BSP to ease rules on housing loans

The Bangko Sentral ng Pilipinas (BSP) has agreed on lower risk-weighting for certain housing loans, pending the standardization of contracts to sell (CTS) for housing developments.

The BSP said over the weekend that it has reached an agreement with the banking industry, specifically the Chamber of Thrift Banks (CTB), imposing specific standards for CTS.

Once completed, BSP Deputy Governor Nestor Espenilla Jr. said CTS loans for housing could qualify for preferential risk weighting under existing BSP rules based on standards set under the Basle II Convention.

At present, Espenilla said contracts to sell are weighted at 100 percent which means that banks have to set aside more capital cover for them.

After the standards are finalized, Espenilla said the risk-weighting for contracts to sell could go down to as low as 50 percent and more bank funds would be freed for lending instead of being kept as reserve.

Espenilla told reporters that an initial agreement has been reached between bank regulators and thrift banks, setting these standards for the quality of CTS loans could qualify for preferential risk weighting.

CTS, Espenilla explained, were preferred by banks over housing mortgage loans since they were easier to manage and generally less complicated to foreclose in case of defaults.

These contracts are issued once a developer sells a housing unit and the homeowner amortizes the housing loan over a fixed period. Developers can sell these contracts to banks which would then assume the collection of monthly receivables.

"Lenders are generally more comfortable with contracts to sell but we want to make sure that the documentation would provide the same level of protection to lenders as do mortgages," Espenilla said.

Espenilla said there was also a need to agree on how to classify contracts to sell in general.

"We have to agree which contracts to classify as performing or non-performing and assign different risk weights to them as such," he explained.

According to Espenilla, mortgages are more difficult to foreclose but he said CTS need to be standardized, particularly third-party developers participating in the process.

"Not all developers are good, reliable and competent," Espenilla said. "If a homeowner is displeased with his developer, he is less likely to pay."

But Espenilla said setting the standards would make it easier for the BSP to qualify contracts to sell for preferential risk-weighting since housing loans, in general, are already considered low-risk loans.

Under the Basle II, Espenilla said housing loans are generally given a 50 percent risk-weighting.

"The psychology behind this is that people will do everything not to be driven out of house and home," Espenilla said. "Experience shows us that this is true. The average past-due account in housing is only four percent of total housing loans."

Espenilla said the BSP has already begun reviewing the legal ramifications of imposing the standards and assigning lower risk-weighting to CTS documents.