Banks’ real estate exposure slips

Philippine banks and trust entities’ exposure to the property sector slipped at the end of September, amid a decline in real estate investments, Bangko Sentral ng Pilipinas (BSP) data showed.

The industry’s real estate exposure ratio stood at 19.54% as of end-September, falling from 19.61% at end-June and 19.55% in the same period a year ago.

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

Philippine banks and trust departments have extended P3.451 trillion in total investments and loans to the real estate sector as of the third quarter, up by 7.19% from P3.22 trillion in the previous year.

Based on central bank data, real estate loans climbed by an annual 8.9% to P3.096 trillion as of September from P2.843 trillion a year ago.

Broken down, residential real estate loans rose by 11.4% to P1.188 trillion, while commercial real estate loans grew by 7.41% to P1.909 trillion.

Past due real estate loans reached P158.619 billion at end-September, 7.06% higher than the P148.157 billion seen a year earlier.

Past due residential real estate loans edged up by 5.16% to P110.379 billion, while past due commercial real estate loans increased by 11.7% to P48.24 billion.

Meanwhile, gross nonperforming real estate loans amounted to P116.086 billion in the nine-month period, up 4.06% from P111.554 billion a year ago.

This brought the gross nonperforming real estate loan ratio down to 3.75% as of September from 3.92% in the comparable year-ago period.

BSP data also showed that the banking sector’s real estate investments stood at P354.749 billion at end-September, 5.75% lower than the P376.406 billion recorded last year.

This, as debt securities slipped by 5.51% year on year to P232.496 billion, while equity securities went down by 6.22% to P122.253 billion.

“Banks’ real estate exposure eased to 19.54% at end-September from 19.61% in June, reflecting lower investments in property-linked securities, muted project launches, and cautious lending amid elevated NPLs (nonperforming loans) and high borrowing costs,” Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion said in a Viber message.

Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., said weak property demand may have weigned on the industry’s real estate exposure ratio last quarter. 

“Banks are rationalizing their real estate exposure because non-performing loans are rising and developers are slowing launches amid weak demand,” he said via Viber. “The BSP’s tighter oversight adds to the caution.”

However, Joey Roi H. Bondoc, director and head of research at Colliers Philippines, noted that bank lending to the real estate sector typically slows in the third quarter. He noted the recent drop in lending was “not significant.”

“We have yet to see a substantial take-up in (the) Metro Manila condominium market, especially in the pre-selling sector,” he told BusinessWorld in a phone interview. “And it only means that banks are still wary to lend to the real estate sector, to the condominium sector at this point. So that’s why, if you look at the exposure of banks to real estate, it’s not a significant increase or decrease. It’s almost (flat), almost the same.”

A recent Colliers Philippines report showed that residential take-up soared by 108% in the third quarter, equivalent to 5,900 units from 2,800 units in the previous quarter. This was the highest take-up since the second quarter of 2023.

For the fourth quarter, Mr. Asuncion said the banking industry will likely grant more loans to the real estate sector following the central bank’s recent rate cuts and increasing demand for residential properties and leasing.

“Exposure ratios should remain broadly stable, with banks balancing growth opportunities against regulatory limits,” he added.

The BSP last week reduced borrowing costs by another 25 basis points (bps), bringing the key rate to its lowest in over three years at 4.5%. It has so far delivered 200 bps in cuts since August last year.

However, Mr. Bondoc said that still-high mortgage rates are offsetting the supposed boost from lower benchmark interest rates.

“But the problem is… the central bank has been cutting interest rates but there is no corresponding decline in mortgage rates by the banks, which again indicates that banks are still a little hesitant to lend to this market,” he said.

Still, Mr. Bondoc noted that holiday bonuses, higher remittances and the peso depreciation will likely spur demand in the domestic residential market.

