Thursday, September 21, 2006

Perplexing article on HDB scam

The Business Times reported today about a new HDB scam called the "cash-down" scheme. Here's how it is supposed to work:

Someone may have bought his flat for, say, $400,000 during the market peak in 1996. With the drop in price, he may be able to sell it today for $300,000 - but the price declared in the official sales documents is lower at, say, $280,000.

The declared sale proceeds ($280,000) will go straight into the seller's CPF account, but he retains the undeclared $20,000 cash that he receives separately from the buyer.

The buyer may be enticed to agree to such an arrangement if he gets to buy the flat at slightly below the market price. In this case, the flat could have fetched a higher price at, say, $310,000, but the seller agrees to sell it for $300,000, so the buyer enjoys a $10,000 saving if he goes along with the seller's scheme.
All sensible so far, but here's where the logic gets confusing:

The scheme is said to involve mostly sellers suffering from negative equity on their property because they had bought their flats at high prices during the boom years. What they do is under-declare their sale price so as to prevent all of the sale proceeds from being returned to their Central Provident Fund (CPF) accounts.

This happens because many owners would have used up a lot of their CPF savings to pay for their flats and the interest cost involved in servicing their mortgages.

Says an HDB resale market observer: 'Whereas the cashback deals were triggered more by greed or profiteering, cash-down deals seem to be driven by hardship and a need for those suffering from negative equity on their HDB flats to get out of the rut - so they can downgrade to a smaller flat, or move on.'
To clarify, negative equity refers to a situation where the value of an asset (in this case an HDB flat) is lower than the value of its attached liability (in this case a loan from the HDB or bank). Hence, asset - liability = equity is negative.

My question is this - how does the scam help you if you are in negative equity? Take the example above. Say the outstanding loan on the flat is $320,000. Hence the seller is in negative equity of $20,000. He will have to repay the bank or HDB $320,000 no matter what.

If he was not in negative equity, i.e. if the flat could be sold at say $350,000 today, the $320,000 loan will be deducted straight from the sale proceeds, with the remainder going first to CPF to cover withdrawals and interest, then to the seller in cash.

If the seller was in negative equity, as in this case where the flat can only be sold for $300,000, all of the proceeds will go to pay off the loan, and HDB or the bank will come after you for $20,000 more in cash. If you under-declare the sale price they will just come after you for more cash.

The only way all this can make sense is if the loan was from the HDB, and it does not have the practice of requiring the seller to top-up the difference between his outstanding loan and the selling price of his flat, i.e. if it forgave the negative equity. (The banks will never do this.)

I have not found anything in HDB's literature to suggest this, and I find it hard to believe HDB will be so generous. If this was true, there will be many who will exploit this route to erase their negative equity. And negative equity will then not be such a big issue.

So I'm back to scratching my head over the logic of the whole thing. Hmmm...


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Anonymous said...


HDB / Banks would have the first charge, while CPF holds the 2nd charge.

Let's assume Selling price is S$320,000. Outstanding loan is S$200,000 and CPF usage is S$400,000. When the sale is made at S$320,000, S$200,000 is FIRST paid to HDB / Bank, while the remaining proceeds will go towards the CPF; in this case S$120,000. There is no need to refund CPF.

If there is under declaration, say the selling price is put at S$300,000, then only S$100,000 is refunded to CPF. The seller gets to pocket his share (let's say 50%) of S$10,000.

Bro... read your analysis I also shack :o)


ps. damn this beta thingy.. cannot post comments to a non beta blog...

hugewhaleshark said...

Yes, bro. But in a negative equity case, the bank or HDB will still come after you for cash. It is the negative equity case which does not make sense.

O. Didn't know that about the beta. Note to self.

Anonymous said...

By negative equity, I think you mean that selling price < loan. In that scenario, then yes.. in fact, it doesn't make sense to sell in the first place.

However, in market convention, when we say there is negative equity, it merely means that one is selling at a lower price than one's original purchase price. A broader definition would include the CPF accrued interest as well. It does not necessarily mean that selling price < outstanding loan.


hugewhaleshark said...

That would explain it. I am surprised Kalpana will mess up the definitions, as she's an old hand.

My understanding was that negative equity was that value < loan, which I thought was the convention both internationally and locally.

Anonymous said...


Must be getting old... you ARE right... negative equity does mean that the loan is higher than the selling price.. *damn* Explain this EVERY DAY when I'm getting clients to sign on their offer letters...

Looking at these numbers everyday as part of my work, I guess my mind automatically goes to the scenarios (as described in my earlier comments) as the most plausible... obtaining the scenario to match the story I guess. In the case where loans are higher than the selling prices then, yes... all the sales proceeds will go to the hdb/bank, with the seller being required to top up the difference in cash.