Friday, May 30, 2008

EMI Holidays: India's Subprime in the Making

An eerie trend is rearing its ugly face as builders get desperate to prop the flagging sales of apartments. In an echo of what caused the subprime crisis in the US, builders are now luring home buyers with loan options that resemble the exotic mortgages of the US.

Trends reported in Delhi point to EMI holidays, where you book an apartment by paying 10-15% down payment of the apartment's cost - determined by the builder - and arrange for your bank loan. Once you have your bank loan in place, the interest component would be paid by the builder until the flat is ready. Once possession is handed over, usually 18-24 months, you begin paying the balance EMIs.

Even in a seemingly straightforward home loan industry in India, loans can take on subtle flavors not easily visible to the borrower. There are all kinds of caveats loaded in to the agreements which emerge only in the event of a dispute. The EMI itself comprises a capital component and an interest component, which is determined by the bank.

Typically, an EMI holiday means no EMI is to be paid by the borrower until the possession of the apartment is given. This basically means the borrower does not have to pay the capital component until the apartment is in his possession. This non-payment of capital will obviously attract an interest which will be calculated and added on to the balance EMIs, which kick in after possession - there is indeed no free lunch. Home loan borrowers are seldom clear about the underlying structure of these loans.

Now, as far as the interest component of the EMI goes, this would be 'happily' shelled out by the builder. At 10% per annum, it is a steal for all builders, who now have ready access to the cash, since under RBI regulations, real estate funding is not automatically available from domestic banks.

EMI holidays have apparently impressed local Citigroup analysts, Ashish Jagnani and Aditya Narain, who have written glowing reports that such ideas would boost transaction activity. Perhaps they should consult their global chief, Vikram Pandit, who is sulking and brooding about how to make good the $400 writedowns Citibank had to endure, arising from similar kind of loans, which the bank had encouraged in the US.

In my view, EMI holidays are an indirect way of providing builders with funds, and an means to keep housing prices at current ridiculously high levels. Since the RBI has tightened its noose around banks lending for the real estate sector, they have come up with such schemes which contravene the law without transgression. Reports say that such trends are mostly a Delhi phenomenon, but this is not entirely true. HDFC Bank in fact offers a similar scheme for Nahar's Amrit Shakti Project in Powai, Mumbai. [Read the story here]

Experts and industry watchers have clearly sent out the message that EMI holiday schemes are simply a ruse by builders to sell their current inventory of apartments at exorbitant prices. Once you take a loan, home buyers would simply find themselves locked on to a rate, and with the prospect of a decelerating market, it is clear that anyone who buys property at current rates is looking at years of sliding property values.

Read the HT story here

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Consider how the crisis has unfolded over the past eighteen months. The proximate cause is to be found in the housing bubble or more exactly in the excesses of the subprime mortgage market. The longer a double-digit rise in house prices lasted, the more lax the lending practices became. In the end, people could borrow 100 percent of inflated house prices with no money down. Insiders referred to subprime loans as ninja loans—no income, no job, no questions asked. - George Soros in latest book

everything’s going up, there’s a feelgood factor and people tell each other how much their houses are going up at dinner parties,” says Professor Mark Stephens of York University’s Centre for Housing Policy. “Then the music stops, as it always does.”

year, Japan was a more attractive market to put money in. If you look at the US, we can now get an internal rate of return of 25% there, so why would anyone want to come to India?” - a senior executive at an international financial services group, who did not wish to be named.

people told us house prices never go down on a national level, and that there had never been a default of an investment-grade-rated mortgage bond, "Mortgage experts were too caught up." - John Paulson, trader, who bet against subprime market and made $15 billion.

most puzzling are the real-estate projects of Parsvnath. Just have a look at the Pride Asia project near Chandigarh. They are asking almost US $300K-$350 K dollars for 2 bed room apartments. They have Villas in this project that costs more than US $1.5 million dollars. It is true that some people in India have that kind of money in India. However most of their wealth is black money and that can not be used to buy these properties. Obviously, these projects have been launched keeping NRIs in mind. - Sanjeev, comment from another site

Desai, aka Bani, the star of Balalji Telefilms's soap, Kasam Se, has been house hunting for over a year. She had almost closed a 2-BHK deal last year for Rs 1.5 crore in a Oberoi Constructions' building located at Andheri, Mumbai, but when she went back to confirm it, she was asked to cough up Rs 2.61 crore. Since then, she is still house hunting. - Mumbai Mirror


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