“Q4 is a strong quarter for condominium take-up because of bonuses for local employees and remittances from the Philippines. And then peso’s depreciating, so it might be a good opportunity for OFWs (overseas Filipino workers) to send home more money and then finally, for example, reserve a condominium unit or buy a house and lot unit in their home provinces,” Mr. Bondoc said.

The peso hit the P59-a-dollar level several times in November and slumped to a fresh low of P59.22 against the greenback on Dec. 4.

Source: Business World

Mortgage Redemption Insurance and fire insurance in home loans

Under Republic Act 10607, which amends the Insurance Code of the Philippines, fire insurance refers to a contract of indemnity that provides coverage for loss or damage to property caused by fire. (Section 169, Insurance Code)

For purposes of indemnification, the valuation of the property insured, often equivalent to the amount of the outstanding loan, determines the insurer’s liability in the event of a covered peril. (Section 173, Ibid.) Accordingly, in the event of fire, the insurer is bound to indemnify the insured based on the said valuation.

Mortgage Redemption Insurance (MRI), on the other hand, is a form of life insurance designed to protect both the mortgagee (lender) and the mortgagor (borrower) in the event of the latter’s untimely death or total and permanent disability within the term of the mortgage loan.

The proceeds of the MRI policy are applied to extinguish the outstanding mortgage obligation, releasing the heirs of the borrower from any liability.

The primary objective of an MRI is to ensure that the mortgage loan will be fully paid in case of the borrower’s death or total and permanent disability.

It is a common practice for banks to require both MRI and fire insurance when granting a home loan. In the event of the borrower’s death, the existence of an MRI coverage prevents foreclosure proceedings, affording the borrower’s family or the latter’s heirs financial security during a period of loss.

The designated beneficiary of an MRI is generally the bank or lending institution, thereby ensuring that any insurance proceeds are directly applied to satisfy the unpaid loan obligation in accordance with the terms of the mortgage contract.

Alternatively, fire insurance serves to indemnify the policyholder in the event of loss or damage caused by fire. A standard fire insurance policy typically includes the cost of repairing or rebuilding damaged structures. However, in the context of a home loan, the application of fire insurance differs.

In the event the mortgaged property is damaged or destroyed, the insurance proceeds shall be applied primarily to the outstanding loan balance, thereby safeguarding the interest of the mortgagee and ensuring that no financial loss is sustained by the lender.

With respect to the premium, the amount and terms of payment shall be governed by the provisions stipulated in the loan agreement and insurance policy.

It is a prevailing practice among banks to bundle the mortgage loan together with the fire insurance and MRI premiums, the total amount being payable either on an annual or monthly basis, depending on the agreed terms.

Source: Manila Times

Unconscionable interest rates can be nullified or reduced

While the parties to a loan agreement may freely agree on the interest rate that applies to their transaction, any imposition of interest rate must always be reasonable and fair.

In fact, the Supreme Court ruled that even the willingness of the debtor to assume an exorbitant and unconscionable interest rate does not validate the agreed rate as legally binding and enforceable. This principle was clearly explained in the case of Spouses Castro v. Tan [GR 168940, Nov. 24, 2009], penned by Associate Justice Mariano del Castillo, which states:

“The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals.”

Relative thereto, any loan agreement stipulating a grossly excessive interest rate is contrary to morals, and therefore void from the beginning, in consonance with Article 1409 of the New Civil Code of the Philippines.

Moreover, to prevent lenders from exploiting borrowers with oppressive rates of interest, the courts are granted the power to reduce unjust or unconscionable contractual interest rates, pursuant to Article 1229 of the said Code, which provides:

“Art. 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.”

With the foregoing, any debtor who enters into a loan agreement with an excessive interest rate may seek judicial relief to declare the interest void and unenforceable, or to reduce it to a fair and reasonable rate as warranted by the circumstances.

In this regard, one may, therefore, file a civil suit through the courts, either for the annulment of the interest rate in your loan agreement or the reformation of the instrument to fix the appropriate interest rate.

Source: Manila Times