U want that home .... here is Santa CLAUSE
Here is an excerpt from a well known and leading Newspaper that has highlighted the concern..... this goes to show that if your contribution to the payment of the house is lower (10 or 15%), you are in deep water. Higher your contribution to the loan, lesser your risk... so to speak! Read this.....
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It’s a clause buried deep in the home loan agreement. But it may rise and become a cause for concern if property prices fall long enough!Not quite a clause for concern yet, but if property prices fall far enough, trouble lies ahead. Buried deep in the bowels of any home loan agreement is a sub-head that goes, ‘events of default’, within which is tucked away a clause that in English means, if the value of the house for which a loan has been taken falls below the loaned amount, the bank, unilaterally, can demand that the borrower make good the difference, or else be declared a defaulter.
The first time this clause was brought to my notice by a former colleague, I dismissed it as not possible. I argued that by the same absurd logic, if property prices rise, the bank should make good the difference or lower the interest rate or give some benefit to the borrower. It was when we asked for copies of home loan agreements from India’s top banks and housing finance companies that we realised that if reading them is an exercise in optics and decoding them a lawyers’ delight, simply getting hold of them is a goal even the Brazilian team wouldn’t be able to score.
But yes, the clause stands strong. In each and every home loan agreement. In fine print. Each a virtual mirror of the other. Even the words and expressions (“security for the loan” or “depreciates in value” or “in the opinion of the bank” or “in the sole discretion and decision of the bank” and suchlike) are so much like each other that one wonders whether lawyers are really as uncreative as their final product suggests.
This clause had little meaning in a real estate market whose building blocks turned small dreams into huge skyscrapers, rising anything between 70 and 150 per cent in three years. Overnight speculators found a haven where their unaccounted for cash could multiply. So rampant was this practice that in November 2005 I got an e-mail from one of Delhi’s reputed builders offering a “special financing scheme”. All investors had to do was put in 10 per cent of the “sale consideration” upfront, a leading bank would finance another 85 per cent, with the balance 5 per cent to be given on possession. No EMI would have to be paid till possession. Come possession day, the investor will have the option to sell the apartment back to the builder at a guaranteed appreciation of 10 per cent. It was a win-win for all parties. The builder got the money upfront to build. The buyer didn’t have to pay EMIs in the construction period and he could sell at a 10 per cent premium.
Nobody’s offering such deals anymore. As Deepak Parekh noted last week, investors have realised that by the time houses are constructed, prices would have fallen. According to him, property prices that have fallen by 20 per cent in some places and are expected to drop further by 10-20 per cent across the board. Many other experts—bankers, builders, brokers, academics—too believe that prices will fall by 10 to 30 per cent over the next four to six months. And right at the top, YV Reddy has repeatedly expressed his apprehensions with high property prices.
When—and not if—they fall, the importance of this clause will rise. Take a survey of home owners who have purchased houses on borrowed funds to find out how many of them are even aware of this clause, leave alone its implications and the answer, after giving a huge room for error will be close to, if not less than, 0.01 per cent (this guestimate implies about 100 out of 1 lakh borrowers).
In a country that’s only beginning its tryst with sophisticated financial products and where financial literacy is weak even among the industry participants (ask a banker how mutual funds work, ask a mutual fund professional how insurance functions, ask an insurance broker about the fineprint of banking and you’ll draw a blank), clauses like these have little meaning. If tomorrow a bank decides to initiate default proceedings against a household, how far will it be able to go? Particularly, if the borrower has not missed a single EMI? More, will they be able to do so to a huge constituency of people?
As I argued these points with a top official at one of the largest players in business, he said, clearly, that the bank will not respond to a “hypothetical scenario”. Hypothetical? When the great property fall is just around the corner, the hypothetical hypothesis gets demolished. “It has been drafted by lawyers,” he said, “to protect the interests of the bank against a few bad elements.” He’s probably referring to some banks’ experience with car loans, where these “bad elements” would drive the cars off and not pay.
But when his boss on the top floor emphatically says that this is an end-user driven market, I begin to wonder just who’s fooling whom. The signal that then emerges is: we, as a bank, could sometimes be lazy with our due diligence and need to protect our backsides and hence lean on such clauses. By just one line, the banks have transferred the risk of market volatility (of which we are going to see much more in the months to come as the Indian property market gets securitised and institutionalised) to us borrowers.
This is not the first time this industry has been playing with its customers. A decade ago, the con was in showing a low rate of interest, when it was fixed, that is, not on reducing balance. Borrowers who went in for fixed rate loans three years ago, are realising that the rate is not really fixed; the bank has the option to turn it flexible. Why home loans, a car on loan can’t be driven out of the city. Why banking, the risk factors of an IPO are often marketing spiels. Why financial services, an airline has the right to drop you in Bangalore even if your ticket is to Delhi; travel agencies don’t disclose visa or airport taxes; exchange offers of white goods are at the discretion of dealers; telecom companies’ freebies begin to cost after a few months.
