Does Hong Kong need a Mortgage Corporation – political and financial adventurism in a public institution?

 In Economic Development & Economy, Land and Housing, Land, Housing & Transport

Speeches delivered at a speaker luncheon of Hong Kong Democratic Foundation on 30 November 2009


The speech of Regina Ip Lau Suk Yee:


Thank you, Alan, for the introduction. Thank you for hosting this lunch and making this unusual arrangement of presenting Emily and me together.


HKMC mission

The subject is Hong Kong Mortgage Corporation — on the face of it, a somewhat esoteric subject. Although there have been rumblings – unofficial rumblings – in informed circles and amongst professionals about the rationale and mode of operation of the HKMC for some years, it was below the radar screen of the media and the public until I joined the Financial Affairs Panel. Not that I want to take credit for raising a red flag over this subject. I should also explain that I have no personal axe to grind. I am not in the private sector or in the mortgage lending business. And I have nothing personal against the public officials involved, both Peter Pang and James Lau were my former colleagues. I have always got on very well with them. For example, James Lau provided good support to me when he was at our Geneva office when we were making representations to GATT in the old days. The reason why I raised this subject is, really, to start a public debate to get some fresh eyes and fresh thinking on this subject.


There are many ways to “skin a cat” if we want to help home owners in Hong Kong or save the banks. Is the HKMC the best way to go about it? Briefly, as related in the clip you saw from TVB’s Money Magazine, the HKMC was set up in early 1997 to help Hong Kong people buy homes, to inject liquidity into the banks and to make the banking system more stable. As James Lau said in the interview: to help banks in times of stress. I think before the Handover, the Government was worried about possible sharp drop of home prices and lack of liquidity. So it borrowed the model from the US institutions “Fannie Mae” and “Freddie Mac” and established the HKMC. The HKMC’s model or mode of operation is supposed to be exactly like that of the US institutions – government sponsored – in fact 100% owned by the Government through the Exchange Fund. But Fannie and Freddie are not to originate mortgages – they don’t deal directly with the public, but they will buy home mortgages from the banks.


The HKMC’s mission changed over time. The Legco brief was crystal clear that HKMC was established 1997 with the primary objective of developing a secondary market for mortgages in Hong Kong. There were scrupulous assurances from the Government that they would stick to the residential market, not even the commercial mortgages. There was no question of going outside Hong Kong. But over time, it changed. The main objective was to ensure the stability of the banking sector by providing a reliable source of liquidity, to support wider home ownership and later on to help develop Hong Kong’s financial infrastructure, to facilitate the growth and development of debt securities and the mortgage-backed securities markets in Hong Kong.


These are very laudable aims, because, as you know, Hong Kong claims to be an international financial centre (IFC). We are strong in banking, insurance, equity and wealth management, but the debt market in Hong Kong is under-developed. It was only with the establishment of Link that we now have REIT. We now lag behind Singapore in Gold, FOREX and many areas. So after the establishment of the HKMC, the Monetary Authority, with the tacit approval of the Financial Secretary, wanted it to do some investment banking – to help develop the debt market and securitisation of mortgage loans – the sort of thing that has been happening in the West for decades.


But look at the numbers. As at September of 2009, the HKMC’s assets from residential home loans were no more than HK$25 billion. According to a recent report in the SCMP quoting Monetary Authority statistics, the total value of home mortgage loans will be HK$630 billion. After 12 years, the value of home mortgage loans owned by HKMC was only HK$25 billion, versus a total market size of HK$630 billion – i.e. 4% after twelve years. What does that tell us? Home owners do not need HKMC’s liquidity. The banks don’t need their liquidity. They are a small player. There is no market need for them. And James Lau made it quite clear – they are short of business and had to diversify in 2006 to taxi loans and public light bus loans, etc., and later on into the Korean and Malaysian home mortgage markets and then into Shenzhen.


