Bill passed to prevent homeowners from using HDB flats as collateral for loans

Source : Channel NewsAsia – 19 Jul 2010

The government has plugged loopholes in the law to prevent moneylenders from egging homeowners to use HDB flats as collaterals for any debt other than as mortgage for the purpose of financing the purchase of the flat.

Changes to the Housing and Development Bill were passed on Monday under a “certificate of urgency”, which means it was read and passed in one Parliamentary sitting.

There has been an increasing number of HDB homeowners using their flats as collateral to pay off loans.

In 2008, there were 12 registered resale applications with caveats lodged by moneylenders.

One year later, the figured jumped to 546.

In the first six months of this year alone, there were 556 cases.

It is a worrying trend that the government wants to put an immediate stop to.

“A HDB flat is for long-term homeownership. I cannot over-emphasize this fact,” said Minister for National Development, Mah Bow Tan.

But this approach will only work if people do not encash their retirement asset prematurely.

The old law had allowed moneylenders to use a seller’s flat as collateral for debt repayment.

“Instead of just the 1.5 per cent interest that was touted before they took the loan, they ended up paying as much as 15 per cent interest rates in some cases. Their shock starts when they discover that they have nothing left after paying off their debts to the moneylenders, which they had to clear first since it is protected by the caveat,” said Mdm Halimah Yacob, MP for Jurong GRC.

MP for Holland-Bukit Timah GRC, Christopher de Souza added: “These lenders have hence made agreements with their borrowers to lodge caveats against their flats. This way, they have the first claim on the sales proceeds. It is all perfectly legal and above board; and the lenders have security in recovering the principle sums loaned, plus an obscene amount of interest.”

Minister Mah said: “Some homeowners may want to get a quick personal loan and therefore allow moneylenders to lodge a caveat on their flats. Moneylenders are more willing to give loans, especially to low-income borrowers, if they are able to secure the loan on the sale proceeds of the flat, as this reduces their risk.

“If the flat owners already plan to sell their flat and take a loan from a licensed moneylender, for example as a bridging loan to meet some urgent needs, the caveat ensures that the loan would be paid from the sales proceeds.

“However, there are some flat owners who originally had no intention to sell their flats, but still allowed moneylenders to lodge caveats against their flat. These flat owners may be pressured to sell their flats to raise money quickly to repay debts.”

So the seller who has sold off his flat and repaid the moneylender, may not be able to afford to buy his next flat.

Some may also join HDB’s queue for rental flats when they do not in fact qualify for rental housing.

With the amended Bill, moneylenders can now no longer claim caveats to have first cut of the sales proceeds of a seller’s flat.

Mr Mah said existing contracts with valid caveats lodged will not be affected. This is in recognition of the sanctity of contracts already legally entered into.

The changes also do not affect banks and financial institutions, which can continue to grant loans on the security of the flat for the purpose of financing its purchase.

“This policy change does not mean that HDB flat owners can no longer borrow from moneylenders. They can continue to do so. But they cannot use their HDB flat as a security and they must find other ways to ensure that they can repay their debts,” said Mr Mah.

The Moneylenders Association of Singapore said a lot of the cases involve real estate agents who are also licensed moneylenders.

It added the new law will mean less protection for moneylenders, which may drive them to raise interest rates.

Interest rates are now between 18 to 25 per cent and this may go up to more than 30 per cent.