KoSong: Alan Tong: Avoiding a subprime crisis

How should we judge a government?

In Malaysia, if you don't watch television or read newspapers, you are uninformed; but if you do, you are misinformed!

"If you're not careful, the newspapers will have you hating the people who are being oppressed, and loving the people who are doing the oppressing." - Malcolm X

Never argue with stupid people, they will drag you down to their level and then beat you with experience - Mark Twain

Why we should be against censorship in a court of law: Publicity is the very soul of justice … it keeps the judge himself, while trying, under trial. - Jeremy Bentham

"Our government is like a baby's alimentary canal, with a happy appetite at one end and no

responsibility at the other. " - Ronald Reagan

Sunday, October 09, 2016

Alan Tong: Avoiding a subprime crisis

Excerpt:

"THE recent announcement by the Urban Wellbeing, Housing and Local Government Ministry to enable property developers to obtain moneylending licences, and provide up to 100% financing for homebuyers has attracted many comments and debate. The minister, Tan Sri Noh Omar said the scheme is intended to assist Malaysians who have difficulties in securing a home loan.

In fact, the move is not new given that it has already existed under the Moneylenders Act 1951. Under the Act, the requirements for a moneylending licence are the same for any company, it only requires the approval of the Minister of Housing and the Registrar of Moneylenders. In our country, some property developers with the moneylending licence have already started to offer mortgage financing to their buyers, even prior to this announcement.

Despite not being a new scheme, all responsible developers need to consider the scheme carefully before jumping on the bandwagon. Without a proper framework, the move may create a similar US subprime crisis.

Let’s revisit the US subprime mortgage crisis that happened in 2008, less than a decade ago. The crisis stemmed from an earlier expansion of mortgage credit, including lending to borrowers who had difficulty in getting mortgages.

In the early and mid-2000s, high-risk mortgages were easily available as lenders were highly motivated to issue new loans without concern for purchasers’ credit quality. This move stimulated the demand for properties which then swiftly increased property prices. When property price finally peaked, mortgage refinancing became less viable for lenders and investors to settle mortgage debts. The bubble then burst. The demand for properties fell and sure enough, prices fell dramatically as well. Those caught in the net had difficulties paying off their mortgages, resulting in lenders also experiencing cash flow problem."

Rest of article in The Star: https://www.blogger.com/blogger.g?blogID=18150687#editor/target=post;postID=3002512907028842697

Incidentally, found the following animation which helps to illustrate how a bubble is created and then burst...