Macro‐economic factors and foreclosure risk: evidence from mortgages in Singapore
| Published date | 01 December 2003 |
| Pages | 411-434 |
| DOI | https://doi.org/10.1108/14635780310508603 |
| Date | 01 December 2003 |
| Author | Peck Yan Nang,Poh Har Neo,Seow Eng Ong |
| Subject Matter | Property management & built environment |
Mortgages in
Singapore
411
Journal of Property Investment &
Finance
Vol. 21 No. 6, 2003
pp. 411-434
#MCB UP Limited
1463-578X
DOI 10.1108/14635780310508603
Macro-economic factors and
foreclosure risk: evidence
from mortgages in Singapore
Peck Yan Nang, Poh Har Neo and Seow Eng Ong
Department of Real Estate, National University of Singapore, Singapore
Keywords Mortgage default, Underwriting, Real estate, Singapore
Abstract Foreclosure risk is a key concern to lenders of real estate mortgages. Using auction
data, this study provides the first analysis of mortgage foreclosure in Singapore by examining
how macro-economic variables affect the probability of foreclosure. The foreclosure rate for
properties is found to be increasing in the first five years of purchase and decreases as the holding
period lengthens. The likelihood of foreclosure increases with unemployment rate, mortgage rate
and expenditure and decreases with equity, dividend yield and lending volume at fourth and
twentieth quarters lag. Further analysis shows considerable differences between residential and
non-residential properties. However, when the analysis on non-residential properties is further
separated into office, retail and industrial sub-sectors, the results are relatively similar among the
three sub-sectors. This implies that banks and financial institutions should apply different
underwriting standards for residential properties, mainly for owner-occupation and non-
residential properties for the purpose of businesses and rental income.
Introduction
Foreclosure is detrimental to the revenue of lenders as losses are incurred when
the cash recouped from the sales is less than the value of the financial asset
(Giliberto and Houston, 1989). In addition, there is the opportunity cost of the
lender's equity from the date the lender took over a property from the borrower
to final disposition (Quigley and Van Order, 1991). Lenders also face third party
foreclosure costs in the form of legal fees, broker's sales commission, property
management fees and property tax (Riddiough and Wyatt, 1994; Clauretie,
1990). Further, foreclosure risk is very important in the development of
mortgage-backed securities. As such, substantial studies on foreclosure risk
have been conducted, primarily focusing on the US market.
Many of the studies have focused on the borrower's characteristics,
especially on the requirements determined by the underwriting standards such
as ability to pay hypothesis (Vandell, 1978); age of borrower (Cunningham and
Capone, 1990); occupations (Waller, 1988); and income and wealth level of
borrowers (Furstenberg, 1969). Studies on the nature of such relationships seek
to permit banks and financial institutions to impose more stringent
underwriting standards to reduce the likelihood of foreclosure. However,
Anderson and Weinrobe (1986) and Waller (1988) found that understanding
borrowers' attributes alone did not give an indication on the likelihood of
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The current issue and full text archive of this journal is available at
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The authors thank participants at the European Real Estate Society conference, Glasgow for
insightful comments. The original title of this paper is ``Foreclosure risk and holding period for
mortgages in Singapore''.
JPIF
21,6
412
foreclosure. As such, this study undertakes to provide an insight on how
macro-economic variables reflect the probability of foreclosure so as to improve
the underwriting for banks and financial institutions.
As property is a highly priced asset, mortgage loan is usually granted for up
to two to three decades and in Singapore, it is up to 35 years. In addition to a
long loan term, property purchase usually constitutes a relatively high
percentage (up to 40 per cent) of the net income. With such long loan terms
and high payment-to-income ratios, lenders are exposed to greater risk of
non-voluntary foreclosure should some wealth-impairing events, such as
unemployment due to economic downturn or increases in mortgage rate, occur.
Conventional wisdom suggests that adverse movements in macro-economic
factors could potentially affect the borrowers' ability to pay and foreclosure
remains as the only choice. Thus it is necessary for lenders to understand the
relationship between macro-economic variables and foreclosure risk in order to
mitigate this risk.
In addition, the linkage between macro-economic variables and foreclosure
risk is important for a country with a large rental market, since this market is
subjected to a greater volatility to economic forces. For instance, the vacancy
rates increase whenever there is a recession; consequently more businesses will
encounter cash-flow problems leading to lower revenue, which in turn will
affect the mortgage repayment. The slowdown in business activities will lead
to a reduction in the number of expatriates in that country which will in turn
affect the residential rental market. This study thus further seeks to determine
if the relationships between macro-economic variables and probability of
foreclosure differ across property types. In particular, we conjecture that the
effects of macro-economic variables on residential properties that are owner-
occupied may be different from those properties that are rented out. As such,
the effect of yield, income, sentiments, mortgage rate and lending volume on
the risk of foreclosure may be different.
The need for a better understanding of the foreclosure risk is most essential
in Singapore as there has been a considerable rise in the number of mortgagees'
sale properties by 23 times from 24 sales in 1995 to 580 in 1999 (refer to
Figure 1). Further, the understanding of the foreclosure risk is also useful for
the development of real estate securitization, especially in Singapore where
there is a recent change in regulation. Prior to September 2002, banks and
financial institutions are ranked ahead of the Central Provident Fund Board,
the authority in charge of compulsory saving for retirement fund in Singapore,
in the event of default by the borrower. With effect from September 1, 2002,
banks and financial institutions would have first charge on the property in the
event of default (Teo, 2002; Business Times Singapore, 2002; Tan, 2002; Leong,
2002; The Straits Times, 2002). As such, the new regulation will encourage the
development of mortgage-backed securities (Rashiwala, 2002; Siow, 2002).
There is hence a more pressing need to understand default and foreclosure risk
for mortgages in Singapore.
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