What is this EPF financed loan-scheme for low-cost housing we read about? Is it good?
The scheme is meant to use EPF funds to provide loans for low-cost housing in KL. Borrowers who were deemed too much of a credit risk by banks, would be able to apply for these loans. The motives of the government in launching this scheme are admirable. It will help relatively risky borrowers who cannot secure home loans from banks to purchase low-cost homes. The fact that banks were unwilling to extend credit to these borrowers on similar terms however suggests that there is some credit risk involved.
Lessons from the sub-prime crash in the US might suggest this isn’t the best idea, especially if we end up encouraging people to buy houses they ultimately cannot afford. This is something the providers of the loan will have to be wary of. However, if loan values are maintained safely below the value of the house (houses can then act as collateral for the entire loan) and the houses are generally low-cost homes, this concern may be somewhat addressed. All in all, if designed properly, this policy could help the poor, albeit with someone taking on a default risk if they become unable to pay.
So, what’s all the fuss about?
Naturally, savers in the EPF are concerned about the risk of these loans turning sour, leading to a loss in the value of their savings. While the initially suggested RM1.5 billion is not a huge fraction of the EPF pool, the principle of investing in something that risky and the precedent it might set clearly angered some EPF savers.
The Federal Territories and Urban Well-being Minister suggested that this default risk was trivial, as the borrowers would be appropriately vetted for ‘outstanding DBKL flat rentals and bad loan repayment records’. If true, then one must ask why it is these people were unable to secure loans from banks directly. The explanation does not add up.
Does the EPF have a better explanation?
Indeed they do; right here. For one, the initial amount being lent is RM300 million, a smaller amount for now at least. The EPF also would not be lending to the borrowers directly, but rather to a body (special purpose vehicle (SPV)) that will then disburse these loans. The houses are collateral, and will remain with the SPV until the loan has been fully settled, preventing a huge loss in the event of default. The EPF will also get security cover of at least twice the amount of the loan, although where this extra cover is coming from is not clear. All in all, from the EPFs perspective, this seems a fairly safe bet based on their statement. The default risk from this scheme appears (although this is unclear as of now) to be lying with the SPV and thus the government (and implicitly, the taxpayer), who provide the EPF with the guarantee.
As YB Khairy Jamaludin points out here in the first half of the article, there are a lot of questions about the collateral that need to be addressed. Nevertheless, on the face of it, from the EPF’s perspective, it appears no riskier than lending directly to the Malaysian government as the EPF currently does by investing in government bonds.
So, everybody should be happy then?
Not necessarily. There’s an old adage in economics that there’s no such thing as a free lunch. The EPF seems to be getting a very safe investment, at a decent return of 5.5%, while not having to bear the credit risk of the borrowers defaulting. So, why is the government (and implicitly the taxpayer) bearing this credit risk (and picking up the tab in the event of default), while the EPF gets a higher return than they would buying government bonds? (If the EPF isn’t actually getting a higher return than on government bond, we must ask why the EPF isn’t investing the money in government bonds instead). Why does the government not borrow at the presumably lower rates in the bond market and use this money to fund this loan scheme directly? Paying the EPF a premium interest rate of about 5.5% without having them bear the credit risk in return for the premium is having taxpayers implicitly subsidising the profits of the EPF. This seems peculiar; given the government has cheaper alternative sources of finance.
In conclusion, while the motives of the policy are admirable, the implementation appears unnecessarily complicated (and thus controversial) and questions remain as to why the government does not borrow the money directly from the bond markets instead (much simpler and less controversial). With a little more thought however, this could turn out to be a good policy. Although the government must ask itself whether it is missing something in the credit-worthiness of these loans. If they were indeed credit-worthy, why are banks unwilling to provide these loans?