Mortgage boycott threatens Chinese banks’ loan quality

This highlights the need to tighten regulatory oversight of escrow accounts, Fitch said.

Chinese homebuyers’ are pulling the plug on mortgage payments to properties whose construction have been suspended for prolonged periods, hitting on banks’ asset quality, reports Fitch Ratings.

Currently, the defaults should not directly affect Chinese banks, the ratings agency said, noting that most lenders disclosed that affected mortgage loans amount to less than 0.01% of their outstanding residential mortgage loans. 

“However, should defaults escalate, there could be broad and serious economic and social implications,” Fitch warned.

Smaller, regional banks from lower-tier cities in China’s inner regions are expected to be the most affected by the mortgage boycotts. 

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Prolonged and widespread distress in China’s property development sector, resulting from the ill-effects of the COVID-19 pandemic as well as ongoing lockdowns, have driven suspensions on the construction of a number of pre-sold housing projects. In China, mortgage payments for pre-sold projects typically begin at the time of purchase rather than when the house is completed.

This, along with stretched household balance sheets for certain segments of the population, may have driven homebuyers to a mortgage boycott, Fitch said.

The mortgage boycotts highlight the need for officials to tighten regulatory oversight of escrow accounts, Fitch added.

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“We do not expect local governments to provide liquidity relief to property developers by relaxing controls over the use of such funds. As such, the funding environment is likely to remain tight for developers until property sales show a sufficient and consistent recovery,” the ratings agency warned. 

Such a recovery may be further stalled by rising homebuyer concerns about project delivery.