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Home loans – and a tale of two banks

ANZ Royal started selling home loan products in 2007. By November 2008, it had 550 customers with a residential mortgage amounting to a total portfolio “between $10 million and $25 million”. But two years on, the number of customers and the book value hasn’t changed. Why?

Stephen Higgins, ANZ Royal chief executive, says the demand for home loans, like the demand for property, stalled during the global financial crisis, so much so that the bank stopped promoting home loans altogether. It only relaunched its offering three months ago.

Higgins says it will take some time before the home loan sector – one of the biggest markets for banks in developed countries – hits its stride here. But it’s not for lack of consumer demand, rather, the main obstacle is the ever-present problem of land title.

“We’d stopped offering because there was no demand. We started pushing mortgages again about three months ago. We felt that demand would start to increase and it has a little but one of the biggest issues [preventing growth] is around hard title and soft title,” he said.

ANZ will only lend to customers with hard title – property ownership that is registered with the Cadastral office. However this condition cancels out the majority of the population.

It’s hard to pin down an official government statistic for the number of the Kingdom’s households without hard title, but land rights groups have estimated the number to be as high as 85 percent.

Meanwhile, one of the Kingdom’s other major banks, ACLEDA Bank, has a different story. Not only does it lend against soft title, but its mortgage book grew over the course of the GFC.

Despite the different experiences of the two banks, there are some similarities

In Siphann, ACLEDA senior vice president and head of credit, says for long-term loans (about 10 years at ACLEDA) of more than $30,000, customers must have hard title, but otherwise, a mortgage against a soft title property is available.
Furthermore, ACLEDA’s home loan book grew 26 percent during the economic crisis, bringing its total number of customers as of September 2010 to 3,876, and its portfolio value to US$ 67 million.

Higgins says the bank’s hard title policy protects it from essentially owning land others may have a claim on, and prevents the situation where it is lending to someone who is already using the property as collateral for a loan with a different bank.

“Hard title is a very good form of security. It’s the ultimate claim on the land – no one can come and take it away from you.”

He added any other mortgages over land are also registered with the Cadastral office whereas with soft title, someone may be using the land as collateral for multiple loans and the banks wouldn’t know.

But hard title is costly, Higgins says, which is why many don’t bother to have their claim on the land officially registered.

“They need a more cost-effective way of converting soft title to hard. It costs quite a few thousand dollars to make the transition, so if you’re buying a $30,000 to $40,000 house on the outskirts of the city and you have to pay several thousand dollars to upgrade the title, that’s a very large impost,” he says.

ANZ did not change the terms of the loan much with its product relaunch keeping the offer at a 20-year loan with a variable interest rate of 10 percent a year. However it did slightly increase the percentage it would lend against to 60 percent of the property, and “for the right customer a little higher”, compared to 50 percent in 2008.

“We’re moving towards [the percentage ratios seen in] other developed markets as property prices have come back to more reasonable levels. One of our concerns in 2008 was valuations were pretty excessive but they’ve come down quite a lot.”

ACLEDA has always loaned up to 60 percent of the value of a property, but it has halved the dollar amount it will lend.

“Before the crisis we would lend up to $200,000 for a mortgage but after the crisis we’ve reduced the size of the [maximum] loan to $100, 000,”In Siphann said.

Despite the different experiences of the two banks, they have a similar story when it comes to the importance of home loans to the bank’s overall lending portfolio.

For ANZ, the residential mortgage book remains a “tiny” part of its total loan book. For example, one corporate customer is the size of the total home loan portfolio, Higgins says.

ACLEDA regards home loans as a “subsidiary product”, with the portfolio regarded as “limited”, according to In Siphann.

“The loan book for businesses is very huge compared with home loans,” he says, pointing out those medium-sized corporate loans total $312 million, small corporate loans are $135 million and micro loans equal $72 million.

Nevertheless he agrees with Higgins’ comment that the home loan sector is growing.

“Yes, there has been much more demand for home loans after the crisis.”

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