When James Lau and Peter Pang, my former colleagues, got wind that I had become interested in this subject, they started inviting me out to dinner or for drinks, which I politely turned down and suggested: why don’t we have a chat in my office? They admitted that they needed to branch out to maintain their operational sustainability. In other words, if they didn’t branch out, they would not have enough business. So question number one is, does Hong Kong need a Mortgage Corporation? Do Hong Kong banks and home owners need the liquidity? Of course, in times of stress, banks need help from the central bank. But must the central bank rely on the Mortgage Corporation to provide help?


Because of the shortage of business and the need to sustain their operation, they did a consultancy study in 2006. I am still not sure if they went back to Legco as I still don’t have a clear answer from them. I have a strong suspicion that they did not as I have not discovered any paper showing that they had consulted the legislature before they branched overseas. They did a consultancy study and went through the motions of consulting the EFAC (Exchange Fund Advisory Committee) which oversees the HKMA (the HKMC is a subsidiary of HKMA). The consultants said they should branch out overseas, probably delivering what the executives wanted. So they went into the Korean market and I think in total, they bought HK$15 billion. This has now been whittled down to HK$5 billion after the media got wind of it. Some expatriate columnists in SCMP specializing in finance wrote about it, particularly because the Korean economy was in bad shape after the financial crisis and there were fears that HKMC might have sustained heavy losses. But the Korean economy bounced back and apparently the HKMC also did some risk management measures, so it didn’t lose money.


But as a matter of principle, should the HKMC have been allowed to do that? And then the mortgage insurance, entering into deals with the Malaysian and Shenzhen organizations to help them to do mortgage guarantees; when James Lau came to see me, I was told the amount was very small, but this was something they were proud of. What they were doing was exporting a very laudable business model. But they did not invent the business model. I think mortgage insurance started in the USA where it was driven by the private sector.


Then they always have this FARM – Fixed Adjustable Rate Mortgage – Programme offering fixed mortgage arrangements to the home owners. They have had this programme for years. As they are not supposed to deal with the public directly, banks were asked to act as distributors. As soon as the banks get the business, the HKMC will buy from the banks. Looking at the latest expansion of the FARM programme, the 7 or 10 years mortgage loans. I did some research on lending rates offered by banks: 1.73% from private banks on a 1-year mortgage versus 1.25% by FARM, so FARM is lower than the banks. A 2-year loan is 2.37%, versus 1.75% by FARM and so on. They are undercutting the banks by 40-50 basis points. Should a government owned corporation using public funds be allowed to do this? Is this fair competition?


I must stress here that neither I nor my organisation received any donations from banks. I have nothing more than cordial professional relationships with bankers. But if this Government is really sincere about small government and big markets, should a government-owned corporation be allowed to compete with banks this way? HKMC has a triple-A rating because it is backed by the Monetary Authority. It can issue retail bonds at low rates and has a HK$30 billion revolving credit from the Monetary Authority. Unlike banks, it doesn’t have to meet the CAR – Capital Adequacy Ratio. So it is a “Non-bank Bank”. Is this fair competition?


There are good reasons why James Lau does not like to see his balance sheet diminish 40% as it would affect his compensation.  That is what I dislike most, the hypocrisy and the double standards, particularly since the Monetary Authority issued guidelines to the banks on compensation. To be fair, they were following G-20 guidelines, but HKMA did ask the banks not to structure compensation in such a way to encourage executives to take unnecessary risks.


The question is, do we need the Mortgage Corporation to provide liquidity? There is plenty of liquidity, record inflows of money. The banks are awash with funds, competing like mad for home loans, the best low-risk high-quality business for the banks.


Look at some numbers from the Mortgage Corporation – take the latest annual report. In 2008 they made after-tax profit of HK$600 million, down 18% from 2007. The asset purchase was HK$26 billion last year – HK$13.8 billion from banks in Hong Kong, HK$12.3 billion from overseas mortgage loans. In another words, without the overseas portion, there would not be enough business. Look at the bond market. Are they helping or hindering its development? They actually sold a lot of bonds. In 2008, they sold a record HK$24.4 billion of debt securities, whereas the Hong Kong Government only started last November asking Legco to approve the Government Bond Programme – HK$100 billion over ten years, compared to HKMC’s HK$24.4 billion in one year. The Government’s bond programme is only starting with HK$3.5 billion – extremely small when compared to HKMC.


