Fengbo Zhang:                    View original Chinese

Perspective on the United States Sub-prime Mortgage Crisis

August 28, 2007

SPECIAL REPORT              MacroChina Network

                The housing problem in China is radically different than the problem in the United

               States. The wrong prescription can cause serious and irreversible damage.

Getting an Accurate pulse

First, we need to have a clear and accurate grasp of this sudden storm. Although the rising interest rates and subsequent cooling of the housing market in the United States is the b
lasting fuse that caused the sub-prime mortgage crisis in USA, the reality is that the United States mortgage market's fluctuations are very limited. The actual bad debts is not as much as hyped, sub-prime mortgage losses is generally estimated to rise to $70 billion, which is about 7% of the sub-prime mortgages, is about 1% of the total mortgage loans in the United States.


While there is no argument that the United States mortgage market overall is in some decline, it is still within operational stability.  In July, new home sales rebounded in the United States 2.4%, while the metropolitan area with a concentration of population and businesses, continued on a strong upward trend. For example, in the New York Manhattan region, the average housing price in this years second quarter rose to 1.333 million US dollars from 1.29 million US dollars in the previous quarter, the annual growth rate of 13.4% conversion; the sales volume rose from 3,474 units to 3,939 units, an annual growth rate as high as 53.5%. Each suite in the market sales period shortened from 131 days to 117 days. Housing stock for sale from 5923 units dropped to 5,237 units.


In my position, I have been in charge of mortgages for more than four years, and have personally handled hundreds of mortgage loans every year throughout the United States, but have never had a bad debt. In what was the best performance of this year, in July, the number and amount of loans increased by 2 times from the same period last year.  Despite the media uproar, we are living in a virtual paradise . 

The reality is, the main battlefield of this crisis is in the United States financial markets. Sub-prime mortgage securitization dealers, brokers and investors prefer the high-risk, short-term high return. The too high expectations and fanatical devotion and hyping created financial bubble speculation. Fluctuations in the housing market, with investors confidence shattered, led to the related enterprise bonds and asset valuation plunge, which resulted in panic, and a slumped USA stock market, and even the whole global financial market, strongly affecting global investors.

However, with risk come opportunities, and crisis is accompanied by business chance. The billions of valuable housing property that turned worthless overnight by crazy financial markets, brings one of the greatest opportunities of a lifetime for sober and rational investors. Including:

1. Acquisition - To purchase greatly underestimated, depreciated mortgage industry-related enterprises at low cost. Some large investment institutions have been eyeing, and trying to acquire many related businesses, including the largest mortgage lender in United States;

2. Purchase related industries stocks, shares and bonds at low price;

3. As housing prices fall in many regions, housing sales cycle is extended.  Its time to bargain with anxious owners to buy houses at low price;

4. As Bank foreclosures and real estate auctions increase, the opportunity to buy the cheapest properties is coming.


As the recovery from this temporary crisis, the market returned to normal, those business opportunities will gradually disappear. To the many slow investors, the best opportunities will pass them by.


The Right Prescription

With regards to the Chinese Housing Mortgage market, the Chinese media almost unanimously suggested, and with the unanimous appeal recommended: tightening of mortgage lending, strict approval conditions, increasing the threshold, proportion of down payment etc. These prescriptions appear to be aimed at the non-performing loan portion of sub-prime mortgages in the United States. Even in the USA mainstream mortgage market, no such stringent measures have taken place. In the United States, the down payment of mortgage loans normally is from 5% to 20%. Most of the sub-prime mortgages have below a 3% down payment, with zero down payment loans sharing a certain portion.  For some loans, the bank even pays closing costs. Furthermore, the ARM rate mortgages (initially to pay interest only, with low interest rates, late pay high interest with principle.) are commonly used. However, in China, the threshold of housing finance is much higher than the United States, with the down payment generally requested 30%. In China there is no similar USA sub-prime mortgage business, and no mortgage securitization etc. financial
derivative products, which impact the financial market crisis. The cause of the Chinese housing problem, or illness, is radically different from the United States, As a result, the wrong prescription can cause serious and irreversible damage.

 The appropriate actins should be taken:

1. Must take strict precautions to prevent some financial institutions tightening lending practices, increasing harsh conditions, raising the threshold, increasing the down payment etc.  to discriminating or make it difficult for the vast numbers of low-middle income people with limited financial conditions and payment ability, to purchase their first home, which will trigger social unrest and turmoil. 


There needs to be a basic recognition that a peaceful country and safe people are the foundation of a nation.  In order to ensure people's safe living and promote successful business, it is necessary to protect people's basic right to survival, and maintain social stability.  Toward that end, the United States has developed Federal and local laws and regulations.  These regulations provide preferential loans; help with down payment and mortgage closing costs, provide lower price houses to the low to middle income first time homebuyers. Mortgage discrimination by financial institutions is prohibited against these vulnerable groups. The relevant law enforcement agencies severely punish offenders.  Among them, the most famous of CRA federal law must be shown in financial institutions, for loan applicants to review.  In the financial crisis, these regulations did not change; and the law enforcement agencies have even stepped up monitoring efforts.  This diligence is due to political stability being more critical than the financial markets fluctuations and interests of financial institutions.


China's homeownership rate is much lower than the United States; with the difficulty of buying a home being one of China's biggest social problems.  We should look to further improve a support system utilizing a combination of the government, social organizations and financial institutions for low to middle income homebuyers, and strengthen their functions.


2. China's current mortgage management level and efficiency still has a significant gap in comparison to the leading international financial institutions. In the US, we use a modern management system for processing mortgage business.  The process from application to approval averages approximately 30 minutes, with initial approval letters being issued from the bank right away.  Following the appraisal and title report, in general, the loan can close within 30 days. If the applicant is appropriate, it is even possible to go from application to closing in one weeks time. However, China's current mortgage business with enormous red tape and demand for extremely high down payment, not only increases the burden of borrowers, but also reduces the bank's earnings.   As a result of this, China's financial institutions are in the face of fierce international competition for survival, and the development necessary to create a more efficient process, must introduce the modern management experience and technology, establish a sound credit system, and improve relevant laws, regulations and a supervisory system.

3. Actions must be taken to prevent the financial speculation, creation of financial bubbles that disrupt China's financial markets. This should be considered with caution, and a comprehensive study on the impact of introduction of mortgage securitization and other financial derivative products to China's financial and economic markets, along with the society as a whole.

4. China's oversea financial investments must be made with solid professional knowledge and rich operational experience, and there should be a strengthening in regard to the professional examination for pre-decision-making, and monitoring and management for after decision-making. The
strong and abundant international institutes in good standing should be selected as business partners.


 (Author: Dr. Fengbo Zhang, Special Advisor of MacroChina Network, and Renowned Expert in International Financial industry)