In (3), we concluded that HB will have to fork out more money to own the house if it appreciates. This is a bigger burden compared to a mortgage where the HB enjoys the appreciation in full without any additional liabilities.
What if the house depreciates? What is the order of priority to suffer the loss – HB, developer and investors?
1. The developer suffers the first loss (from the 20% he did not receive when the house was sold).
2. HB is next, up to the equity he has put in (20% of the original house value).
3. Lastly is the investors.
Although the HB has to absorb all the depreciation in a mortgage, he is not under threat of compulsory loss realisation (he has to sell the house if he cannot raise the refinancing amount in Year 5) as per the FMH scheme. He can opt to just stay in the house, which is what home ownership is, in the first place.
3. HB is responsible for all 3rd party charges (eg. valuer, FMH platform? legal, trustee –may needed if there’re multiple investors). These charges should be higher than a normal mortgage as there are more third parties and more steps. FMH put that at 4% of the house price. Note the upfront 2% booking fee.
4. 6 months before the 5th anniversary, the house is valued. HB has to decide – sell or refinance? The developer gets 1st bite of any capital appreciation up to the original 20% of the house price (remember, he hasn’t been paid his 20%). The refinancing is at the new house value, meaning, if the house appreciates, HB has to fork out more. And, has HB’s credit standing improved enough in Year 5 to support a higher loan?
FMH’s table shows scenarios of -+10% capital appreciation of up to -+30%. Taking the 20% example:
Day 0: House price RM300k.
Year 5: Value is RM360k.
Amount to refinance: RM300k. Remember that on Day 0, HB paid RM60k, investors RM240k. But at Year 5, HB has to pay RM300k to refinance.
5. If the property can’t be sold before the 5th anniversary, HB has to pay a rental yield of 5% (on new market value). This is very high. And open-ended until presumably a buyer can be found at the valuation price.
Should a home buyer (HB) get onboard?
1. The HB pays 20% upfront and nothing else for 5 years.
FMH says the HB can spend or invest the money which he would otherwise have to pay under a normal mortgage. If it is the lower income group, this money is likely to be spent. Come Year 5, how is he going to refinance the FMH scheme which is even higher than before (to be covered later based on FMH’s own table in their website). Prudent?
This mirrors the Collateralised Debt Obligations (CDO) issuances in Malaysia where most CDO bonds defaulted. Participants (corporate borrowers) were given loans without a specific purpose and only had to pay back on maturity (normally at Year 5). So the borrowers spent indiscriminately.
2. The 20% is given to the developer BUT to be kept in escrow and earn a return for the 80% investor. So the developer only receives 80% of the house value (raised from investors). Now, the house buyer doesn’t pay anything for 5 years so where is the guaranteed 5% to investor coming from? This part is not clear. As it’s not possible for the 20% to generate a 20% return p.a. (to equate to 5% return on the 80%), it is likely that the 20% capital will be used to pay the return to the investors (tranches of 4% each year = 20% over 5 years)
Should a home owner, investor and developer go for the scheme? As Tun said, the proof of the pudding is in the eating.
Symphony has reviewed the scheme from publicly available information and FundMyHome’s website. This is our opinion. Do note that there are still a lot of unanswered questions which may change our opinion.
FundMyHome seems investment rather than home ownership is driven. This is because a lot of emphasis is placed on capital appreciation, though FMH says they discourage speculation with the 5 year lock-in period. Based on our analysis also, home ownership is even further away under the scheme at the end of the day (more tomorrow).
The scheme is supposed to help first-time house buyers. We assume that these people have difficulty in getting a housing loan (the lower income group), otherwise, why the scheme.
Remember the 2008 economic crisis brought about by the US sub-prime crisis? The assumption then was that the housing market would continue to appreciate. It did not. The complicated financing structures behind the whole shebang on was simply over-collateralisation of mortgages of people who were of not good credit standing.
Tomorrow is a historic day. It will be the first time that a budget is tabled by an alliance other than BN. All eyes are on PH’s first budget. It is expected to be non-expansionary budget as the “new” Government seeks to manage the country’s finances amidst a mountain of debt.
Everyone should be interested to know what is in the budget because everyone will be affected. Will there be new taxes, e.g. capital gains tax (affecting people who invest in shares and properties), inheritance tax (affecting families), digital tax (affecting buying and selling online)? The Government has ruled out increasing cigarette tax so smokers’ wallets remain unchanged.
What are the infrastructure projects that are on or off? This affects jobs and the amount of money in the economy. Will the Government cut the size of the civil service which has pushed the national operating budget to such a high level?
