http://www.straitstimes.com/archive/...ework-20140701

Borrowers' risk profile gets lift from TDSR framework

It encourages prudent bank lending and borrowing among buyers: MAS

Published on Jul 1, 2014 1:17 AM

By Lee Su Shyan Money Editor


THE risk profile of borrowers has improved with the introduction of the Total Debt Servicing Ratio (TDSR) framework a year ago, said the Monetary Authority of Singapore.

It noted that the proportion of borrowers with a loan-to-value ratio above 70 per cent has declined. This segment comprised 77 per cent of mortgages issued in the second quarter of 2010 but the proportion has fallen to 66 per cent since 2012, MAS assistant managing director (policy, risk and surveillance) Wong Nai Seng told The Straits Times in an exclusive interview recently.

That simply means a greater proportion of mortgages is now being taken out by people putting 30 per cent or more as a down payment - which in turn means less debt to service.

Another measure also shows improvement. The proportion of borrowers taking a second or subsequent housing loan has fallen sharply, from 30 per cent in 2011 to about 10 per cent. This suggests the proportion of potentially over-leveraged borrowers has fallen.

The TDSR framework sets a total debt servicing ratio of 60 per cent, which means a borrower's total monthly debt repayment is capped at 60 per cent of gross monthly income.

The rule, which took effect on June 29 last year, aims to encourage prudent lending among banks and prudent borrowing among consumers.

Its impact has been wide-ranging on the property market, with market observers noting that it has hit property developers hard while many potential buyers are unable to get loans.

Data for the first 10 months of the TDSR shows an average of $2.3 billion in new mortgages granted each month, down 40 per cent compared with the $4 billion in the six months prior to the framework's introduction.

Mr Wong said: "The TDSR is meant as a structural measure for the long term. It aims to strengthen underwriting standards of lenders and also to encourage financial prudence among borrowers and does that by matching the size of the loan to the borrowers' payment (capacity) so they don't take on too much borrowings."

Even before the framework's introduction, banks had already adopted the concept of the debt servicing ratio in assessing whether to grant loans.

Mr Wong said: "But what we found from our inspections of banks was that practices and methodologies vary. We wanted to introduce a framework to help level up to the best practices across the banks and the industry."

Low interest rates were also a cause for concern.

The MAS wanted to ensure that a person would think carefully of his financial obligations when taking out a loan, particularly if rates were to rise, Mr Wong added.

But he also acknowledged that the improved risk profile of borrowers cannot all be attributed to the TDSR.

Stricter loan-to-value rules had already been brought in for the property market, for example.

These require buyers to stump up much higher down payments on second or third properties, which in turn reduces the amount that can be borrowed.

Mr Wong said the MAS looks at a broad range of factors when assessing the state of the property market, including "demand, supply, prices in the different market segments".

In addition, "we also look at the speed at which the various metrics change, not just the levels of the prices but how significant the changes have been".

"Overall loan volumes, outstanding loans and loans in different buyer segments" are scanned as well, added Mr Wong.

An International Monetary Fund study this year concluded that macro prudential policy actions such as higher loan-to-value ratios have had some success in helping curb house price rises, credit growth and bank leverage in Asia.

Since mid-2013, private home prices in Singapore have stabilised. The URA index of private home prices fell 1.3 per cent in the first quarter this year, following a 0.9 per cent drop in the previous three months.

Having such a framework as the TDSR forces borrowers to think carefully about what they can afford. Having to compile the documents for their loan application gives them pause for thought. Banks have to consider more carefully as well compared with a few years back when they were promising loan approvals within the hour.

They now need more documentation in place and are less likely to give out loans to less creditworthy individuals.

From the MAS' point of view, these are all positive developments, Mr Wong said.

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