DPM Lee announced in his Ministerial Statement yesterday that HDB would be implementing bank origination of HDB market rate loans from 1 Jan 2003. Let me elaborate on this and related issues, as well as respond to Members’ comments.

2 First of all, let me explain the difference between HDB’s concessionary loans and market rate loans. HDB provides mortgage loans at a concessionary interest rate in order to ensure that HDB flats are affordable to those who need them. This includes first-time subsidised flat-buyers and second-time buyers who are upgrading from smaller flats. The interest rate is pegged to the CPF Ordinary Account interest rate plus 0.1%. In 2001, 63% of the loans granted by HDB were at the concessionary rate. As DPM Lee has announced, the changes related to the use of CPF for the purchase of HDB flats, namely, the imposition of the Valuation Limits and the cash downpayment requirement, will not apply to these loans. In other words, the majority of HDB flat buyers will not be affected by these changes.

3 Apart from concessionary rate loans, the HDB currently also provides loans at "market rate". Market rate loans are for HDB flat buyers who have either previously consumed HDB housing loan subsidies, or who do not qualify for HDB subsidies in the first place. There are five categories of such buyers: one, Singapore permanent residents; two, private property owners; three, high-income households, ie those which earn $8,000 or more a month; four, those who have already enjoyed two concessionary loans, and five, those who have previously enjoyed one concessionary loan and are buying a similar-sized or smaller HDB flat. The HDB market rate is pegged to the interest rate DBS Bank imposes on ex-Credit POSB customers, which currently stands at 3.75%.

4. Members may recall that I had informed this House during the Budget debate earlier this year that my Ministry is currently reviewing the roles and functions of the HDB, to see in what way HDB can better fulfil its core responsibility, which is to provide basic affordable housing to the majority of Singaporeans. As a general rule, HDB should consider allowing the private sector to take over those functions which extend beyond its core responsibility.

5 One such activity is the provision of market rate loans. As these loans are not subsidised and are pegged to commercial rates, there is no special reason for HDB to continue to provide them. Furthermore, the private sector is well positioned to provide such loans. Currently, there are more than 100 financial institutions licensed by MAS who are allowed to provide housing loans. This includes the 3 local banks and the 6 Qualifying Full Banks or QFBs.

6 The Government has therefore decided that HDB will no longer provide market rate loans with effect from 1 Jan 2003. Flat buyers who are not eligible for HDB’s concessionary rate loans can take their market rate loans from the many banks which are licensed to offer housing loans. Existing HDB market rate mortgagors can transfer their remaining mortgages to the banks if they wish.

7 HDB flat buyers can enjoy immediate benefits from bank origination. HDB market rate loans, which are pegged to the interest rate that DBS Bank imposes on ex-Credit POSB customers, currently stands at 3.75%. Mr R Ravindran and Dr Lily Neo commented that, while banks may give promotional interest rates in the first few years of the mortgage, HDB’s market rate may be more attractive than the rates offered by banks over the longer term.

8 We cannot assume that HDB’s market rate will remain at 3.75% forever. DBS Bank has previously stated its intention to, at some point, harmonise the mortgage rate imposed on ex-Credit POSB customers with its Board rate, which stands at 5.75% today. When that happens, HDB market rate loans will become more expensive. In fact, some members of the public have been asking why they must take loans from HDB instead of the banks, which are offering more competitive mortgage rates, especially at this point in time.

9 With the move to bank origination, HDB flat buyers will now have more choices and the opportunity to take up the most competitive interest rates. They may enjoy longer repayment periods. I understand some banks do offer loans of up to 35 years, compared to the maximum of 30 years with HDB. Others may offer customised loan packages for HDB customers. Banks also do not require mortgagors to fully draw down their CPF balances before granting them mortgage loans, unlike HDB, and this may appeal to some HDB flat-buyers.

10 The implementation of bank origination will allow HDB to exercise greater flexibility in the future for those who take market rate loans to buy HDB flats. It will reduce HDB’s role as a lender, and allow it to focus on the provision of subsidised housing and subsidised loans. It is another step towards further relaxation of HDB’s rules and regulations in the purchase and resale of HDB flats. This is something that MND has been studying, as part of the review of HDB’s roles and functions. This is also in line with the recommendation of the ERC to help home owners monetise their assets, which the Government accepts in principle.

