15,000 foreclosed properties in Wenzhou pummeling guarantee companies

15,000 foreclosed properties in Wenzhou pummeling guarantee companies

Staff Reporter

2013-10-13

Wenzhou’s banking authorities confirmed rumors of 15,000 houses in Wenzhou nearing foreclosure after surveying 42 financial institutions. It has assured the public that “the situation is under control,” though shaking guarantee companies might not second the opinion, the Shanghai-based Jiefang Daily reports. Wenzhou banks, as of the end of July, reported only 580 cases of foreclosed houses, and 2,584 houses with non-performing loans (NPLs). Of the 580 cases, 183 involved mortgages, and 397 involved mortgages with “collateral plus guarantees,” said the report.Foreclosure is a specific legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as collateral for the loan.

Nosedives in the Wenzhou property market of up to 50% have forced some property buyers to stop making payments to the lenders and drop their guarantees to companies as their mortgages have exceeded the property’s market value. Many have literally abandoned property, a tremendous fallout for the city’s 300 surviving guarantee companies, the report said, citing Fang Peilin, chairman of finance and guarantee company Wenzhou Xing Fang.

A guarantee company is one that acts as a guarantor for a business and contributes a nominal fee towards securing it.

In 2008, Wenzhou’s private investors could easily get mortgages from banks, inflating a bullish investment force and sending property prices skyward. In March 2011, the State Council introduced regulations to tighten property prices, restricting conditions for buyers. Coupled with Wenzhou’s slowing economy and more cautious financing, the property market climbed the summit, and tumbled downward. Since Sept. 2011, Wenzhou’s property prices have dropped 22 consecutive months based on year-on-year comparisons.

Wenzhou has some 300 guarantee companies to help property buyers finance their houses, accounting for more than half of the total mortgages in the city, including some clients using corporate credits or goods for collateral, Fang said.

The 300 guarantee companies capitalized on the “residual value of collateral,” using the remaining quota in a property mortgage to leverage a second mortgage. For example, banks, out of safety concerns, typically approved a mortgage of about 60% of the evaluated value of the property, with 40% untouched. Guarantee companies will try to offer mortgages for the remaining 40%, and claim a service fee. The entire operation relies heavily on a stable property market.

Once the market dips, guarantee companies will immediately face the risk of being forced to make payments for their clients, which is why they are now on the brink of collapse, Fang said.