CPF Loss

Finally! It seemed the press was deliberately keeping away from this hot potato for the longest time - no matter how many times we highlighted the matter, it just never seemed to get reported in any depth! Thank you, Ms. Cheam for not forgetting the owners who are financial losers in the mythical world of en bloc millionaires; HUDC owners who lose their CPF, their homes and who have no cash for a down-payment on their next house (no money to pay even the removal van!).

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Enbloc Battles

Straits Times - 20 Aug 2008
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In the name of my neighbours, is there no hope for me?

I REFER to the article “Fix bank-or-CPF charge problem” (Aug 20) by Jessica Cheam. She called an en bloc sale “a forced sale in the name of urban renewal”.?

I might add that en blocs are “a forced process in the name of my neighbours”. As my condo tries to go en bloc again for the fourth time, I am now at the mercy of en bloc team No. 4 which has decided, after they formed a year ago, to actually stop short of the Collective Sale Agreement (CSA) signing. As most of us know, this is a technical ploy to keep the collective sale in the estate hanging over our heads like the sword of Damocles, for an indefinite period. Because the clock only starts ticking on the collective sale once the first SP (subsidiary proprietor) has signed the CSA.

So, how long will we live under threat of this and every en bloc? Every year after our 10th year in the condo? Should families be allowed to be unsettled in this way? Did the framers of those en bloc laws consider this?

In my estate, there is a diehard group of pro-en bloc residents. They form about 20 per cent of the owners. Again and again, they call for an extraordinary general meeting to “en bloc” the condo? Because the laws allow this. So far, they have been defeated, yet they are indefatigable! Once one disbands, a new committee rears its head. A committee, I might add, which consists primarily of owners who do not live in the condo and do not call it home. Should my abode, my place of rest, be subject to this repeated unease? Should someone who does not value my estate and looks upon it as an economic tool, who has no roots in my community, be allowed to unsettle those who have nested there? Surely the core values of home and community should outweigh those of “urban renewal”? Should it always be about the money?

Property laws that are created to facilitate urban renewal and allow others to steamroll the nesting urges of ‘Stayers’ will always create dissent and unhappiness. Why should we have to fight tooth and nail to keep our home??

Is there hope for Stayers?
Yeo Li Ying (Miss) 
Straits Times - 27 Aug 2008

There are two points to argue in this matter:-

• Is the first charge /second charge differentiation fair?
• Should loan interest be taken into account when computing financial loss?

Is the first charge /second charge differentiation fair?

 I shall use concrete examples taken from Tampines Court's data f submitted at the STB (Round 1) , to show the inequity of Bank/CPF & CPF/Bank order of charges:-

A) 239 out of a total of 560 owners in TC gave their partial or full financial details to the en bloc lawyer. These details were listed in a Table designated A-2 at the STB.

B) According to the statutory newspaper advertisement of 27 December 2007, listing out all the charges on all the properties in Tampines Court; here is an approximate breakdown as to how many were CPF/bank and Bank/CPF.

(my eyes aren't as good a they used to be, the newspaper print is pretty small, so allow for some error):

Total number of units :560
Total number of double/triple charges: 269

Total number with Bank first charge/CPF second: 150

Total number with CPF first charge/Bank second: 112

C) It was the change in CPF rules which divided home owners into two distinct groups; those who have protection pre-2002 CPF rules (the Winners) and those who have been abandoned and set adrift by post-2002 CPF rules (the Losers)*

* post-2002 - all properties have CPF second charge (except HUDCs phases III and IV, which were uniquely and inexplicably set adrift pre-1996).

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The Losers with CPF as second charge (56% of double charged units):-
1) Full outstanding Bank loan redemption
2) Partial CPF redemption up to the maximum of sale proceeds

From the Table in A-2

This is what some owners would have lost in their CPF accounts (had the sale been approved)

CPF loss (unrecoverable) + Alpha (recoverable)

1. ($260,671) + Alpha $8,083
   
2. ($252,180)
   
3. ($251,063)
   
4. ($222,552) + Alpha $3,298
   
5. ($246,233)
   
6. ($218,264 + Alpha $35,475
   
7. ($206,001)
   
8. ($203,164)
   
9. ($193,534) + Alpha $26,570
   
10. ($186,504)
    
11. ($183,771)
    
12. ($174,729)
    
13. ($172,572)
    
14. ($172,040)
    
15. ($166,387) + Alpha $6,709
    
16. ($165,107)
    
17. ($163,881)
    
18. ($160,474)
    
19. ($144,683) + Alpha $25,687
    
20. ($146,824)
    
21. ($132,772)
    
22. ($131,264)
    
23. ($120,067)
    
24. ($105,486)
    
25. ($103,830)
    
26. ($95,593)
    
27. ($93,504)
    
28. ($74,124) + Alpha $85,603
    
29. ($66,188)
    
30. ($63,921)
    
31. ($52,898)
    
32. ($43,462) + Alpha $21,839
    
33. ($42,248)
    
34. ($38,324)
    
35. ($22,684)
    
36. ($17,808)
    
37. ($13,103)
    
38. ($10,312)
39. ($5,271) + Alpha $48,035 .