11 At this point, allow me to explain why we have these rules and regulations in the first place. Our public housing programme started in the early 1960s, when many people lived in over-crowded and unhygienic conditions. The Government needed to provide basic housing fast. At the same time, we wanted to promote home ownership to give our people a stake in Singapore. To achieve this, subsidies were given to ensure affordability. Safeguards to protect HDB homeowners were also put in place. For example, the Housing and Development Act (H&D Act) prevents third-party creditors from recovering their loans from the sale of the HDB flat upon the bankruptcy of the flat lessee. At the same time, restrictions on the use of HDB flats were imposed to ensure home ownership and to justify the subsidies enjoyed by HDB flat lessees.

12 These rules have been relaxed over time. In the 1960s, lessees who wanted to dispose of their flats had to return them to HDB. In the early seventies, HDB allowed flat lessees to sell their flats at market prices in the open market after satisfying the minimum occupation period. In the eighties, the eligibility criteria for resale flats were broadened to include private property owners and Singapore Permanent Residents.

In the nineties, the rules were relaxed further to allow single citizens to buy 3-room and smaller resale flats, and to permit the subletting of whole flats under certain circumstances.

13 By moving towards market practice, bank origination can gradually pave the way, at the appropriate time, for HDB to further relax its rules. Mr Ong Kian Min suggested yesterday that, with loans being given by banks, we should at the same time relax rules such as the Minimum Occupation Period policy and existing subletting restrictions. Ms Irene Ng, Ms Penny Low and Dr Warren Low made similar suggestions today. Sir, I believe their suggestions are reasonable and logical. I would like to inform Members that MND is actively studying these issues, to see whether and how we can make such changes, so as to treat HDB flats bought with bank loans more like private properties.

14 While allowing banks to grant loans gives flat buyers greater flexibility, I want to stress that it also means greater responsibility on the part of the flat buyer. Flat buyers should exercise financial prudence and buy a flat that is within their means. They must go into their purchase with their eyes open. They must expect to be subject to the mortgage financing rules imposed by the commercial banks, including their credit assessment and foreclosure policies.

15 Some members have expressed concern that the implementation of bank origination is in effect a partial withdrawal by Government of its social safety net. In particular, several members including Mr Ravindran, Mr Andy Gan, Dr Lily Neo and Dr Maliki have pointed out that the HDB is generally very sympathetic towards flat lessees who are in arrears, and only re-possesses flats due to loan defaults as a last resort. They are worried that banks will be a lot less forbearing compared to HDB as they are profit-driven. I would like to address these concerns by making the following points.

16 Firstly, I wish to assure Members that there is no change in the Government’s commitment to the provision of basic housing in the form of subsidized HDB flats. We are not touching our basic housing safety net. Our housing subsidies have enabled the vast majority of Singaporeans to own their own homes. In 1960, 9% of our people lived in public housing. Today, it is 85%. Almost all of them, or 96% own their flats. Concessionary loans are a key instrument to promote home ownership. Hence, the Government will continue to provide HDB loans at concessionary rates to eligible buyers.

17 However, with this move, the Government is indeed pulling back the safety net a little bit, at the fringes, at the edge, for those who should not need the safety net in the first place. They are the financially better off, or those who already have a flat. Who are we talking about? Specifically, they are the non-citizens, the private property owners, the high-income earners, and the second or third – timers, who are either moving sideways or downgrading. They are not those buying a flat for the first time or upgrading to a second flat when they are ready to do so. It is not tenable for Govt to continue to maintain such a wide safety net that people become over-dependant on Govt and are unable to exercise individual responsibility.

18 This move will give them more flexibility, but at same time, they must exercise more responsibility, as Dr Chong Weng Chiew observed. It is in line with what we have been talking about in Remaking Singapore -- how to encourage more entrepreneurship and more risk taking, and how to let people take more responsibility, and be more dependant on themselves rather than on Govt. However, let me assure Members that we are not yanking away the safety net from those who need it. We will continue to maintain our home ownership policy, by providing subsidised loans for subsidised flats so that eligible Singaporeans can afford good quality public housing. To ensure that this remains so, the changes announced yesterday will not apply to such buyers. I wish to assure Dr Ong Chit Chung that the social compact between govt and people that he talks about will not be diminished by these changes.

