Real estate lending to require closer monitoring amid rising risks

Lending to the real estate sector will need tighter supervision amid emerging risks that could impact the financial system, a Philippine central bank report showed.

“Real estate loan (REL) exposures need closer monitoring amid evolving market conditions,” the Bangko Sentral ng Pilipinas (BSP) said in its latest financial stability report.

“The high-interest rate environment, shifting consumer preferences, remote work arrangements and recent government pronouncements banning Philippine offshore gaming operators (POGO) have implications on the sector’s loan quality.”

Latest data from the BSP showed Philippine banks and trust entities’ real estate exposure ratio rose to 19.75% as of end-December from 19.55% at end-September.

The central bank monitors lenders’ exposure to the real estate industry as part of its mandate to maintain financial stability.

Broken down, real estate loans increased by 7.9% year on year to P2.95 trillion at end-December. This as residential real estate loans climbed by an annual 9.6% to P1.1 trillion, while commercial real estate loans went up by 6.9% to P1.85 trillion.

The BSP also noted the rise in nonperforming loans in the real estate sector. Data showed the bulk or 62.5% of the NPL portfolio consists of commercial real estate.

“However, majority of the nonperforming RELs are residential RELs at 65.2% against commercial RELs at 34.8% as of September 2024,” it added.

The BSP also said that the rise in bad loans was driven by the mid- and low-cost housing segments as they account for a large share in residential loans.

“What does not show up as higher NPLs for commercial real estate are likely to be seen in the financial statements of real estate developers,” it added.

Joey Roi H. Bondoc, director and head of research at Colliers Philippines, said consumers could be struggling to pay back their loans, which is why developers are finding ways to offer more flexible payment terms.

“Based on anecdotes that we have been getting, a lot of buyers right now are scouting and looking for the most attractive payment terms or incentives, especially in the ready-for-occupancy (RFO) market,” he said in a phone call.

Mr. Bondoc said there is a “pretty substantial” number of unsold RFO units in the market, especially in the mid-income segment, which covers nearly 60% of unsold RFO units.

“Essentially, six out of 10 unsold RFO (units) are from the mid-income segment, which is heavily dependent on bank mortgages,” he added.

He noted some developers are extending downpayment terms among other measures to make financing more accessible.

“Banks should also be more cautious moving forward because the ready-for-occupancy (RFO) promos are getting sweeter, they’re getting extended, but you don’t want to see the market falling into that trap again,” Mr. Bondoc said.

The BSP noted the oversupply in the property market, especially in the condominium segment. It noted it would take 34 months for the current condominium supply to be sold.

“Despite recovery in prices, vacancies remain elevated amid the increase in residential real estate supply,” the central bank said.

The rise in new units is outpacing net take-ups in the secondary market, it added.

“It will be very interesting this first quarter because we’re seeing tepid launches. Developers are almost not launching new projects at this point,” Mr. Bondoc said.

OTHER RISKS

Meanwhile, the BSP also flagged other risks to the real estate sector.

“A potential risk is the buildup of in-house financing as reflected in the installment contract receivables of real estate developers. These contribute to revenues but also expose developers to credit risk.”

“Past due and impaired receivables remain elevated including in real estate developers exposed to POGOs,” it added.

While property developers are seeking ways to provide more enticing payment terms, Mr. Bondoc noted it is unlikely that there will be significant price reductions.

However, he noted that once the central bank continues cutting interest rates, this would result in lower mortgage rates.

“Probably that’s when we might start seeing low interest rates having a positive impact, kicking in and resulting in lower mortgage rates. Therefore, perhaps chipping in to greater take-up in the pre-selling sector.”

Housing prices rose by 6.7% year on year in the fourth quarter, according to the latest Residential Real Estate Price Index. This was a turnaround from the 2.3% decline in the previous quarter.

The Monetary Board cut the key rate by a total of 75 basis points last year.

While the central bank delivered a pause at its first meeting in 2025, BSP Governor Eli M. Remolona, Jr. has said it is still on an easing trajectory and has signaled further rate cuts this year.