And shouldn’t the bond market be spearheaded by Government? Why isn’t the government allowed to issue more debt? Is it because the Mortgage Corporation wanted more business so that the executives could argue for better pay and compensation? Or is it because the linked exchange rate – the currency board system – prevented the Government from issuing debt on a large scale? And should we be more worried about the mortgage insurance business? HKMC say that the market penetration for mortgage insurance is only 16%, but they practically have 100% of that business. The FARM programme that I drew your attention to earlier guarantees fixed interest at a very low rate – at a time when there is plenty of money around. If interest rates suddenly go north, the HKMC will be stuck with this mortgage business.


So there are lots of questions to answer, you could also give counter argument to every answer they give you. What if the housing bubble goes bust? What about the question of moral hazard? Are they not amplifying it?


Over lunch, I was asked if we are trying to shut down HKMC? I don’t think Emily and I will ever manage to pull off such remarkable feat as we don’t have the power. Emily and our colleagues (in Legco) have been agonizing over those questions for years and it is legitimate for us as watchdogs to raise the questions publicly. So I will leave those questions to you and invite Emily to offer some observations of her own.


Thank you.



Regina Ip Lau Suk Yee (葉劉淑儀)
Member of the Legislative Council (立法會議員)
30 November 2009



The speech of Emily Lau Wai Hing:


Good afternoon ladies and gentlemen, Regina is always a hard act to follow. So I will just try to be better than the coffee being served now. Alan (Lung) was wrong in saying that it was quite amazing for Regina and I to be here together, because when Regina came back from America, she hosted a TV programme on ATV and she invited me onto her show, for which I thank her. And then I am hosting a web TV programme myself and I invited Regina onto my show. So, Alan, you have to get your facts right.


I am very happy to be talking with Regina today, although I believe that some of you may be under the misunderstanding when you saw our names that we would be talking about constitutional reform. I am sure there Regina and I will be debating that very hot topic some other time.


Actually, I agree with many things that Regina said. And I am not going to repeat them. One key point is that I don’t think the administration should compete with the private sector. What the administration should be doing is to provide the infrastructure, the rule of law, rules, transparency, accountability and fair competition – even though we are still waiting for the bill on that. So I don’t think there is a need for them to weigh in to the mortgage business. But of course some of you will agree that when the Mortgage Corporation was first set up, some of their aims were worthwhile. Maybe they still are, so they should stick to those aims and not to branch out.


Regina said that HKMC did its consultancy and she’s wondering if they came to Legco. They did not. I raised the question during the Financial Affairs Panel Meeting, and they said they did not come in 2006 and they never had any intention to bring it to Legco.


So for whom was the consultancy done? It was for their board. Who sits on this board? The Chair is the Financial Secretary, John Tsang. Then you have people from the Monitory Authority, including Norman Chan, Peter Pang and Eddie Yu. And you have the Secretary for Financial Services, Professor Chan and you have Legco members – Paul Chan (Accounting FC), Tanya Chan (Civic Party), Starry Lee (DAB), Andrew Leung (Business FC), David Li (Banking FC) and Abraham Shek (Professional Forum) . You also have Anthony Cheung (Executive Council), Eddie Fong (Chairman of SFC), Louisa Cheng (Regional Director of HSBC), Esther Hwang (partner of PC Wu & Co) and so on. So these are the people. Have you ever heard anyone of them saying anything?


Financial accountability
So some of the things HKMC is trying to do are for the community and they should probably do those things. Some of the things are more controversial, particularly about branching out into Korea, Malaysia, Shenzhen and Mainland China. And I put it to them on 2nd November and again when Norman Chan came to Legco – the money in the Exchange Fund is not to be used like that. It is public money.