These practices, imported from the developed world without thought or modification, need to be quarantined: fine print has to be made bold, legalese has to give way to simplicity. Meanwhile, going forward, watch this default clause very carefully if you’re buying a house.
The first time this clause was brought to my notice by a former colleague, I dismissed it as not possible. I argued that by the same absurd logic, if property prices rise, the bank should make good the difference or lower the interest rate or give some benefit to the borrower. It was when we asked for copies of home loan agreements from India’s top banks and housing finance companies that we realised that if reading them is an exercise in optics and decoding them a lawyers’ delight, simply getting hold of them is a goal even the Brazilian team wouldn’t be able to score.
But yes, the clause stands strong. In each and every home loan agreement. In fine print. Each a virtual mirror of the other. Even the words and expressions (“security for the loan” or “depreciates in value” or “in the opinion of the bank” or “in the sole discretion and decision of the bank” and suchlike) are so much like each other that one wonders whether lawyers are really as uncreative as their final product suggests.
This clause had little meaning in a real estate market whose building blocks turned small dreams into huge skyscrapers, rising anything between 70 and 150 per cent in three years. Overnight speculators found a haven where their unaccounted for cash could multiply. So rampant was this practice that in November 2005 I got an e-mail from one of Delhi’s reputed builders offering a “special financing scheme”. All investors had to do was put in 10 per cent of the “sale consideration” upfront, a leading bank would finance another 85 per cent, with the balance 5 per cent to be given on possession. No EMI would have to be paid till possession. Come possession day, the investor will have the option to sell the apartment back to the builder at a guaranteed appreciation of 10 per cent. It was a win-win for all parties. The builder got the money upfront to build. The buyer didn’t have to pay EMIs in the construction period and he could sell at a 10 per cent premium.
Nobody’s offering such deals anymore. As Deepak Parekh noted last week, investors have realised that by the time houses are constructed, prices would have fallen. According to him, property prices that have fallen by 20 per cent in some places and are expected to drop further by 10-20 per cent across the board. Many other experts—bankers, builders, brokers, academics—too believe that prices will fall by 10 to 30 per cent over the next four to six months. And right at the top, YV Reddy has repeatedly expressed his apprehensions with high property prices.
When—and not if—they fall, the importance of this clause will rise. Take a survey of home owners who have purchased houses on borrowed funds to find out how many of them are even aware of this clause, leave alone its implications and the answer, after giving a huge room for error will be close to, if not less than, 0.01 per cent (this guestimate implies about 100 out of 1 lakh borrowers).
In a country that’s only beginning its tryst with sophisticated financial products and where financial literacy is weak even among the industry participants (ask a banker how mutual funds work, ask a mutual fund professional how insurance functions, ask an insurance broker about the fineprint of banking and you’ll draw a blank), clauses like these have little meaning. If tomorrow a bank decides to initiate default proceedings against a household, how far will it be able to go? Particularly, if the borrower has not missed a single EMI? More, will they be able to do so to a huge constituency of people?
As I argued these points with a top official at one of the largest players in business, he said, clearly, that the bank will not respond to a “hypothetical scenario”. Hypothetical? When the great property fall is just around the corner, the hypothetical hypothesis gets demolished. “It has been drafted by lawyers,” he said, “to protect the interests of the bank against a few bad elements.” He’s probably referring to some banks’ experience with car loans, where these “bad elements” would drive the cars off and not pay.
But when his boss on the top floor emphatically says that this is an end-user driven market, I begin to wonder just who’s fooling whom. The signal that then emerges is: we, as a bank, could sometimes be lazy with our due diligence and need to protect our backsides and hence lean on such clauses. By just one line, the banks have transferred the risk of market volatility (of which we are going to see much more in the months to come as the Indian property market gets securitised and institutionalised) to us borrowers.
This is not the first time this industry has been playing with its customers. A decade ago, the con was in showing a low rate of interest, when it was fixed, that is, not on reducing balance. Borrowers who went in for fixed rate loans three years ago, are realising that the rate is not really fixed; the bank has the option to turn it flexible. Why home loans, a car on loan can’t be driven out of the city. Why banking, the risk factors of an IPO are often marketing spiels. Why financial services, an airline has the right to drop you in Bangalore even if your ticket is to Delhi; travel agencies don’t disclose visa or airport taxes; exchange offers of white goods are at the discretion of dealers; telecom companies’ freebies begin to cost after a few months.
These practices, imported from the developed world without thought or modification, need to be quarantined: fine print has to be made bold, legalese has to give way to simplicity. Meanwhile, going forward, watch this default clause very carefully if you’re buying a house.
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posted by beekay at 5:36 AM
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