already have been reflected fully in the current price of the condo itself.

A lower condo price then means smaller loan backed by a smaller expected value of collateral. Nothing there to deter a bank.

PC said...

Anonymous : In a way, you are right...

But add in a fire sale, and the prices will fall through the floor... so there is additional risk there. That's why valuers will express 3 values when they do a formal valuation : the Current Market Value, the Forced Sales Value (which is the expected selling price of the property under auction), and the Reinstatement Value (which is the expected cost of rebuilding the structure if the property were burnt down)...

I know of cases where banks are left with properties in Geylang and are unable to sell because the prices they were offered were much lower.

For the sake of interest, most banks are also adverse to financing religious buildings such as temples and churches. Imagine how difficult it would be to get rid of a temple if a bank were forced to repossess it *grin*

Lau Min-tsek said...

I am thinking that if a developer wants to make it more palatable for a bank to issue out loans, one idea is to build residential property that is more suitable to the demographic of the location.

I wouldn't buy a family type condo in a red light district. But I think it may be a good idea to plan small 1-2 bedroom apartments or studio apartments for young singles, who might find the area fascinating and dynamic to live in. This idea may stimulate residential demand in the area. In my mind, the idea seems to fit better overall than family type condos, where residents are also looking at things like schools, places for family activities etc, which isn't available in Geylang.

lee hsien tau said...
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