A journalist asked me, "Mr Tan, did you buy a life annuity? I suppose that you did?"
Here is my honest reply.
Quote: I did not buy an annuity because I have enough money to last me for the next 100 years, and I cannot live that long. An annuity is necessary for people who do not have enough money, and need to stretch it for their lifetime. Unquote.
Tuesday, August 21, 2007
More visitors to my blog
The stockmarket turmoil appears to be encouraging more people to read my blog. I used to have an average of 500 visitors on weekdays. I received 1,500 visitors during the last two days. This is 50% more than average.
Mortgage Insurance
MORTGAGE INSURANCE
The Government is drafting new rules to allow banks to take up mortgage insurance. The insurance protects banks from the risk of borrowers defaulting on their mortgages.
This insurance works well in good times. Only a small proportion of borrowers default, due to their personal circumstances such as loss of employment or severe illness. It can be covered by the premiums paid by the other borrowers.
During an economic downturn, when many people loss their jobs at the same time and property values drop severely, it can cause a big problem for the mortgage insurers.
This happened in Europe in the early 1990s. Many insurance companies that provided this type of insurance faced large losses. They had to be re-capitalised or sold to other owners.
In more recent times, we have the problems caused by the sub-prime mortgages in America. The mortgages were issued to sub-prime borrowers to generate a high return to the lender. Funds were raised through the credit market in the form of asset backed securities, with the credit risks being guaranteed by the lending institution. Several of the lenders were not sufficiently capitalised to take the losses caused by the downturn in the housing market.
Considering the risks, is it a good practice to encourage mortgage insurance as a way to transfer or spread the risks?
Here is a surprise. I think that it is a good idea. But it has to come with certain caveats.
1. The mortgage insurer must have expertise in the assessment of the risks. They should be familiar with the property market, economic conditions and lending practices in Singapore. In particular, they have to know the rules regarding the use of Central Provident Fund savings to pay the instalments under the mortgages.
2. The mortgage insurer should be required to retain the major share of the risk, and not be allowed to transfer the risk to the credit market through securitisation or other means. This is to avoid the moral hazard.
3. The mortgage insurer should have sufficient capital to allow them to ride over several years of an economic downturn.
4. The mortgage insurer should be required to use sufficient actuarial expertise to measure the potential losses and to charge an adequate premium to cover the risk. They should avoid excessive competition leading to inadequate pricing.
There is a significant advantage of the in the mortgage insurance scheme, especially for the handling of the more risky loans.
Lenders, who are hungry for business, may be tempted to lower their credit assessment standards to win a large market share. If they are required to buy mortgage insurance, the assessment is transferred to a professional mortgage insurer, which can assess the risk independently of the lending. This may impose some discipline on the lending institution.
The Government is drafting new rules to allow banks to take up mortgage insurance. The insurance protects banks from the risk of borrowers defaulting on their mortgages.
This insurance works well in good times. Only a small proportion of borrowers default, due to their personal circumstances such as loss of employment or severe illness. It can be covered by the premiums paid by the other borrowers.
During an economic downturn, when many people loss their jobs at the same time and property values drop severely, it can cause a big problem for the mortgage insurers.
This happened in Europe in the early 1990s. Many insurance companies that provided this type of insurance faced large losses. They had to be re-capitalised or sold to other owners.
In more recent times, we have the problems caused by the sub-prime mortgages in America. The mortgages were issued to sub-prime borrowers to generate a high return to the lender. Funds were raised through the credit market in the form of asset backed securities, with the credit risks being guaranteed by the lending institution. Several of the lenders were not sufficiently capitalised to take the losses caused by the downturn in the housing market.
Considering the risks, is it a good practice to encourage mortgage insurance as a way to transfer or spread the risks?
Here is a surprise. I think that it is a good idea. But it has to come with certain caveats.
1. The mortgage insurer must have expertise in the assessment of the risks. They should be familiar with the property market, economic conditions and lending practices in Singapore. In particular, they have to know the rules regarding the use of Central Provident Fund savings to pay the instalments under the mortgages.
