Ooi Sang Kuang: Managing risks in mortgage financing
Welcoming address by Mr Ooi Sang Kuang, Deputy Governor of the Central Bank of
Malaysia, for the talk on "Managing Risks in Mortgage Financing", Kuala Lumpur, 13 January
2010.
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It is my great pleasure to welcome all of you today to this dialogue on "Managing Risks in
Mortgage Financing". This event is jointly organised by Bank Negara Malaysia and Cagamas
Berhad to review and exchange perspectives on developments in the area of mortgage
financing. At least two factors make this a highly topical subject at this particular time. Firstly,
the dramatic events of the global financial crisis have shed the spotlight directly on the
mortgage market, prompting many questions to be raised about current practices in
mortgage financing. These questions have challenged traditional assumptions that mortgage
lending is generally a safe and low-risk activity, and drawn attention to the blind spots that we
need to be concerned about. Secondly, the current accommodative stance of monetary
policy coupled with the increasing intensity of competition in the mortgage market calls for
greater vigilance by banks in monitoring risks in the mortgage portfolio. Expectations of faster
and stronger recovery prospects for Asia, and that Asia will begin the process of unwinding
of accommodative policies ahead of the rest of the world, could also lead to strong capital
inflows and asset price increases. These combined conditions require banks to carefully
monitor any changes in the direction of risks emanating from the housing market.
Today's discussion aims to contribute towards a deeper awareness and understanding of the
risks and emerging issues in mortgage financing. We hope that this, in turn will be useful to
the boards and senior management of financial institutions in framing your own approaches
to managing risks in this area.
Tremendous growth prospects exist in the mortgage market in Malaysia. Over the last
5 years, mortgage financing experienced a strong and sustained average annual growth of
more than 9%. Such loans now constitute a significant 27% of the total industry loan books.
With emerging signs of an early and stronger recovery in the domestic economy, renewed
optimism can be expected for more robust growth in the domestic mortgage market. The
demand for housing will also receive additional support from continuous efforts by the
government to promote home ownership and investments. For example, the new scheme to
be launched this year for EPF contributors to fund the purchase of higher value or additional
houses is expected to increase consumer purchasing power for homes in the coming years.
The growing stream of new entrants in the labour market has also enhanced prospects for an
expanded market among first time home buyers.
At present, the overall mortgage financing portfolio in Malaysia remains sound, with gross
non-performing loan on a declining trend since 2000. However, while mortgage financing has
continued to be a profitable business for most banks, competition has intensified
considerably, with lending yields falling dramatically over the last decade. To a large extent,
such competition has been the outgrowth of a fundamental change in the general approach
to mortgage lending. Traditionally, mortgage financing was approached as a credit rationing
process. In contrast, today banks compete aggressively for borrowers by packaging highly
competitive spread of home loan products to meet different needs of borrowers. In the more
developed markets, this has manifested in more prevalent sales of non-traditional mortgage
products to sub-prime borrowers as competition for borrowers has intensified. The rise of
investment property has also been striking, with significant growth in this loan class observed
in Malaysia relative to owner occupiers.
In this environment, it is important that banks develop a more complete understanding of the
full spectrum of risks presented in this business. The dangers of complacency have been
clearly demonstrated in the devastating consequences of this global financial crisis. Basic
failures in risk management and oversight have been cited as a key characteristic of financial
institutions that suffered large losses during the crisis. In many instances, boards and senior
management of these institutions neglected to understand and control their institutions'
balance sheet growth and the risks that they were exposed to. Some institutions in fact made
deliberate strategic decisions to retain large exposures to financial instruments linked to
subprime assets but failed to take appropriate measures to control or mitigate those risks. In
many financial institutions, the rigor of board scrutiny and due diligence was replaced with an
over-reliance on external ratings or complex internal models for credit evaluations. This was
compounded by incentive structures that were not adequately risk-aligned and inconsistent
with long-term value creation, eventually undermining the soundness of banks.
These failures have extracted a high price on affected financial institutions, investors and
national economies at large. Some of the large financial institutions that entered aggressively
into the sub-prime market are now no longer around, while losses from the write-downs of
loans and provisions have been staggering. Between the second quarters of 2007 and 2009,
the global write-down of loan provisions had amounted to USD1.3 trillion. In October 2009,
the International Monetary Fund indicated that the estimates could rise further to as much as
USD2.8 trillion1.
The events which have since unfolded underscore the fact that effectively managing risks
associated with mortgage financing encompasses a much broader set of considerations -
including the consequences of an adverse and broad downturn in the housing market. The
crisis has reinforced the need for banks to consider the cyclical developments in the
mortgage financing market more explicitly in their risk assessments. Factors such as a
sustained growth in house prices, low interest rates and modest equity commitment should
inform banks of the risk outlook for the mortgage segment and corresponding risk mitigation
actions that are needed to avert potential losses.
Changes observed in the market features of the business in other countries also foreshadow
what may in time characterise the mortgage market in Malaysia. In some markets, brokers of
home loans are commonplace and a growing proportion of loans are protected by insurance.
In an increasingly challenging environment, banks will need to demonstrate that they have
sufficiently strong balance sheets, processes, and management plans in place to contain the
risks, while providing continued support for portfolio expansion and product innovation in the
mortgage financing segment. This will entail continuous assessments of the changing profile
of risk and the appropriate consideration of new and alternative ways to manage risks. The
board in particular is responsible to ensure that product innovation and the re-packaging of
risks in the mortgage portfolio do not outstrip the bank's capacity to manage the associated
risks.
Today, we are pleased to have three distinguished speakers address some of these issues
and developments in greater depth. They are Dr. Yeah Kim Leng from RAM Holdings Berhad
and Dr. John Lee from KPMG who will share an overview and their perspectives on risks in
mortgage markets in Malaysia, as well as their experiences with approaches to managing
these risks in the light of the many changes taking place in this area.
We are also especially honoured to welcome Mr. Peter Pang, the Deputy Chief Executive of
the Hong Kong Monetary Authority, who will speak on Hong Kong's experience in the area of
mortgage financing. As you all know, Hong Kong has one of the most developed and
healthiest mortgage markets in the region with a delinquency ratio reported at only 0.04% in
October 20092. Hong Kong's leadership in advancing innovations in sound mortgage risk
management practices over the years, including through the role of the Hong Kong Mortgage
Corporation (HKMC), provides many useful parallels and lessons that can be drawn for
Malaysia. Cagamas is very pleased to have established a strategic partnership with HKMC in
2007 which will allow us to avail of HKMC's significant expertise to provide the banking
industry in Malaysia with expanded options for effectively managing mortgage risks.
We are encouraged by the strong turnout from among members of the board risk
management committees, senior management and risk managers at this event today. Your
roles are critical in bringing visibility and attention to the key risk issues in mortgage financing
within your institutions in order to ensure that the associated risks, both present and
foreseeable, are identified and effectively controlled. It is particularly useful to bear in mind
that vigilance is needed to be alert to problems that can quickly arise in business segments
that may not have presented difficulties in the past. By acting proactively to avoid controllable
risks, material future losses can be avoided at far lower costs to banks and the society at
large. On that note, I look forward to a fruitful and constructive dialogue.
Thank you.