Apart from lower interest rates, real estate loan demand could also be impacted by remittance flows, Mr. Bondoc said.

“I think that will be crucial because data from the central bank would also show that more remittance-receiving households are in fact allocating money for real estate requirements,” he said.

The BSP’s latest Consumer Expectations Survey also showed that 5% of households plan to buy or acquire real property in the next 12 months, up from 4.8% a year ago.

Source: Business World

Guarantor's Rights and Obligations in the Philippines

In the Philippines, a guarantor plays a critical role in financial transactions, particularly in loans and credit arrangements. Acting as a guarantor is a significant responsibility that entails both rights and obligations under Philippine law, specifically governed by the Civil Code of the Philippines (Articles 2047 to 2081). Whether you are considering becoming a guarantor or seeking one for your loan, understanding these rights and obligations is essential to make an informed decision.

What is a Guarantor?

A guarantor is a person who agrees to be liable for another person's debt or obligation if that person (the principal debtor) fails to fulfill their obligation. This is commonly referred to as guaranty or suretyship. A guarantor essentially provides financial security to the lender by ensuring that the debt will be paid.

It is important to note that in the Philippines, guaranty and suretyship have distinct legal definitions:

• Guaranty: The guarantor is secondarily liable, which means they are only required to pay if the principal debtor fails to do so.

• Suretyship: The surety assumes direct and primary liability alongside the principal debtor.

This article focuses on the obligations and protections provided to guarantors, which predominantly fall under the concept of guaranty.

Rights of a Guarantor

1. Right to Be Informed

A guarantor has the right to be fully informed about the terms of the debt or obligation. This includes the loan amount, payment schedules, interest rates, and any other conditions that may affect the guarantor's liability.

2. Right to Demand Prior Exhaustion of Assets

One of the most important protections for a guarantor under Philippine law is the principle of benefit of excussion. This means that a guarantor cannot be compelled to pay the debt until the creditor has exhausted all legal remedies against the principal debtor's properties.

However, this right can be waived if:

• The guarantor expressly renounces the benefit of excussion.

• The guarantor acts as a surety (i.e., assumes primary liability).

3. Right of Subrogation

If the guarantor pays the debt, they are entitled to recover the amount paid from the principal debtor. This is known as the right of subrogation, which allows the guarantor to step into the creditor's position and collect the debt from the original borrower.

4. Right to Reimbursement

A guarantor who pays the creditor is entitled to reimbursement from the principal debtor, including any interest or damages incurred as a result of fulfilling the guaranty.

5. Right to Refuse Unfavorable Modifications

If the creditor and debtor alter the terms of the original obligation without the guarantor's consent (e.g., increasing the loan amount or extending the loan term), the guarantor may be released from their obligation.

Obligations of a Guarantor

1. Secondary Liability

In a guaranty agreement, the guarantor is only liable when the principal debtor defaults. The guarantor's obligation begins when the debtor fails to meet their obligation after the creditor has attempted to collect from them.

2. Payment of the Debt

If the principal debtor fails to pay, the guarantor must fulfill the debt or obligation, including interest and any applicable penalties, up to the limit specified in the guaranty agreement.

3. Notification of Default

While the guarantor is not obligated to monitor the debtor constantly, they must be prepared to fulfill their commitment if the creditor notifies them of the debtor’s default.

4. Liability for Additional Costs

The guarantor may also be liable for additional costs, such as legal fees or collection expenses, if specified in the guaranty agreement.

5. Compliance with the Terms of the Agreement

The guarantor must comply strictly with the terms and conditions of the guaranty agreement, including timelines for payment and any collateral requirements.

When Can a Guarantor Be Released from Their Obligation?

A guarantor can be released from their obligation under the following circumstances:

1. Expiration of the Guaranty: If the guaranty specifies a time limit and that period has lapsed.

2. Payment by the Debtor: If the principal debtor fulfills their obligation, the guarantor's liability is extinguished.

3. Alteration of the Contract: If the creditor and debtor change the terms of the agreement without the guarantor’s consent.

