Singapore Refinance: Commentaries on PM Lee's call to Foreign bank to take long term view

SINGAPORE REFINANCE: PM Called on Foreign banks to take a long-term view

This week, reported in the straits times on the 20th Feb 2009 and Channel

News Asia, Prime Ministers Lee Hsien Loong spoke at a dinner held by

Standard Chartered. PM Lee called on foreign banks to take a long term

view and to consider the merits of borrowers who need financing to do

business, and continue to nurture clients.


We view this as a pre-emptive notice or plea to banks to stand behind

borrowers in times of hardship.

Just a few weeks ago, DBS chairman, Mr. Koh Boon Hwee re-iterated that

DBS will "stand behind it's loyal customers."


These are confidence boosting measures which we hope carry some weight

as Home Owners whose property's valuation has fallen a lot are in real

danger of the bank asking them for topping up CASH.


As we discussed in our previous article, where we highlighted the risks of banks

turning on your backs during tough times. One of the ways they can do that is not to

lend you money. Another even more drastic measure is to ask you to top up your equity

in your home loan in cases where your Property value has fallen.


An example of how a bank ask you for money when you need it most.

For example (The figures are just illustrative), your Home loan was $800,000

and your property value was $1,000,000. Banks usually have a provision

that states that they may require equity top up if valuation falls below

$900,000. If the bank valued your property and the valuers come up with a

value of $800,000, the bank, in order to maintain a Loan to Valuation Ratio

of 80%, that means the bank can only lend you $640,000.


The Bank asks you to TOP UP CASH of $800,000 - $640,000 = $160,000!!!

If valuations of properties could fall so quickly, it signifies severe distress and

many people are out of cash.

If you do not have the cash, you can refinance your loan with another bank

(which most likely will reject your application) or you can SELL you house at

a FIRE-SALE price to pay back the loan.

You very likely will lose Hundreds of thousands of dollars and perhaps go

bankrupt.


What we think

PM Lee's call to Foreign bank is an open call for them to NOT to do anything

so drastic and add to the market woes.

We hope the "Call to take a long term view" is also followed up with some

Carrot and Stick to greater effect. The fact is, borrowing money, despite your

credit rating has become very hard. This is making the already bad

economic situation even worse.


In fact, the banks in Singapore should have not lent too freely during the

economic boom times which created this problem in the first place, this also

applies to banks in Singapore.


They were lending money to the tune of 90%, creating an asset price

bubble.


Banks Make the BOOM and BUST even worse

So in order words, banks made the BOOM and BUST cycle worse! It may be

time to have a back to basics bank. And a bank that is an "efficient

thermostat", to turn on the heat when it's cold and turn on the Cool air when

it's hot. Not the other way round, giving you ice when you are freezing and

pouring hot water on you when you are already scalded.