MANILA BULLETIN - February 22, 2008

Subprime woes seen not hitting RP

The buoyant real estate sector said the subprime mortgage woes that now threaten economic recession in the US is not likely to happen in the Philippines following the implementation of document procedure to avert delinquencies in payments of housing loans.

In a statement, Chamber of Real Estate and Builders' Association Inc. (CREBA) chairman Manuel M. Serrano said the government housing institutions have already implemented the change in the documentation on installment sales of house and lot packages from the conventional deed of sale with mortgage (DSM) to the Contract to Sell (CTS) mode.

"While the switch in documentation appears simple, the implications are far-reaching," Serrano said.

Serrano explained that under a CTS mode, a 100 percent collection of monthly amortizations is assured such that should delinquencies ensue, the holder of the CTS has simply to cancel the contract, forfeit all previous payments, and re-sell the house and lot. The title to the property purchased is transferred only upon full payment of the consideration.

On the other hand, under the DSM mode the title to the property purchased is transferred immediately in the name of the buyer and the balance of the consideration is covered by mortgage and annotated at the back of the title covering the property.

When delinquencies occur, which was the case with what is now happening in the U.S, Serrano said the mortgagee has still to resort to foreclosure, repurchase the property through the auction sale, and consolidate ownership only after the redemption period of one year has expired - a process that is not only time-consuming but expensive as well. In the meantime, the money covered by mortgage remains idle.

Apart from the assurance of a 100 percent collection of receivables, said the CTS has opened opportunities for Filipinos to afford decent shelter.

Under the CTS mode, a token 10 percent equity from a housing loan borrower will suffice as against the substantial 30 percent equity required under the DSM mode.

"While the DSM equity requirement was meant to minimize chances of foreclosure but in essence it constricts the market only to the moneyed who can afford the payment of substantial equity upfront even if the payments of monthly amortizations are well within the capability of the buyer to meet," Serrano noted.

In addition, a mortgage origination under the DSM is messy and takes long time to process and approve because of the many supporting documents that the buyer must satisfy to establish the buyer's eligibility, proof of capability to pay such as Income Tax Returns and list of income sources, a thorough credit check and proofs of good credit standing such as good track records in payments of credit cards, utility bills, etc.

Under the CTS, Serrano said, all these unnecessary requirements may be dispensed with because in essence, the issue of repayment capability is selfpolicing. How the buyer performs under the terms and conditions of the CTS is what establishes his right to acquire the property he contracted to purchase or not;

"If the buyer misrepresents and is therefore unable to pay and by reason of which is contract is cancelled, he has only himself to blame. This is why under CTS, all that is required is that he files an information sheet and he understands fully the terms and conditions of the CTS," he said.

That is why the housing bonds and securities backed by mortgage receivables could shaky as what happened in the U.S. As a result, before housing securities can henceforth be marketed, future investors may require issuance of an insurance cover or sovereign guaranty.

On the other hand, housing bonds and securities backed by CTS, because of its all attractive features of 100 percent collection assured, may not only be attractive to ordinary invistors, local or foreign, but may also serve as ideal substitutes for insurance and bank reserves.

The use of the CTS in lieu of DSM was CREBA's proposal which was adopted by the government financial institutions involved in financing installment sales of house and lot packages.

Since its adoption in the late 1990's, banks have been scrambling in purchasing CTS receivables instead of DSM receivables.