2. The mortgage insurer should be required to retain the major share of the risk, and not be allowed to transfer the risk to the credit market through securitisation or other means. This is to avoid the moral hazard.
3. The mortgage insurer should have sufficient capital to allow them to ride over several years of an economic downturn.
4. The mortgage insurer should be required to use sufficient actuarial expertise to measure the potential losses and to charge an adequate premium to cover the risk. They should avoid excessive competition leading to inadequate pricing.
There is a significant advantage of the in the mortgage insurance scheme, especially for the handling of the more risky loans.
Lenders, who are hungry for business, may be tempted to lower their credit assessment standards to win a large market share. If they are required to buy mortgage insurance, the assessment is transferred to a professional mortgage insurer, which can assess the risk independently of the lending. This may impose some discipline on the lending institution.
Shares traded in Hongkong and Shanghai
A stockbroker sent me a list of more than 20 shares traded in Hongkong and Shanghai. They are probably the larger corporations in China.
The share prices in Hongkong showed a discount of 40% to 88% to the Shanghai price. The average is 64%. This means that, on average, the prices in Shanghai are about 2.8 times of Hongkong.
Either the prices in Hongkong are too low, or the prices in Shanghai are too high. It is likely to be the latter.
Investors in China will soon be allowed to buy shares in Hongkong. What will happen to the share prices? Will the Shanghai prices collapse to the level in Hongkong? Or will Hongkong prices move close to Shanghai?
My guess is that the prices in both Shanghai and Hongkong are over-valued. But, this is China fever.
My stockbroker thinks that the prices of these shares in Hongkong will move up (it is called arbitrage), but not to the same level as Shanghai. He is probably right.
The share prices in Hongkong showed a discount of 40% to 88% to the Shanghai price. The average is 64%. This means that, on average, the prices in Shanghai are about 2.8 times of Hongkong.
Either the prices in Hongkong are too low, or the prices in Shanghai are too high. It is likely to be the latter.
Investors in China will soon be allowed to buy shares in Hongkong. What will happen to the share prices? Will the Shanghai prices collapse to the level in Hongkong? Or will Hongkong prices move close to Shanghai?
My guess is that the prices in both Shanghai and Hongkong are over-valued. But, this is China fever.
My stockbroker thinks that the prices of these shares in Hongkong will move up (it is called arbitrage), but not to the same level as Shanghai. He is probably right.
Two prices for the same share
Some China companies are listed in Shanghai and Hong Kong exchanges. They are the same shares, but the prices traded could differ by more than 30%. I know of a large company where the share trades in Shanghai at three times the price in Hong Kong.
China has announced that they will soon allow the residents to buy shares in Hong Kong. This will mean that the prices of the same company will converge. The price will fall in Shanghai or rise in Hong or both.
This will be an interesting development.
More than 10 years ago, the blue chips shares in Singapore trade in local and foreign tranches. They are the same shares, entitled to the same dividend and voting rights. But the foreign shares trade at a higher price than the local shares.
When the distrinction between the two tranches were removed, the price of the local tranche increased to the foreign tranche. The increase varied from 20% to 50%. It was a big bonanza for the holders of the local tranche.
China has announced that they will soon allow the residents to buy shares in Hong Kong. This will mean that the prices of the same company will converge. The price will fall in Shanghai or rise in Hong or both.
This will be an interesting development.
More than 10 years ago, the blue chips shares in Singapore trade in local and foreign tranches. They are the same shares, entitled to the same dividend and voting rights. But the foreign shares trade at a higher price than the local shares.
When the distrinction between the two tranches were removed, the price of the local tranche increased to the foreign tranche. The increase varied from 20% to 50%. It was a big bonanza for the holders of the local tranche.
Adequate Savings for Retirement
I wrote an article on how to get adequate savings for retirement. It us published in the Business Times today. You can read this article here.
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