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Mortgage data is missing piece in credit puzzle

(Published by South China Morning Post, 30 May 2007)

In August 2003, Hong Kong improved the personal data collection of consumer credit information by collecting positive credit data for all unsecured loans from banks and other financial institutions.

In Hong Kong, positive credit data comprises all available and utilised credit lines from each consumer’s credit cards and unsecured personal loans.

After this successful introduction, the consumer credit database size grew from two million to more than 21 million records by the end of last year.

During the lead-up to the sharing of this new set of consumer data, there was much anticipation and speculation on whether secured consumer credit data would also be shared, in particular, residential mortgage loan data.

Interestingly, many consumer banking executives commented that it would only be a matter of time before mortgage loan information would eventually have to be shared as well.

Nearly four years later, it appears that very little progress has been made in getting the largest portion of outstanding consumer credit data into the database. Has the market become complacent because of the economic rebound and banks no longer believe the value in supporting a comprehensive consumer credit database for Hong Kong?

By looking more carefully at the statistics, the real story can be revealed. Since 1997, the percentage of outstanding residential mortgages extended to individuals (both private sector and government subsidised housing programmes) in Hong Kong comprises the largest percentage of all consumer loans, about 85 to 90 per cent.

In addition, during this past decade, the four largest banks in Hong Kong have originated and retained nearly 70 per cent of all residential mortgages. So, while the sharing of 10 to 15 per cent of positive consumer credit data (only for unsecured loans) was a definite step in the right direction, the reluctance by the major banks to share their residential mortgage data places Hong Kong’s consumer credit reporting framework woefully behind its Asian neighbours and, interestingly, China.

As shown in the table, Hong Kong clearly lags behind others in Asia by not including positive residential mortgage consumer data as part of the comprehensive consumer credit data bureau.

Further evidence that additional consumer data is needed to provide a complete credit profile of each individual borrower is the persistent high charge-off amounts for credit cards. Last year, banks in Hong Kong charged off more than HK$2 billion in bad debt, or about 3.15 per cent of the average total receivables.

While this percentage is a far cry from the peak charge-off rate of 13.36 per cent in 2002, where banks wrote off more than HK$8 billion, the absolute amount of charge-offs last year is still substantial and grew 14 per cent from 2005.

As a result of the Asian financial crisis and our fixed exchange rate system, Hong Kong suffered the steepest property price depreciation in Asia with residential prices falling by nearly 75 per cent from peak to trough (1997 to 2003).

What surprised many market professionals was the stellar repayment record of mortgages as delinquencies only reached 1.43 per cent in 2001. However, only after thousands of personal bankruptcies were filed did consumer banking credit officers realise that many mortgagors began to take out higher interest rate loans (such as cash advances from credit cards or other unsecured loans) to maintain their regular monthly mortgage payment.

If Hong Kong’s consumer credit database had contained a comprehensive credit profile of borrowers, which included all unsecured and secured loans, banks would have been able to detect the early warning signs of such occurrences and minimised their credit card losses.

As Hong Kong’s banking industry is practically an oligopoly, the largest banks have resisted and will continue to resist sharing residential mortgage information. If Hong Kong wants to maintain its status as an international financial centre, it is essential that the largest portion of consumer credit data – mortgages – be shared with the market. Otherwise, this deficiency will clearly hinder the development of Hong Kong’s the mortgage and consumer finance market as evidenced by the lack of innovative products offered by banks.

Leland L.Sun

Leland L.Sun
Director and Founder of Pan Asian