House buyers' traps: purchasers lose their homes because of defaulting developers

WHY does this keep happening to house buyers in Malaysia?

This incident happened two years ago in Taiping where a laid-back community of mainly retirees found the roof over their heads nearly, and in some cases, actually, blown away. The purchasers had paid the developer and had moved into their houses and lived there for 10 years. Problem was that the purchasers paid the developers in cash remittance without taking out end-financing loans.

Unknown to the purchasers, the developer did not pay the developer’s bank to settle the developer’s loan vide bridging loans. The developer’s charge remained and grew into bigger indebtedness to the bank.

Apparently, the developer’s bank had not been collecting payment of the loan from the developer, even as the developer was collecting the instalments of the purchase price from the purchasers, as provided in the sale & purchase agreement (S&P) schedule.

Having waited for 10 years for the developer to settle his loan, the bank realised that the developer was not going to pay; that foreclosure was unavoidable.

The bank had a problem. Apart from the developer’s loan having ballooned over the years because of the bank’s laxity in not insisting on the developer paying promptly, there was also political repercussion. There are a few issues here, namely, the destruction of a settled community in a pleasant location, the injustice of the S&P; the solicitousness for developers in preference to purchasers on the part of the powers that be; and the embarrassment resulting from the bank’s philanthropic ramifications.

Has the bank breached the fiduciary duty of care to the purchasers as the bridging loan financier to the defaulting developer?

The crux of the problem is that the Housing Ministry-prescribed S&P allows the developer to build the purchaser’s house with the instalments of the purchase price paid by the purchaser from the day the S&P is signed. On top of this, and even more seriously, the developer is allowed to borrow from the developer’s banks on the security of the purchaser’s property.

Where a purchaser has paid the purchase price in full to the developer, and the developer does not pay the developer’s loan secured by the purchaser’s property, the developer’s bank may foreclose, auction off the purchaser’s property to recover the developer’s loan.

The developer suffers nothing. It has received the purchase price and pocketed it. The developer borrowed from its bank and gave the purchaser’s property as security, and with foreclosure the developer’s bank recovers its loan, and so the developer owes no money to the bank. It takes no risk, suffers no loss.

Purchasers the victims

It is the purchaser who loses. He loses his house and he has to settle the loan he took to buy the house with increasing interest on it. He is blacklisted, which means he can never borrow again. He may never buy a house again! Is this fair to the buyer who never did anything wrong to the developer or to the developer’s bank? In the Taiping housing fiasco, some of the purchasers had to buy their houses again at prices bloated by 10 years’ arrears of interest (i.e. pay the developer’s debt) to stave off foreclosure.

Who is to blame for this sad state of affairs? We will consider each one in turn. The most obvious candidate is, of course, the developer. Not so. It is the Housing Ministry for providing a standard form S&P that allows this to happen. Firstly, the S&P allows the developer to borrow money from a bank with a charge on the whole housing development land before it is sub-divided and sold. This pre-sale loan is referred to in the recitals to the S&P. This is understandable as the developer needs money before sale. The result of this is that the purchaser buys an encumbered property but the purchaser is not told how much of the developer’s loan, if apportioned equally, is borne by each purchaser’s sub-divided land (the redemption sum). After sale, the developer collects money from the purchaser from the day the S&P is signed, and should be able to make use of it to meet all the expenses of the development. However, after the sub-divided land is sold, the developer keeps borrowing, and no effort is made to keep the purchaser informed about the increasing amount of the developer’s loan/ the redemption sum.

The purchaser’s consent to the additional, post-sale loans is taken for granted. In fact, the purchaser cannot withhold his consent as long as the purchaser receives some fig-leaf protection from the developer’s bank in the form of an undertaking not to foreclose.

What is the use to the purchaser of the developer’s bank’s undertaking not to foreclose? What the purchaser needs is the absolute undertaking by the developer and the developer’s bank that a purchaser who has paid the purchase price will not face foreclosure vis-à-vis the disclaimer(s). This would have helped the Taiping purchasers. It is, therefore, a matter between the developer’s bank and the developer, with the Housing Ministry playing the proper protective role required of it by law, to ensure that such an undertaking/ disclaimer is given by the developer’s bank to the purchaser. This and other issues arising from the S&P have been raised by HBA with the Housing Ministry which continues to procrastinate.

