In continuing fallout from the Suruga Bank document forging scandal, Japanese regional banks, which currently do the majority of financing for individuals investing in condominiums have indicated that they will be pulling back from extending these types of loans. This is the key takeaway from a recent survey conducted by the Nikkei Shinbun.
In September, the Financial Services Agency (FSA) ordered Suruga Bank to cease part of its business operations in connection with numerous bank employees involvement in forging documents related to the Kabocha No Basha share house investment scheme.
A failed investment scheme
In this scheme, Kabocha No Basha, a share house operator, recruited individual investors to provide equity and/or land in exchange for a ‘guaranteed’ minimum return. The operator then used the cash and property to receive financing for the project, which involved either refurbishing a share house or having a new share house built. Kabocha No Basha would lease the completed share house from the investors (i.e., the owners) in order to operate its subleasing business. In such an arrangement, if the operator were to go bankrupt because it couldn’t find enough tenants the investors would still be responsible for repaying the project loans. This is, in fact, exactly what happened to Kabocha No Basha and its investors.
However, there is more to the story than a failed business scheme.
In the Kabocha no Basha share house project, the FSA found that numerous employees of Suruga Bank were involved in forging documents to enable the deal to even take place. The forged documents included fake bank book entries and deposit slips, which the operator used to create the impression that there was more equity behind the deal than there really was. This allowed the project to pass internal controls at Suruga when it should have been judged as too risky for bank financing.
An independent investigative committee found that Suruga employees were forced to meet unreasonable internal sales quotas, which caused them to forge documents and inflate income data and amounts on deposit at the bank for investors (borrowers) to qualify for real estate loans.
Tip of the Iceberg
However, as we reported earlier this month, Suruga Bank was just the tip of the iceberg. The FSA has now also carried out an on-site inspection of Seibu Shinkin Bank to ascertain whether employees of the bank cooperated with real estate companies to forge and accept documents showing inflated deposit amounts for borrowers applying for real estate loans and to inspect the bank’s internal controls.
Japanese media reports have cited multiple industry sources saying that several other regional banks in Japan may be involved in a similar form of loan document forgery. These have been dubbed “Mini Suruga Banks”.
Regional Banks Pulling Back, Major Banks Already Have
The fallout from the Suruga Bank scandal is far from over, but what is already clear is that it will have a direct impact on individual property investors applying for investment loans.
A recent nationwide survey of regional banks in Japan done by the Nikkei Shinbun provides some insight on how banks are responding in the wake of Suruga Bank’s illicit lending.
The survey was conducted in October covering 100 regional banks which collectively held over 22.9 trillion yen (about 202 billion dollars) in outstanding condominium investment loans. This was a 1.3% increase compared to the previous year and represented about 65% of the total market for these types of loans.
Of the banks surveyed, none indicated that they would be proactively expanding in the area of condominium investment loans, while 40 percent answered that they would be valuing collateral much more conservatively for these types of loans.
This is in contrast to regional banks’ lending patterns up until the scandal broke, as they had been targeting this market in order to increase revenue in the midst of Japan’s declining population and ultra-low interest rate environment. Regional banks have been targeting landowners looking for tax havens and salarymen looking for a secondary source of income (rental income) with condominium investment loans. About 81 percent of the banks surveyed indicated that they had increased lending for these types of loans compared to the previous year.
It is not that banks will completely withdraw from this market, but that underwriting standards are likely to become much stricter. Twenty-two percent of respondents indicated that in the wake of the Suruga Bank revelations, they now do a comprehensive inspection of loan documents for signs of forgery, while 76 percent answered that they check originals of such documents as bank books and withholding slips to confirm borrowers’ actual ability to repay.
Japan’s major national banks have already taken a cautious attitude towards condominium loans. From July to September this year, total nationwide bank lending for condominium purchases stood at 734.4 billion yen, a year-on-year decrease of 14%, representing 7-consecutive quarters of decline.
If regional banks decide to aggressively pullback as well, it will likely have not a small spillover effect on the condominium investment market.
Source: Nikkei Shinbun, November 15, 2018
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