Regulators step in to curtail risky real estate lending practice

By Huang Ge Source:Global Times Published: 2016-3-9 19:33:52

Given the jump in home prices in first-tier cities in recent months, loans for down payments are in great demand. Property agencies and P2P platforms have become a driving force by offering loans for down payments, though some real estate agencies in Beijing and Shanghai were recently forced to stop the practice. Experts noted that this type of loan can make it easier for buyers to purchase property, but also adds the risk of additional leverage to the domestic real estate market. Consequently, Chinese authorities are set to roll out rules to regulate the practice.

An introductory page of loans for down payments gets shown on, the e-finance platform under China's Internet giant Inc. Photo: IC

An agent at the Lianjia real estate agency in Beijing's Chaoyang district sorts a thick pile of documents on Tuesday provided by his clients for their applications for loans to cover down payments.

"More and more homebuyers have come to apply for the loans in recent months, but an internal notice arrived Monday night that said we have to stop the loan service for down payments in Beijing," said the agent, surnamed Wang.

"It is quite simple to apply for this kind of loan. An identification card, household registration or residency permit and proof of salary for six months are all that are needed," he said.

The real estate agency was offering homebuyers loans of up to 1 million yuan ($153,806) for 70 percent of their down payment, according to a flier Wang was handing out.

The loans had an interest rate of 13 percent with repayment terms that range from three to 12 months. Lianjia also charged borrowers a 2 percent fee on the loan principal.

For the sake of comparison, the average mortgage rate for first-time homebuyers in Beijing was 4.25 percent in February, according to data from Beijing-headquartered industry platform

The flier promised that borrowers could receive the funds in three to five days after the application was approved.

Wang said he had no idea if the agency would be able to resume its lending business in the future.

"Our company made the decision suddenly, and we do not know what will be next," he told the Global Times on Tuesday.

Media reports said last week that Lianjia had suspended its financial services for home purchases in Shanghai after being investigated by local authorities. Also, some other realty agencies have halted their loan businesses.

"Our company's loan service was halted the other day," a property agent from realtor Corp in Beijing told the Global Times on Tuesday. The agent refused to be identified.

Experts said the suspension signaled that authorities were planning to roll out new regulations to put an end to the practice of down payment loans.

Property agencies and online peer-to-peer (P2P) platforms have become the main driving force for down payment loans, which could support homebuyers, but also bring the hidden risk of leverage to mortgages, experts said.

Rising demand

Given the soaring home prices around the country, especially in the first-tier cities, down payment loans have been incredibly popular as many homebuyers and some speculators rush into the property market, according to media reports.

Shanghai and Beijing, as well as Guangzhou and Shenzhen in South China's Guangdong Province, are ranked China's first-tier cities.

It is unclear when realtors began offering down payment loans, but Wang said the loans started to get popular in September 2015.

Property developers and real estate agencies fund the down payment loans on their own or through third-party online financing institutions, the Economic Information Daily reported on Monday.

Many online financing institutions offer down payment loans, such as Haofangdai, which is being promoted by an e-commerce platform of Ping An Insurance (Group) Co, and the Guangzhou-based P2P lending platform

The original purpose for offering down payment loans was good because it helped less well-off homebuyers get easier access to the property market, said Yan Yuejin, a research director at the Shanghai-based E-house China R&D Institute.

"It is also easier for homebuyers who want to purchase a second home because they can pledge their personal property as collateral," he told the Global Times on Monday.

"I applied for a down payment loan from an online P2P platform three months ago when I bought a new apartment in Luohu district in Shenzhen," said a white-collar worker in his 30s surnamed Wu.

"This kind of loan is quite good because my savings failed to cover the down payment," Wu said.

"Many of my colleagues in my age were also willing to try this loan," he noted.

But the hidden risks brought about by the loans, such as increasing the financial levearge in the domestic property market, should not be overlooked, Chen Juntao, an analyst at the market research firm Analysys International, told the Global Times on Monday.

Strengthening regulation

Considering that the country has stepped up efforts to cut the inventory of unsold housing, some "zero down payments" leverage has appeared in the domestic property market, media reports said.

In fact, the loans for down payments is another kind of financial leverage posed by some private financial institutions following commercial banks' previous leverage strategy, said Yan, the research director.

"Some property spectators take advantage of this kind of loan," he noted.

More attention should be paid to the leverage posed by financial innovation and financial products that aim to make profits, said Huang Qifan, mayor of Southwest China's Chongqing, during a panel discussion at this year's annual session of the National People's Congress, news portal reported on Tuesday.

"If the inventory cut was realized by increasing leverage in the property market, it would add huge risks to the country's economy," Huang was quoted as saying in the news report.

China's central bank and departments such as the Ministry of Housing and Urban-Rural Development and the China Banking Regulatory Commission (CBRC) are about to govern the financial business that involves real estate companies and realtors in the market, Pan Gongsheng, deputy governor of the People's Bank of China, said Wednesday during a panel discussion in the National Committee of the Chinese People's Political Consultative Conference.

If the property firms and agencies are unqualified, they cannot offer such financial services, Pan noted.

Bloomberg reported on Monday that authorities will ban lenders including developers, real estate agencies, small-loan companies and P2P networks from offering loans for down payments.

Regulators including the central bank and the CBRC will also ask commercial banks to scrutinize mortgage applications and reject those in which down payments come from loans offered by such institutions, Bloomberg reported, citing people familiar with the matter.

"After home prices jumped in recent weeks, authorities will probably launch investigations into institutions that offered loans for down payments," Yan said.

Because some financing platforms cannot do as strict credit checks on homebuyers as commercial banks, default risks are likely to grow, Yan said.
Newspaper headline: The lowdown on down payment loans

Posted in: Insight

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