To the developer’s bank, the loans to the developer on the security of the purchaser’s land is regarded as if it is the developer’s property entirely; it is of no concern to the developer’s bank that some of the purchasers have paid the developer and the developer may or may not have forwarded some of these payments to the developer’s bank.

The developer’s bank’s concern is whether the whole loan has been settled by the developer-borrower. If not, the developer’s bank feels secure in the knowledge that the entire housing development land is available to the developer’s bank to recover its loan/s. In so far as the developer’s bank is concerned, payments made by each purchaser to the developer is of no consequence. The transaction between the bank and the developer is the one that matters.

Under the then S&P, there is also no control over how much the developer should be allowed to borrow, for what purpose and by when it should be settled. Each loan to the developer increases the risks to the purchaser.

In the recent past, developer’s borrowed only for the purpose of meeting the expenses of the housing development. The developer was allowed to borrow twice only – once before sale and once after sale. Although the developer was not required to disclose the redemption sum, there was a very important safeguard. And that is, the developer had to settle the redemption sum to the developer’s bank before completion of construction so that at the end of the 24- or 36-month construction period, as the case may be, the property was free from the developer’s encumbrances and safe from foreclosure, even if the property was not transferred to the purchaser just as promptly. It was at least safe from foreclosure.

Bank initiatives

Banks/financial institutions should take the initiative to recover progressively the loan it had given the developer. Banks should stipulate as a condition for giving loans to their customers (developers) that the latter open its Housing Development Account (HDA), a statutory requirement, with the same bank and require the instalments of the purchase price be paid into it, and authorise the bank to deduct the developer’s loan by instalments from the HDA so that when the purchaser completes payment, the developer’s loan is also settled.

There is no such statutory requirement in the S&P so that if it happens at all, it’s serendipity!

HBA had meetings with the Housing Ministry to propose changes to the law and S&P with the view of giving greater protection to purchasers within the framework of the sell-and-build (which Rehda defend so fervently) but some pertinent ones had been objected by Rehda.

As if that is not enough, the ministry too have rejected those proposals vis-a-vis pre-determination of redemption sums in the S&P transaction. And that notwithstanding the Housing Development Act 1966 stating that it is inter alia for “the protection of the interests of purchaser.”

The next continuing article will dwell on the new “protection” or whatever in lieu thereof approved by the Attorney-General’s Chambers vis-à-vis “redemptions and disclaimers”.

Buyers beware by Chang Kim Loong

Chang Kim Loong is secretary-general of the National House Buyers Association: www.hba.org.my, a non-profit, non-governmental organisation.

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Unfair housing loan agreement

MOST if not all house buyers will require financing to buy their dream homes. While there appears to be stiff competition among banks for market share and interest rates may be kept low, house buyers are ultimately at the mercy of banks when it comes to the detailed terms and conditions of the housing loan. (Banks in this context refers to commercial banks, Islamic banks and other financial institutions).

Unfair legal fees

When a borrower takes a housing loan, the borrower is required to execute a loan and other related agreements. This entails the borrower having to pay legal fees, the amount of which varies, depending on the loan amount – the higher the loan amount, the higher the legal fees although the complicity and level of work does not necessarily commensurate directly with the loan amount.

Although it is the borrower paying the loan lawyers’ fees, the said loan lawyer is actually acting for and on behalf of the bank. As such, the loan lawyer is not in the best position to advise the borrower if there are clauses in the loan agreement which are not in the best interest of the borrower.

In addition, in the event of any dispute between the borrower and the bank, the borrower cannot ask the loan lawyer for advice as the loan lawyer is acting for the banks.

If this is the case, then is it “fair or equitable” for the borrower to pay such legal fees when it is clear that the lawyer is actually acting for the banks? Obviously not. Hence, the bank should absorb the legal fees as the lawyers are clearly there to act for the bank and protect its interest.

Exorbitant fees for simple letters

The banking sector in Malaysia is a very tightly regulated industry. Any fees that banks intend to charge must be approved by Bank Negara. It is disheartening to note that borrowers continue to be charged exorbitant fees which seem to have the explicit blessings and consent of Bank Negara. Instances of borrowers being charged unreasonable fees for copies of redemption statement, EPF statement letter etc are common.