20 Nonetheless, the Government recognises that bank origination is a significant move for some HDB flat buyers and hence certain safeguards will still be in place. I would like to assure Mr Ravindran that the current protection clause in the H&D Act against third-party creditors will be retained, and we have no intention of changing this. This ensures that flat buyers and their families do not lose the roof over their heads as a result of claims by third-party creditors in the event that the owners become bankrupt.

21 In addition, we will continue to disallow HDB flats to be used as collateral for other purposes, except to finance its purchase. In other words, one cannot, for instance, mortgage the flat to raise capital for business ventures. The refinancing of existing loans will also be capped at the outstanding loan amount. These measures are adopted for prudential reasons and will minimize the risk of defaults in mortgage payments.

22 Some Members (Mr R Ravindran, Mr Andy Gan, Dr Lily Neo) have suggested that Government should provide a safety net for those who lose their HDB flats due to foreclosure by the banks. Sir, it does not make sense to pull back the safety net in one form and replace it with another, in the form of subsidized rental housing. I would like to stress that the individual must exercise care and prudence in deciding whether and if so, what type of flat he wants to buy, and how much he wants to borrow from the bank, especially if it is for the purchase of his second, third or even fourth flat. Having said that, I think Members here will know that HDB looks at all appeal cases carefully and where there are deserving cases, HDB will render appropriate assistance. So I do not think Dr Lily Neo need fear that she no longer has a role to play.

23 Some Members were concerned that CPF Board ranks second to the mortgagee for bank loans, despite the need to safeguard CPF savings for retirement needs. As DPM Lee explained yesterday, allowing banks to stand first is necessary for prudential reasons. In addtion, I should point out that in the case of HDB flats, there is really no change to the status quo since HDB already has first charge on the mortgage loans that it lends out, followed by CPF Board.

The banks will merely step in the shoes of HDB and take first charge on the mortgage when they grant loans to HDB flat buyers from 1 Jan 2003.

24 Changes related to the imposition of Valuation Limits and cash downpayment requirement are necessary and major changes. So it is prudent that they be phased in slowly to allow HDB flat buyers to adjust to them.

25 Capping CPF withdrawals for housing purchases is necessary to encourage prudent housing purchase and safeguard CPF savings for retirement. The limit will be set at 150% of the property value initially, and will be gradually reduced to 120% over 5 years. These valuation limits will apply to HDB flat-buyers who take loans from banks, and will not apply to new market rate loans granted by HDB between 1 Sep 2002 and 31 Dec 2002. As the valuation limits will be gradually phased in, they should not have a significant impact on the HDB resale market.

26 HDB flat buyers taking loans from the banks will pay a minimum 10% cash downpayment, so that there will be a buffer to protect their CPF savings against losses in a downmarket. However, there will be ample time for HDB flat buyers to get used to the cash downpayment as it will be phased in over 5 years. There will be no change come 1 Jan 2003, ie zero cash downpayment will continue. The cash downpayment will be gradually increased by 2%-points per year, from 2% on 1 Jan 2004, until we reach 10% in 2008. As long as borrowers do not overstretch themselves, there should be no problems.

27 HDB will work with CPF, MAS, the banks and other relevant agencies on the administrative and operational issues to ensure that the transition to bank-originated loans from 1 Jan 2003 will be smooth. HDB flat-buyers will also be fully informed, educated and advised on the changes so that they can benefit from bank origination.

28 Mr Speaker Sir, bank origination of HDB market rate loans is a major step towards injecting greater flexibility into the public housing market. At the same time, it allows the private sector to take over an activity which is not part of HDB’s core responsibility of providing basic affordable public housing. Thus, it gives flat buyers more choice, and it allows HDB to focus on doing what it does best. Sir, I believe it is a move in the right direction. Together with the changes that we will make in the CPF, this will ensure that our home ownership programme remains relevant in the years ahead and our public housing market can cope with the challenges going forward.

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