During the great housing crisis in 2008, many homeowners across the US and Europe saw house prices fall which meant that when it came time to renew the mortgage, people were underwater. This causes a problem both for the homeowner and bank which has the mortgage. Legally, they can only offer a mortgage to 95% of the value and how does the homeowner get a mortgage for the other part. It was cheaper to walk away and foreclosures went up. The problem in the longer term is once a house is foreclosed there is long process before it goes up for sale and anyone moves in.

In an article by Keith Bradsher of the New York Times News Service, in China foreclosures are on the rise. The roster of homes seized and list for auction leapt 43% last year, according to official data. Numerous banks have disclosed increases in mortgage defaults during the first half of 2024.

The legal system is struggling to keep up with evictions.

The increase in evictions and foreclosures piles pressure on China’s banks. They face other losses related to the real estate meltdown, including on loans to local governments, property companies in default and buyers of unfinished apartments that developers never delivered.

To make matters worse, corporate borrowers in China have long posted real estate as collateral. The value of the collateral has decreased.

According to Alicia Farica-Herrero, the chief economists for Asia at Natixis, banks have long been the best ally and instrument of Chinese policy makers, soon they might be the largest problem.

China’s mostly state-owned banking system earned more than $600 billion a year in profits before setting aside reserves to cover losses on unpaid loans. The issue is the banks pay money to China’s government treasury for income taxes, transactions fees and dividends, to the tune of 1% of China’s economy.

China has over 90 million empty apartments after a decade long construction boom. Many foreclosures involve the 2nd home often occupied by friends and family of the owner.

4 years ago, there was practically no foreclosures. During that period, new rules were passed which made evictions harder. Bidders who buy apartments in foreclosure auctions must often purchase the apartments unseen and then work with neighbor officials to persuade the occupants to leave.

According to analysts at UBS at least 7 million apartments sit unfinished across China. 4 million were bought for $350 billion in mortgages. That is about 7% of all the mortgages on the balance sheets of China’s banks.

Regulators are encouraging the banks not to foreclose on unfinished apartments.

Linking to dividend paying stocks, if you own bank stocks, while most banks make money as long as the reserve fund remains low, then it is a good time to own banks. Once the number rises, you need to seek alternatives. For all your investments you need to know what a good ratio is to determine whether you want to keep the stock or look for alternatives.

There are more questions than answers, till the next time – to raising questions.