Mortgage Loans: Bank’s Lesson From Clayton Homes

Berkshire Hathaway, Warren Buffett's investment company, owns Clayton Homes, which is the largest maker and financier of pre-fabricated and mobile homes in the US. These homes are the most popular with buyers who have credit problems and who are prime candidates for subprime mortgages. Yet Clayton Homes managed to sidestep the severe subprime mortgage losses that plagued its counterparts in the housing and loan industry.

This goes back to Buffet’s investment fundamental saying, which is: “When we (Clayton Homes) make a mistake in making or buying a loan, it costs us money, not some buyer thousands of miles away." On the same note, do not be too happy too early with the current housing loan situation. Here’s why:

• The availability of low interest rates is not equivalent to the approval of the loan.
   
• Banks are still dishing out home loans, but they are also more selective these days.

• The rule is that banks can grant up to 90% of the purchase price or valuation, whichever is lower. If the sale price of a property exceeds the valuation (an amount that is determined by an independent professional), the buyer will have to make up the shortfall.
   
• With the current economic situation, however, banks have a more stringent credit approval process. After all, mortgage default is one of the main causes of today’s crisis.

• Most banks now prefer to offer up to only 80% financing and some loans are only applicable to completed properties for fear that developers may go into bankruptcy in today’s market environment.

• Banks now exercise more discretion during the screening process especially if the property is the buyers first or second. Creditability and credit history may be scrutinized more seriously now.
   

Here is an overview of some of the pegged-rate loan packages offered by some of the local and overseas banks (as of Jul 09):

With record sales of 2,767 units in the private housing sector for the month of July alone, the total sales figure looks set to break 2007 property boom heights of 14,811 with over 10,000 units already sold up till August. This has resulted in even smaller banks like the State Bank of India (SBI) looking to grab a slice of the lucrative home loan pie with interest rates going as low as Sibor plus 0.6% for the first year as reported in The Straits Times on the 19th of August. While the general consensus being banks will continue to maintain tight lending rules in the aftermath of the subprime crisis, they will be looking to entice new buyers with attractive interest rates and packages in their attempt to recoup the losses suffered last year during the crisis. This may lead to the beginning of a “Mortgage War” where multiple banks compete to dominate the market.

*Pls click here for Tip: Purchase/Market Price vs. Bank Valuation