China Regulators Querying Banks on Mortgage Prepayment Strain

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The China Banking and Insurance Regulatory Commission held a meeting late last week with banks with nationwide operations to discuss the latest wave of home loan prepayments, people familiar with the matter said, asking not to be identified discussing a private meeting. The banks were asked to report on the amount of loans affected as well as solutions to cope with the pressure, the people said.

How to adjust existing mortgage rates is something being discussed by banks and the CBIRC, while regulators are also advising banks to ensure they don’t introduce hurdles for qualified homeowners to prepay their mortgages, one of the people said.

The move comes in the midst of a fresh wave of mortgage repayments and a surge in complaints about banks placing restrictions on the practice. Some homeowners are also taking advantage of boon in short-term, cheap consumer loans to raise cash to prepay mortgages, a practice that is banned by regulators.

The CBIRC didn’t immediately comment.

Citigroup Inc (NYSE:C). analyst Judy Zhang estimated China homeowners prepaid 4.68 trillion yuan ($686 billion) worth of mortgages last year, according to a note last week. It’s unclear how much more of the nation’s 39 trillion yuan of such loans have been repaid this year.

Prepayments have become another big challenge for authorities after homebuyers across China last year boycotted making loan payments unfinished homes. Beijing is struggling to restore confidence in the slumping property market.

Chinese banks extended a record amount of new loans in January, boosting new loans to 4.9 trillion yuan from 3.98 trillion yuan a year earlier. The data showed a surge in loans to companies and a rebound in corporate bond issuance. While consumers took out more loans than in December, their demand for financing plunged from a year earlier. 

While China’s record low five-year loan prime rate, a benchmark for long-duration mortgages, means that banks can mortgage rates to as low as 4.1%, many existing homeowners didn’t benefit since banks only reprice loans at the beginning of every year. Some cities have already slashed mortgage rates for first home purchases to below 4% to revive their struggling housing markets.

Bank Dilemma

Residential mortgages, which accounted for about 30% of the loan books for China’s largest banks as of the of June, are considered one of the highest quality asset classes. The early payments could further squeeze banks’ margins, which are already under pressure from Beijing’s directive for them to pump up the economy with cheap consumer loans.

Homebuyers are already quite reluctant to add leverage. The nation’s outstanding mortgages rose only 1.2% last year, a sharp slowdown from the above-11% growth at the end of 2021.

The demand for prepayment has surged in the past few months, building on the momentum from last year as people cut their household leverage amid economic uncertainty and developers’ debt woes. Some banks had to impose caps on early repayment, while others shut their online system for submitting such requests, local media have reported. 

Still, Zhang estimated that the pace of early repayment could slow down in 2023, as an economic recovery might boost stocks and prompt households to reallocate their funds into the equity market.