Prudential Measures for Property Mortgage Loans

Our Ref.: B4/1C
10 June 2011
The Chief Executive
All Authorized Institutions
Dear Sir/Madam,
Prudential Measures for Property Mortgage Loans The Hong Kong Monetary Authority (HKMA) has been closely monitoring the property market in view of the increasing risk of an asset price bubble that may undermine the stability of the banking system in Hong Kong. Despite a brief slow down in transactions following the introduction of the measures by the SAR Government in November 2010, property prices in Hong Kong have continued to rise and exceeded the levels in 1997. Given the current exceptionally low interest rate environment and the expectation of higher inflation, we believe that authorized institutions (AIs) will continue to experience increasing risk to their mortgage lending business. In addition, the HKMA noted in the latest round of onsite examinations that AIs have encountered some difficulties in properly assessing the repayment ability of borrowers whose income is mainly derived from outside Hong Kong. In view of these developments, the HKMA considers that it would be prudent to introduce further prudential measures for mortgage lending to address the increasing risk to the stability of the Hong Kong banking system. AIs are required to observe the following guidelines in undertaking mortgage business:
Measures applicable to owner occupied residential property mortgage loans only (a) For properties with a value at HK$10 million or above, the maximum LTV ratio shall be 50%; (b) For properties with a value at HK$7 million or above but below HK$10 million, the maximum LTV ratio shall be 60%, subject to a maximum loan amount of HK$5 million; (c) For properties with a value below HK$7 million, the maximum LTV ratio shall be 70%, subject to a maximum loan amount of HK$4.2 million.

Measures applicable to residential and non-residential property mortgage loans (d) Reducing the applicable maximum LTV ratio by 10 percentage points for all property mortgages to borrowers whose income is derived mainly from outside Hong Kong. However, borrowers who can demonstrate having a close connection with Hong Kong (e.g. those who are on secondment by a local employer to work outside Hong Kong with documentary proof provided by the employer or those who have their immediate family members 1 residing in Hong Kong) will not be subject to the LTV reduction; and (e) Lowering the maximum LTV ratio for property mortgage loans based on borrowers’ net worth (i.e. net worth-based mortgage loans) from 50% to 40% irrespective of the value of the properties. In view of the difficulties in verifying borrowers’ net worth regularly, it is considered prudent to lower the maximum LTV ratio. The above guidelines take immediate effect. To avoid causing hardship to borrowers who have signed a provisional sales and purchase agreement on or before the date of this letter, AIs may assess mortgage applications of these borrowers based on their existing underwriting criteria. With the introduction of positive mortgage data sharing, AIs should consider whether it is necessary to apply more stringent credit underwriting standards when lending to borrowers with multiple outstanding mortgages. Specifically, in view of the higher risk involved in industrial and commercial property mortgages, the HKMA considers that AIs should exercise extra care in granting mortgages to borrowers with multiple mortgages, one of which being related to industrial and commercial property. For example, AIs may consider lowering the LTV ratio, or requiring the borrowers to deposit with the AIs an amount of cash sufficient to cover a sufficient number of monthly instalment payments. Detailed guidance on the above guidelines can be found in Annexes 1 and 2 of this letter. The HKMA will monitor AIs’ compliance with the guidance in this letter through its routine onsite examinations and off-site reviews. If your institution has any questions about this letter, please approach your usual contacts at the HKMA. Yours faithfully, Encl

1
Immediate family members include the borrower’s spouse, parents, and descendants.

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Annex 1 - Prudential Measures for Property Mortgage Loans

Annex 1
Prudential Measures for Property Mortgage Loans Measures applicable to owner occupied residential property mortgage loans only

1. For properties with a value at HK$10 million or above, the maximum
   LTV ratio shall be 50%
   This requirement, as well as Requirements 2 to 5 below, expect Als to apply a LTV ratio lower than 70% under different circumstances. In cases where more than one of the HKMA's prudential requirements are applicable, Ais should apply the lowest LTV ratio dictated by the relevant requirements.
2. For properties with a value at HK$7 million or above but below HK$10
   million, the maximum LTV ratio shall be 60%, subject to a loan cap of HK$5 million Als are required to limit the maximum LTV ratio to 60% for residential properties with a value at or above HK$7 million but below HK$10 million. However, to avoid the anomaly that the maximum amount a purchaser of a property with a value of slightly below HK$ IO million could borrow would be higher than that for a property valued at HK$10 million 1 , the maximum loan amount for properties with a value at or above HK$7 million but below HK$10 million should be subject to a cap ofHK$5 million.
3. For properties with a value below HK$7 million, the maximum LTV ratio
   shall be 70%, subject to a loan cap of HK$4.2 million In other words, only properties with a value at or below HK$6 million are eligible for a maximum LTV ratio of 70%, and the maximum mortgage loan amount for residential properties with a value between HK$6 million and HK$7 million is HK$4.2 million. Measures applicable to residential and non-residential property mortgage loans
4. Reducing the applicable maximum LTV ratio by 10 percentage points for
   property mortgages to borrowers whose income is derived mainly from outside Hong Kong It is considered prudent for Ais to apply a lower maximum LTV ratio to this group of borrowers whose credit risk may be higher due to the following reasons:
   Had there not been a cap of HK$5 million, a purchaser of a property valued at HK$9 million would have been able to borrow HK$5.4 million (HK$9 million x 60%), whereas a purchaser of a property valued at HK$10 million would only have been able to borrow HK$5 million (HK$10 million x 50%).

( a) Difficulty in verifying their income derived from outside Hong Kong; (b) Difficulty in verifying their indebtedness incurred outside Hong Kong; and ( c) Difficulty for Als to take recourse actions in case of default by these borrowers. However, borrowers who can demonstrate that they have a close connection with Hong Kong will not be subject to the reduction. Under the following circumstances, a borrower may be regarded as having a close connection with Hong Kong:
( a) The borrower is on secondment by a local employer to work outside Hong Kong with documentary proof provided by the employer; or (b) The borrower's immediate family member (i.e. spouse, parents, and descendants) is residing in Hong Kong.
5. Lowering the maximum LTV ratio for property mortgage loans based on
borrowers' net worth (i.e. net worth-based mortgage loans) from 50% to 40% Als are required to lower the maximum LTV ratio from 50% to 40% for net-worth based mortgage loans, irrespective of the value of the properties.
6. The impact of the above requirements are summarised in Annex 2.

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Annex 2 - Summary of New Prudential Measures for Property Mortgage Loans

Annex 2
Summary of New Prudential Measures for Property Mortgage Loans Maximum LTV ratio Types of properties / Value of Borrowers whose mortgage loans properties Base case income is derived mainly from outside Hong Kong Measures applicable to owner occupied residential property mortgage loans only

HK$10 million 50% 40%
HK$7but million (subject
60% to a maximum (subject
50% to a maximum
Owner occupied < HK$10 million loan cap of HK$5 loan cap of HK $4 residential properties million) million) 70% 60% , (subject to a maximum (subject to a maximum < HK$7 million loan cap of HK$4.2 loan cap of HK$3.5 million) million) Measures applicable to residential and non-residential property mortgage loans Non-owner occupied | residential properties, and all commercial Regardless of 50% 40% and industrial value properties Net worth-based mortgage loans for | residential properties, Regardless of 40% Not applicable commercial and value industrial properties ! These include: owner occupied residential properties, non-owner occupied residential properties, and residential properties held by companies.