Lessons from Sub Prime Mortgage Crisis in US

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SUB PRIME MORTGAGE (SPM) crisis in US has started since 2006, but it became a global financial crisis in July 2007. As reported before, the crisis has caused “insolvency” problem to several minor banks and mortgage financial institutions in US. The crisis has also put some financial institutions involving in SPM market to close down their operations.

What is the deference between SPM and mortgages lent by mainstream lenders? Can SPM crisis influences mortgage market in Indonesia? How to protect Indonesia’s mortgage market from such a crisis in the future?

SPM are mortgages lent to borrowers who do not qualify for mainstream lenders. The mainstreams lenders only lend to those who qualify for loans, such as: having a good credit history, enough income to fulfill future financial obligations, and cash to pay down payment of the real estate transaction. SPM lenders lend to those who do not qualify for loans with an assumption that if borrowers can not pay their installments, lenders will put their collaterals into foreclosures.

Because of risks involved in this kind of mortgages, the interest rate charged to SPM usually 3 to 4% higher than that of ordinary mortgages. This unusual high interest rate is a danger not only for borrowers but also for lenders. And because SPMs are also adjustable rate mortgages (ARMs), the interest rate can even go higher if market rate changes. One factor that has put SPM market into crisis is the rise of interest rate due to a recent unfortunate economy situation in US. The rise of interest rate has caused many SPM borrowers fail to repay their installments.

Meanwhile, since so many collaterals go into foreclosures, the housing price plunges bringing “bubble” situation in US housing market. The SPM crisis then became a global financial crisis, because the fact that many financial institutions and global hedge funds bought the “derivative” products of SPMs. With the increasing worries of the ability of borrowers to fulfill their obligations, many investors began to redeem their funds from hedge funds resulted in a global financial crisis.

Mortgage Market in Indonesia

SPM crisis in US has influenced financial market in Indonesia very badly. Because of the crisis, the composite index (IHSG) of Jakarta Stock Exchange (BEJ) fell to 1.863 point in 16 August, 2007 from 2.403 point in 26 July, 2007. The rupiah also depreciated to 9.500 level per one US dollar in the same month. Although Indonesia financial market has been recovered from crisis, but worries are still not disappeared, especially in the mind of investors.

It also happens to financial market authorities, which are Central Bank (BI) and Stock Exchange Supervisory Body (Bapepam-LK) that still keep on observing global market movement. Worries about financial market situation in Indonesia is normal, but not about mortgage market. Mortgage market in Indonesia will not be affected by crisis. This is because both markets are different one another. Mortgage market in Indonesia consists of borrowers who qualify for loans, while SPM market in US consists of those who do not qualify for loans.

Accept from that, although mortgage market in Indonesia has been developing since 1976, but it just grows recently as more players come into the market. In such a growing market, the capacity of lenders to originate mortgages is very small compared to the demand of mortgages from home buyers. In the marketing theory, this kind of market is called “seller market”, meaning that there are more home buyers who need mortgages than the capacity of lenders to originate mortgages.

Since mortgage market in Indonesia is a “seller market”, lenders in Indonesia can choose borrowers who qualify for loans only. So, there is no need to worry about mortgage market condition in Indonesia and the effect of SPM crisis to ower market. Why this is important for being addressed? Firstly, housing sector in Indonesia has not been developed properly, because home buyers do not have a good access to mortgages.

To support the development of housing sector, banks in Indonesia are encouraged to keep opening their door to home buyers. If banks are worried about ongoing crisis, they will probably limit their access to home buyers. Secondly, PT. Sarana Multigriya Financial (PT. SMF) founded in 2005 based on President Decree No. 19/2005 is preparing a first mortgage securitization in Indonesia. This transaction involves Bank BTN as an originator that will sell Rp. 500 billion pool of mortgages to investors.

The due diligence process involving arranger, rating agency, financial advisor, and lawyer has being conducted now. If the investors are worred about mortgage market situation in Indonesia, they will be discouraged to participate in that transaction. As a result, it will cause a set back in secondary mortgage market development in Indonesia.

Lessons Although

SPM crisis will not affect mortgage market in Indonesia, but there are lessons that we can learn from the crisis. SPM crisis had taken placed, because SPM lenders have violated prudential principles in lending. Lenders in Indonesia do not have to follow SPM lenders. Mortgage market in Indonesia is not a mature market like those in developed countries.

Mortgage market in Indonesia is still promising to both lenders and investors in the future. It is unnecassary for lenders in Indonesia to conduct a market inovation like that of SPM market in US. Other lesson that Indonesia can learn from crisis, that it is necassary to develop a strong and healthy mortgage market to avoid such a crisis in the future.

To do that, mortgage market infrastructures have to be strengthened both primary and secondary market. In primary market, for instance Indonesia needs to develop a credit bureau to provide accurately and timely credit history to lenders not only to cover credit records of banking and financial institutions transactions but also other transactions such as electricity, telephone, and tax payments. In secondary market, Indonesia also needs to develop infrastructures to support the operations of PT. SMF in providing long term funds to lenders. As we know, mortgage lenders (banks) in Indonesia are facing difficulties in finding long term funds from capital market, since PT. SMF can not operate effectively because of the lack of market infrastructures. (Sasmaya Tuhuleley, work for an Indonesia national bank)


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