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Avoiding a mortgage meltdown

08/09/2007 NST By Salleh Buang

A number of our real estate players may have learnt a valuable lesson following the recent mortgage meltdown in the United States.

Besides property, other sectors of the national economy were also affected. And, as everyone predicted, the problems spread around the globe, albeit in different degrees.

This meltdown, arising largely from lenders giving easy loans to people with poor credit history, could have been salutary since the people were able to buy their own homes. However, the way the loans were extended was clearly recipe for disaster.

Early March this year, Angelo Mozilo, chief executive of Countrywide Financial Corp, the largest mortgage lender in the US, predicted that the nation "would soon face a dangerous liquidity crisis in the mortgage sector". The situation, he added, would get uglier as the months passed.

By March 15, big-time losers in the country included major Wall Street banks, commercial lenders as well as thrift and loan societies. These institutions have massive exposure to mortgage lending.

Trading in the shares of some of these large, independent sub-prime lending companies was suspended by the New York Stock Exchange, while others were issued grand jury subpoenas, signifying the start of a federal criminal probe.

Data released by the US media in March 2007 showed that repayment default rose to a three-and-a-half-year high, fanning speculation that many troubled lenders would restructure or seek protection under bankruptcy laws. In the same month, at least 22 of these lenders filed for bankruptcy.

The US Mortgage Bankers Association said then that lending institutions have begun foreclosure proceedings against "more than one out of every 200 mortgage borrowers", setting a new national record for foreclosure proceedings.

These proceedings were directly attributed to increasing delinquency in repayment in more than 49 states. Analysts were quick to predict that the looming housing bust would pull America into recession.

Prof Nouriel Roubini of New York University, who shared this sentiment, said that there was a 14.4 per cent drop in the launches of new housing projects in February 2007, and this, he predicted, would cause the loss of up to 600,000 real estate jobs this year.

Explaining his view, Roubini said the US was facing a "reverse cycle", where the credit crunch hit before the slowdown � a rare pattern indeed. Normally, recession arrives first followed by credit troubles.

"We have a housing recession, an auto recession, a manufacturing recession, and a real investment recession already present. If all this is happening in what the consensus terms a 'Goldilocks economy', what will happen if the economy slows down?" he asked.

As a sign of the times, major British bank HSBC set aside more than US$10 billion (RM35 billion) to cover bad loans in the US.

Contagion factor

While economists are painting a pessimistic view of the future, citing the inevitable contagion factor, the US government is downplaying the danger, dismissing such fears as "groundless" and "unsubstantiated". This is despite reports by CNN that "foreclosures are skyrocketing, home prices are falling and recovery forecasts are being scaled back".

Peter Schiff, author of Crash Proof: How to Profit from the Coming Economic Collapse, had long predicted that "most of the mortgages taken out during the past few years will fail", leading to a mortgage meltdown.

In Australia, Prime Minister John Howard said his country's economy could withstand shockwaves from the US mortgage meltdown and the ensuing credit crunch. Australia, he said, has a much smaller percentage of risky mortgage loans compared to the US.

On our shores, new agency Bernama reports said the ripple effect of the US meltdown "was already apparent when the Kuala Lumpur Composite Index (KLCI) fell 33.63 points", or 2.802 per cent, on March 14.

Dealers said local investors "over-reacted" to the US meltdown, following the panic selling in most regional bourses. Remarked Bursa Malaysia�s chief executive officer Datuk Yusli Mohamed Yusoff, "Today's losses were merely a knee-jerk reaction to Wall Street's plunge."

He expressed confidence the strong fundamentals of listed Malaysian companies would remain intact.

So, why did so many US lenders end belly-up early this year?

Lack of prudence in lending has been cited as the main reason. They approved too many loans to borrowers, who couldn't even pay their first, second or third house payment.

Investors buying mortgages on the secondary market then demanded lenders buy back the loans with a history of early payment defaults. Unfortunately, these imprudent lenders did not have enough cash to make the buy-back and so some closed shop, while others filed for bankruptcy protection.

Other lenders, having seen what happened to their competitors, quickly took steps to avert a similar catastrophe. They tightened rules and made it more difficult for people with poor credit history to get loans.

This scenario did play on our shores over a decade ago. Only, we did not call it a mortgage meltdown - we preferred the term "NPL" or non-performing loans.

Several banks went bust, the careers of a number of prominent people hit the dust and ultimately in June 1998, statutory body Pengurusan Danaharta Nasional Bhd appeared on the scene to bail out the failing institutions.

We regained our footing only after the National Economic Recovery Plan was launched and effectively implemented.

Hopefully, our housing industry has taken the US mortgage meltdown as a good lesson. Malaysian property developers and bankers should be more cautious and prudent than their American counterparts.

Giving housing loans to people with questionable credit histories, merely to ensure the sale of houses offered under the long-practised Sell-Then-Build system of housing delivery should be avoided.

If abandoned housing has always been a worry, the future may just be a national mortgage meltdown ....

Salleh Buang is senior advisor of a company specialising in competitive intelligence. He is also active in training and public speaking and can be reached at


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