Certified Forensic Loan Auditors, LLC

  Upcoming Classes

Search CFLA's Article Archive:

Is China Building a Mortgage Bomb?

bloombergview.com | November 21, 2014

By William Pesek

The first Chinese interest-rate cut in more than two years is a stark recognition that the world's second-biggest economy is in trouble.

After years of piling ever more public debt onto the national balance sheet, it makes sense to have the People's Bank of China take the lead in propping up gross domestic product. Yet while today's benchmark rate cut should help stabilize growth, the move also adds to worries about looser credit that could pose risks to the global economy. Case in point: mortgages.

Earlier this year, Chinese officials took several stealthy steps aimed at stabilizing the property sector and bolstering GDP growth. The China Banking Regulatory Commission loosened lending policies. Even before cutting the one-year lending rate to 5.6 percent and the one-year deposit rate to 2.75 percent today, the central bank had cut payment ratios and mortgage rates, while prodding loan officers to ease up on their reluctance to approve borrowers without local household registrations. Pilot programs for mortgage-backed securities and real-estate investment trusts got more support. Incentives were rolled out to encourage high-end buyers to upgrade properties.

There's good news and bad in all this. The good: It marks progress for President Xi Jinping's efforts to recalibrate China's growth engines. In highly developed economies like the U.S., the quest for homeownership feeds myriad growth ecosystems and offers the masses ways to leverage their equity for other financial pursuits. And China's debt problems are in the public sphere, not among consumers. The bad: If ramped-up mortgage borrowing isn't accompanied by bold and steady progress in modernizing the economy, China will merely be creating another giant asset bubble.

"Expanding the underdeveloped mortgage market is not bad news," says Diana Choyleva of Lombard Street Research. "But if China relies on household credit to power the economy and pulls back from much-needed financial reforms, the omens are not good."

Take the experience of South Korea after the 1997 Asian crisis. With regulatory tweaks and a variety of ill-fated incentives, Seoul effectively shifted the nation's debt burden from government to families. By the early 2000s, fresh headwinds were intensifying; in April 2004, one in 13 Koreans was three months or more behind on debt payments. Of Korea, Choyleva says, "all it has to show for its efforts are the mess left by a burst household-debt bubble and an economy even more dependent on exports."

For all the grand talk of reining in state-owned enterprises and the shadow banking system and tolerating a "new normal" of slowing growth, Beijing remains intent on getting as close as possible to this year's 7.5 percent GDP growth target. With Moody's and S&P watching, and prominent economists like Larry Summers arguing that China could soon slow to 4 percent growth, officialdom is looking for covert stabilizers. Among them: securitization.

One of China's few reforms in the mid-2000s was securitization of loans, which began with a trial program in 2005. Three years later, Wall Street's crash made the bundling and selling of loans and assets a pariah among financial instruments, and the experiment was shelved.

Since 2012, though, securitization has not only returned but flourished. According to Choyleva, issuance reached $28 billion in the first nine months of the year, compared with $16 billion between 2005 and 2013. While most sales have been of auto, corporate and credit-card debt, those of mortgage-based securities are rising. In July, the Postal Savings Bank of China did the first residential mortgage-backed deal in seven years, and the markets are buzzing about more to come. These market rumors fit with the housing-as-stimulus narrative.

Risks abound, not least of which is the danger of helping lenders to hide dodgy investments off balance sheet. If transparency was a problem on Wall Street, imagine what state-coddled Chinese banks could hide. Also, to avoid Korea's missteps, China would have to complement this nascent mortgage boom with policies to redistribute income toward consumers. That means working to narrow the gap between rich and poor by increasing the average household's share of national income and curbing a savings rate that is reaching excessive proportions. While China has surpassed Japan in absolute GDP, its distribution of gross household disposable income in GDP terms is tiny by comparison.

There's much China could learn from Korea, including how to beat the "middle-income trap" that befalls many developing nations when they reach the $10,000 per capita income level. Xi and his lieutenants, though, should pay just as much attention to the country's failures as its successes.


Back to November 2014 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

SEE BELOW- http://www.certifiedforensicloanauditors.com

Call us toll free at 888-758-2352

Bookmark and Share
Facebook Like us on Facebook
Twitter Follow us on Twitter
YouTube View our YouTube Videos
LinkedIn Connect to us on Linkedin
BBB Logo


Contact us or view our Sample Documents & Audits by completing the form below.

  • Reload
  • Should be Empty:


DVD Sets Only $99


FREE Mortgage Fraud Analysis


Order Cutting-Edge Services Now


Quiet Title Packages from Licensed Attorneys


Affiliate Services


CFLA Sponsored Attorney Links


Take-Home Education Package