Allocation of monthly repayment to principal and interest

This is a story about three friends who took a housing loan (HL) of RM500,000 ten years ago. They were offered the same HL interest rate of 4.2% (base lending rate of 6.60% less 2.40%) but took different loan tenures as follows:

Albert took a 20-year HL. Eric took a 25-year HL and Jamie took a 30-year HL.

After servicing their monthly loan instalments diligently for the past 10 years, they decided to fully settle their housing loan using a combination of their EPF monies and own savings. When they asked for a redemption statement to find out what was the principal sum outstanding, they received a shock of their lives.

Albert, Eric and Jamie were under the impression as they had served 50%, 40% and 33.3% of the loan tenure, their principal sum outstanding would be RM250,000, RM300,0000 and RM333,333 respectively.

So, when their respective redemption statement showed that Albert, Eric and Jamie still owed respectively RM301,654, RM359,415 and RM396,652, they got a big shock.

So, why did they still owe so much more than what they had thought? The answer lies in the allocation of the monthly instalment towards covering the principal sum and interest charged by the bank.

In an equitable world, the monthly instalments would be allocated on a “straight line basis” to cover the principle and interest charged. Thus, a borrower who served 10 out of a 20-year HL would only owe 50% of the original loan amount.

However, the reality is that the borrower still owes 60.3% of the original loan amount.

The typical borrower will always be “penalised” for settling his loan before the maturity date. Even in the penultimate year of the original loan tenure, the actual amount outstanding is still higher than the theoretical amount, which should be the amount outstanding had the allocation of monthly instalments been done on a straight line basis.  

Is it fair and equitable?

Most borrowers do not know or even understand how this allocation is calculated. Is such an allocation “fair and equitable” to the borrower? Under such circumstances, are borrowers supposed to accept that the bank’s own generated computer system has calculated the interest correctly and allocated the payments in the correct manner?

To the borrower, they have paid 10 out of a 20-year loan, he should only owe balance 50% and not 60.3%. Is this manner of allocation not just another unjust way for the bank to generate higher profits, after all the bank did receive the payments on time and in full every month. It is the dream of every borrower to be debt-free as soon as possible and it is not fair to the borrower to be penalised in such a manner when he wants to settle his loan early.

That said, borrowers have no choice but to accept the calculation of the bank as correct and final. If the borrower were to reject and not pay the required sum, the loan will not be considered as repaid in full. The borrower could even be blacklisted and even have his property auctioned off by the bank to recover the remaining sum outstanding if the borrower refuses to pay up.

It would be more transparent and equitable if the monthly payments made by the borrower are allocated in a “straight line basis” to interest and principal equally over thetenure of the housing loan. Short of that, borrowers are at the mercy of banks.

Some banks operate like a “cartel” and standardise their fees to be charged to customers. One wonder whether such unfair practices are condoned by the regulators like Bank Negara.

It is also interesting to note that banks are exempted by the Malaysia Competition Commission allowing banks to agree and collude on unfair fees, penalties and practices to be charged to borrowers.

Unnecessary expenses

Loan agreement “printing charges” – sold between RM150 and RM350. The banks’ solicitors need to purchase a standard loan agreement from the bank (via soft copy) and adds the borrowers’ details in order to complete the loan agreement. The banks charge the lawyer and the lawyer charges the borrowers.

Standard loan agreements are now downloaded from the bank’s website or from soft copy. The bank no longer need to print them and should not charge for such documents. Alas, this has been continuing till to date. Lopsided terms and conditions

Lopsided terms and “add-on” products are aplenty, if the borrower wants to identify with them. It would be good practice to remove or qualify the banks’ arbitrary powers.

Conclusion

The National House Buyers Association (HBA) had on Sept 4, 2014 made representation to the Finance Ministry (MOF), Bank Negara. Housing and Local Government Ministry in the presence of Association of Banks Malaysia and Islamic Banks of Malaysia in the form of slides presentation on some observations and unethical practices of some banks.

HBA is looking to work closely with MOF, Bank Negar and all related stakeholders to level the playing field for housing loan borrowers in the long-term interest of the banking industry. We had proposed to set up a working committee to resolve all unfair practices. MOF and Bank Negara have a legitimate interest in the final shape of the banking industry into operating a principled and towards a “customer friendly arena”.


Buyers Beware By Chang Kim Loong

Chang Kim Loong is the honorary secretary-general of the national House Buyers Association: www.hba.org.my, a non-profit, non-governmental organisation manned purely by volunteers.

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