4. Waiver of Rights: If the creditor waives their right to demand payment from the guarantor.

5. Extinguishment of the Principal Obligation: If the debt or obligation is extinguished, the guarantor is no longer liable.

Key Considerations Before Becoming a Guarantor

Becoming a guarantor is a serious financial commitment, and it is crucial to evaluate the following before signing any agreement:

• Understand the Terms: Carefully review the loan agreement and guaranty contract.

• Assess the Debtor’s Ability to Pay: Evaluate the borrower’s financial stability and capacity to repay the debt.

• Know Your Risks: Be aware that you may need to pay the debt if the debtor defaults.

• Set Limits: If possible, specify the maximum amount and duration of your liability in the guaranty agreement.

• Seek Legal Advice: Consult with a lawyer to understand your rights and obligations fully.

Final Thoughts

While acting as a guarantor can help a friend, family member, or business partner secure a loan, it is not without risks. Understanding your legal rights and obligations under Philippine law will help you protect yourself and make an informed decision.

Always remember that being a guarantor means putting your financial future on the line, so it’s crucial to approach this role with caution and knowledge.

If you find yourself in a situation where you need to act as a guarantor or seek one, take the time to review all the terms and seek professional legal advice when necessary. In the world of financial commitments, being informed is your best defense.

Source: ZRE

Mortgage contracts in the Philippines

A mortgage contract is a crucial legal instrument in the Philippines, particularly for those looking to secure loans using real estate as collateral. This article will delve into how mortgage contracts work, their legal requirements, and the implications for both the mortgagor (borrower) and mortgagee (lender).

What is a Mortgage?

A mortgage is a contract where a debtor (mortgagor) offers an immovable property, such as land or a building, as security for a loan or obligation to a creditor (mortgagee). If the debtor fails to fulfill the obligation, the creditor has the right to sell the property to recover the debt.

Legal Requirements for a Mortgage Contract

1. Principal Obligation: The mortgage must secure the fulfillment of a principal obligation, such as a loan.

2. Ownership and Disposal: The mortgagor must be the absolute owner of the property and have the legal capacity to dispose of it.

3. Public Document: The mortgage contract must be in the form of a public document, notarized by a notary public.

4. Registration: To be valid against third parties, the mortgage must be registered with the Registry of Property.

Steps to Enter into a Mortgage Contract

1. Execution of the Document: The mortgagor and mortgagee must execute a mortgage contract detailing the terms of the agreement.

2. Notarization: The contract must be notarized by a notary public to ensure its authenticity and legality.

3. Payment of Taxes: The documentary stamp tax must be paid within the first five days of the succeeding month after the execution of the mortgage.

4. Registration: The notarized mortgage contract must be registered with the Registry of Property to be enforceable against third parties.

Implications of a Mortgage Contract

• For the Mortgagor: The mortgagor retains ownership of the property but grants a lien to the mortgagee. If the mortgagor defaults on the loan, the property can be sold at a public auction to satisfy the debt.

• For the Mortgagee: The mortgagee gains a security interest in the property, ensuring that the loan is backed by a tangible asset. In case of default, the mortgagee can foreclose on the property and recover the loan amount from the sale proceeds.

Foreclosure Process

If the mortgagor fails to pay the debt, the mortgagee can initiate foreclosure proceedings. There are two types of foreclosure in the Philippines:

1. Judicial Foreclosure: This involves filing a case in court to obtain a judgment for the sale of the mortgaged property.

2. Extrajudicial Foreclosure: This is conducted without court intervention, provided it is stipulated in the mortgage contract and follows the procedure outlined in Act No. 3135, as amended.

Conclusion

Understanding the intricacies of mortgage contracts in the Philippines is essential for both borrowers and lenders. Ensuring that all legal requirements are met can prevent future disputes and protect the interests of both parties. If you are considering entering into a mortgage contract, it is advisable to seek legal counsel to navigate the complexities of property and mortgage law.