Will the budget have more social elements, in which case more taxes will be required? What about healthcare and education, 2 sectors which need urgent reform and from which Malaysians are suffering?
Bank Negara Malaysia announced that effective 1 January 2019, banks must report any cash transaction exceeding RM25,000, a 50% reduction from the original RM50,000. This move is to tighten the loopholes for money laundering and corruption.
Many times we have read in the news of huge sums of money (in millions and hundreds of millions of Ringgit) found hidden in some Government officials’ homes. Why would someone keep so much cash in the house which doesn’t earn any income and is at risk of being stolen through burglary? It is to avoid detection because there is no trail compared to cheques and bank transfers. The giver hands over bagfuls of money to the corrupt official and nobody is the wiser, unless the official foolishly spends indiscriminately, displaying ostentatious wealth.
Illegal activities such as gambling, drugs and prostitution are also cash-based. Doubt you give a cheque to the pimp, right?
Charge is a common form of security taken by banks for granting a loan to the borrowers. When you charge your assets to the bank, you are called “Chargor” and the bank is “Chargee”. There is no transfer of ownership / title required to create a charge. The ownership remains with the Chargor. In the event the borrower is not able to pay back the loan, the bank has a right to foreclose the property.
In most cases, the borrower and the chargor are the same, this is called First Party Charge. Third Party Charge is when the borrower and chargor are different. For example, Party A and Party B enter into a joint venture to develop a housing project. Party A has the land and Party B has the expertise. Party B needs to borrow from the Bank to fund the development costs. In this case, Party A may offer the land as security for Party B’s loan.
There can be more than one charge on the same assets, i.e. First Charge, Second Charge. For example, your property value is RM1 million but your loan outstanding is only RM200,000, you may borrow more by creating a second charge over the same piece of asset. The rights of the subsequent Chargee shall rank after the first Chargee.
Remember PKFZ and the infamous letter of support?
The courts recently found Port Klang Authority’s GM guilty in the PKFZ fiasco.
PKFZ was supposed to be Malaysia’s Jebel Ali Free Zone but it ended up a failure, a massive RM12 billion failure for the taxpayer. This was THE Malaysian financial scandal until it was eclipsed by 1MDB.
At the bottom of the fiasco was the Letter of Support issued by the Minister of Transport to support the bonds issued to develop PKFZ. The Letter was obviously issued to support the bonds because it was not likely to generate the cash flows to meet the financing obligations.
But did the Letter tantamount to a guarantee by the Government for the bonds? The Government decided to honour the Letter though it was signed by the Minister of Transport (bypassing MOF as required under the Financial Procedure Act), and even addressed to MARC, the rating agency (instead of the trustee for the bondholders)!
Finally, why was a similar Letter of Support issued by LKIM not honoured by the Government for the Malaysian International Tuna Port? The court judgments on that case make for very interesting reading.
As expected, Utusan has announced a VSS exercise for its staff. While the employees grapple with the question of whether they should take up the VSS offer, the key question is will Utusan survive in the medium term. This is a question which all employees affected by VSS need to ask themselves.
Some companies undertake VSS exercises to cut costs, to be leaner in order to protect their profit margins. Some do it because they have no choice. During the 1997 economic crisis, many companies had to offer VSS to the staff. It was a matter of survival. A lot of companies did not pull through. Their turnaround plans did not work out. The key things to be considered are:
1. Does the company have a viable and changed business plan to improve its business and cash flows?
2. What is the company’s operating leverage like? High overheads vs variable costs.
3. Are the banks willing to take a hair cut on the loans?
4. Are the shareholders able and willing to pump in money?
When a turnaround fails, it is the remaining staff, suppliers and minority shareholders who will lose the most. Secured lenders will still have the collateral to offset their loss.
There was a lot of controversy regarding Felda’s land in Jalan Semarak where the land titles were transferred to a private company, Symphony Promenade (SP), who then came out with a press statement to deny any wrongdoing and explain that the transfer was necessary to secure funding for the development. In our opinion, their explanation is not strictly correct.
It was to be a joint venture between Felda and SP to develop Kuala Lumpur Vertical City. This type of JV is common where 1 party provides the land and the other develops it. The JV sources for financing for the development.
To secure financing, the land is charged to the banks. BUT, typically and crucially, the land title remains with the landowner. There is NO need to transfer the title. This is called a third party charge, done all the time. Once the title is transferred, the landowner has no control or right over the land except what has been agreed in the JV agreement which is to share in the profits of the development. If the development fails, the landowner gets nothing and loses his land. The developer mainly loses his working capital.
Our opinion is based on publicly available information only and may change if the info is incorrect.