I am invited here today because I am Chair of the Finance Committee of Legco. In our institutional set up, if our administration wants to spend public money, they should come to us for approval. All the things Regina talked about, none of them ever come before us. Why is that? There is no need, because every time they spend money, they take it from the Exchange Fund. It is only up to the Financial Secretary and he has very wide and flexible power, including buying the Monetary Authority’s office – HK$3.7 billion dollars.


A few years ago, I remember Joseph Yam kept saying to me: “You know we’re going to buy an office.” I did not respond, not that I don’t have any views, but I thought they were going to come Legco, so I thought – wait till you come. A few weeks later he said to me again: “Emily, we’re going to buy this property.” I did not say anything and then it dawned on us that they are not going to come to Legco (for approval). So we raised it at the Financial Affairs Panel (Regina was not there then) and we asked – “Where is your authority?” They said, their authority was in the ordinance – purchase of the office was a “staff cost”. Is there a lawyer in the room? Staff cost! The definition is stretched to the limit to say that this is a staff cost – because the office provides places for staff to sit in.


In the end, we said, “No way.” And they say, “No way, we’re going to buy it.” Then what happened? Mr. Tung stepped in. He said: “Shut up, I give my authority under the ordinance for the HKMA to buy the office.” Of course he has the authority. In any legislation, the Government always has the final power to say these things. Donald Tsang, on the final day in his office as FS (he was promoted to be CS), he signed the document that allowed the HKMA to buy the property.


So this is only one thing: in 1998 after the Asian Financial Crisis – HK$11.4 billion; after the collapse of Lehman Brothers, HK$11.5 billion. Many of you might argue that’s money worth spending. But we, the people of Hong Kong, have no say. They can just do it. And I just don’t this is right. When Norman Chan came to Legco two weeks ago, I said: this business of having the “Slush Fund” – that exactly what I called it. Right now, we have the fiscal reserves – around HK$400 billion. There is an account in the Monetary Authority called accumulated surplus – which is just money they made over the years which is over HK$500 billion dollars. That is over HK$1,000 billion dollars if you add the two together. And that is money that we can spend.


Firstly, why do we need so much money? Anthony Leong and other FSs have said what we need is a year’s spending. And later they said, particularly Joseph Yam — we need as much as possible. Why? Because there could be an attack on the Hong Kong Dollar at any time and we need the money to stave off the attack. I said, even if you need that, why don’t you close this “Slush Fund” account and transfer all the money to the fiscal reserves? They say: no, we want to have two accounts as we want to make sure the FS can do whatever he likes with that money. So if he likes to buy shares in the Stock Exchange, or whatever, they can do it, without anyone of us knowing it, let alone approving it.


So ladies and gentlemen, Regina’s points are very good. We should all concentrate on the HKMC – consider if we need it or not, whether it has served its usefulness. Even if it is useful, isn’t it time for us to impose more accountability on the HKMA? Especially now they have got a new Chief Executive? How come they can spend public money like that — without consulting, without informing the public and without getting Legco’s approval? This is a big, big loophole through which you can drive several trucks.


And I think this is bad!


I will support Regina, continuing to ask questions. But don’t hold your breath. We are not able to change it, unless Regina mounts a judicial review. That is the thing they are afraid of. We can say anything till our faces turn blue, and they can say: “Thank you very much”, and do nothing. But if we go to court and the court says they are wrong then they have to change. So even Beijing is furious – they say Hong Kong is run by the judges. And that is why our Chief Justice is going to step down in a few months time. And Beijing is now talking about cooperation and coordination between the Executive and the Judiciary. I don’t know what that means. Some of the barristers said to me – that means we are going to pack up: no more cases in court.


The issues are not that complex. In fact they are very “juicy”, so I want to thank you for your attention.


Thank you very much.



Emily Lau Wai Hing (劉慧卿)
Member of the Legislative Council (立法會議員)
30 November 2009



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