Wednesday, September 16, 2009

Time to kill off giant mortgage 'Frankenstein'

Time to kill off giant mortgage 'Frankenstein'

Nicole Alpert
Tuesday, September 15, 2009
The Standard

The Lion Rock Institute is pleased to report that a group of legislators, including Regina Ip Lau Suk-yee, has decided to consider the threat the Hong Kong Mortgage Corporation poses to the territory's financial stability. This anecdote explains the problem well:

When I was 16, I yearned to visit Europe. I had enough savings, but I wasn't free to leave without my parents' permission. As long as I was still living off my parents, I wasn't going. The experience taught me a valuable lesson: the importance of financial independence. Financial independence gives you autonomy; while welcome to take anyone's advice, you aren't forced to.

Autonomy is the right to self- governance, Hong Kong's model under one country, two systems. The HKMC puts this arrangement in a precarious position by operating far outside its original mandate. In doing so, it threatens Hong Kong's financial stability and therefore its independence.

Ironically, it was the HKMC's purpose to maintain stability when it was incorporated in March 1997 as a wholly owned, public sector entity. It is only in the past few years that it has extended beyond its original mandate and started to potentially endanger the financial health of the government.

The HKMC mandate was to disperse residential property mortgage risk away from the banks and it was explicitly stated in its business plan that it would not buy "mortgages on commercial properties or properties outside Hong Kong, which may entail greater risk." At first, the HKMC was well aware how risk potential could become a real threat. Today however, the reality is quite different. With every year's shrinking need for the HKMC, it further expands its balance sheet and violates its mandate.

In 2006, the HKMC took its first steps towards becoming the government's Frankenstein, purchasing the first-ever taxi loans at HK$1.4 billion. In 2007, it purchased HK$10.6 billion of Korean mortgage- backed securities, and in 2008 partnered with a subsidiary of the People's Bank of China, the Shenzhen Financial Electronic Settlement Center, to provide "bridging finance guarantees" for secondary property market transactions in Shenzhen.

Unlike a responsible government entity, the HKMC has expressed no plans to return to its original mandate, instead, it anticipates expanding to "provide other types of services in the future" in the mainland.

It is not so much a matter of whether current activities by the HKMC are low- or high-risk. What matters is that it is continuously and relentlessly pushing outwards, embracing even more risk. More overwhelming is the flagrant, irresponsible use of public money when there are strong arguments that there is no longer a need for the HKMC.

After SARS, the property market rose again, banks resumed their health, and the exchange rate was maintained. If Hong Kong survived then as it did, it is questionable what the HKMC can offer. Regardless if it is needed in its original capacity or not, the bottom line is that the HKMC is acting to expand its balance sheets to profit, operating where it shouldn't be - far outside its mandate.

This is dangerous because the HKMC is now Hong Kong's Fannie Mae and Freddie Mac, and we remember all too clearly what happened with them. When management bonuses are privatized, and losses are socialized, most of us find ourselves the losers.

As with Fannie and Freddie, it is the taxpayer and the Hong Kong government that is the loser with the HKMC's violation of its mandate. The HKMC's activities could cause huge losses, and just as Freddie and Fannie were bailed out, so too would it as a government wholly owned entity. Once that bailout takes place, Hong Kong will need to ask for financial help, most likely from Beijing, and autonomy is lost.

The HKMC may find reasons to justify its existence. Some say that as long as it remains in the government's hands, it is "safe," but the very first of the violations to its own mandate disproves that and turns the HKMC into a threat. In the past few years, the HKMC has increased its balance sheet, ignored its mandate, and left risk to be borne by the taxpayer. This current practice poses dangerous threats, and it is not safe to allow this to continue.

Privatizing the HKMC is an option. If instant liquidation is not an option, it should merely be asked to cease lending, run off its loans and await full repayment of what has been lent out.
As long as the HKMC finds ways to increase its balance sheet beyond its original mandate, it is no longer acting as a responsible government-owned entity, but a government Frankenstein. It's time to rein in this monster.

Nicole Alpert is research associate with the Lion Rock Institute, a public policy think-tank that offers free-market solutions

1 comment:

Nic said...

Now, I'm not sold that privatisation could be an option. The issue with Fannie was that it was privatised. Didn't get rid of socialised losses - hard to see how HKMC could successfully privatise and also get rid of socialised risk.