Only 9 in this group of owners were considered Alpha owners (i.e. financial loss) by LTSA rules. The CPF loss could neither be reclaimed from the Alpha sum nor from the defeated Beta sum, as the CPF Board had said it would waive any outstanding amount owed to it. The reason why there are so many CPF losers, is that rules changing CPF to second charge for HUDCs phases III & IV were applied between 6 to 9 years earlier than all other properties in Singapore. Also, since only 43% of TC owners gave their financial details, and there are up to 150 units with CPF second charge, there are potentially many more CPF losers out there. 

The Winners with CPF as first charge
1) CPF redemption
2) Bank mortgage redemption

(actually, there's a specific order by which the CPF principle sum and interest is returned. See my post Financial loss and shortfall for an imperfect analysy.)

On top of a full refund to their CPF accounts taking up a mega portion of their sale proceeds; this is what other owners would have received extra, above and beyond the sale price to cover their outstanding Bank charges in full.

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Extra after full CPF redemption, bank charge +

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1. + $248,609
2. + $216,831
3. + $95,916
4. + $44,741 + Alpha $955
5. + $26,311

Because a Bank would never waive any outstanding amount owed to it, money would have had to be scrambled from somewhere to pay off these mortgages in order for the sale to go through. It could not be taken from Alpha, as they did not suffer financial loss according to LTSA rules. In TC, it would have been reclaimed from the failed Beta. In other enblocs, the money would have to come either voluntarily from the other owners or from the developer-buyer. If not, the sale would not get STB approval. Since there are up to 112 such owners with Bank second charge; clearly the A-2 table understates the total amount needed to cover possible payouts.

So, there is an inequality built into the system from the start. Different owners start from an unequal footing and either benefit hugely or are penalised brutally. This inequality is baseless, there is no earthly reason why CPF/Bank should be any different from Bank/CPF. Two owners can buy a similar sized unit at the same price and suffer widely different fates .

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Blk 118 - Buy price $660k - CPF 2nd charge - loses $222,552

Blk 123 - Buy price $580k - CPF 2nd charge - loses $203,164

Blk 119 - Buy price $605k - CPF 2nd charge - loses $172,572

Blk 119 - Buy price $640k - CPF 2nd charge - loses $252,180

Blk 119 - Buy price $655k - CPF 2nd charge - loses $251,063

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Blk 121 - Buy price $580k - CPF 1st charge - gains $216,831

Blk 130 -Buy price $605k - CPF 1st charge - gains $248,609

Blk 122 - Buy price $486k - CPF 1st charge - gains $95,916

Blk 133- Buy price $650k - CPF 1st charge - gains $44,741

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Comparing apple to apple:-

Blk 123 owner would have received $700k in sale proceeds taking a loss of $203,164 to his CPF account. Blk 121 owner would have received $916k. Both bought at the same price yet look at the difference in sale proceeds! The only significant difference between these two units is the ORDER OF CHARGE.

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Comparing orange to orange:

Blk 119 owner would have received $709k in sale proceeds taking a loss of $172,575 to his CPF account. Blk 130 owner would have received $949k.

Remember, all TC units have the same share value and are all around the same size (~1700sqft). The only difference between these two units is the ORDER OF CHARGE.

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If an owner were to sell his property individually on the open market, the order of charge would not matter - both would have to be repaid in full. Ironically, it is only in an en bloc sale that unjustness and discrimination go hand in hand.

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It is doubtful that many owners know what constitutes financial loss and shortfalls before signing the CSA, and naively assume that whatever is owed to the Bank and CPF will be covered automatically. Did so many owners really sign off knowingly on 6 figure sums in Tampines Court? I wonder.

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Actually, this baseless inequality only crystallized in the Waterfront View case in April 2007; before that, there were no reported cases of CPF loss in en bloc sales in the press. No En bloc owners complained of insufficient funds to cover Bank or CPF charges on their property. Perhaps all en bloc sale proceeds up to that point were sufficiently high enough to satisfy all charges AND let the owner walk away with a nice wad of cash, too. This is just speculation on my part; had there been cases, they surely would have been reported in the press. So, I am taking Waterfront View as the first such instance where CPF loss was brought up as a minority objection and tackled by a STB Board panel. They ruled that CPF loss is not financial loss. The Waterfront View couple then brought their case to the High Court where they pleaded that their CPF loss of $106, 244 should be recoverable (see ST articles here and here ). Again, they lost. The case was never brought to the Court of Appeal; so technically, the ruling is not set in stone and is still open to challenge if any future owner decides to take it on.

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Should loan interest be taken into account when computing financial loss?

According to the ST article above, Prof. Jayakumar's rational is that CPF funds that go into repaying bank loan interest should not be taken into account. This is to distinguish between owners who take no loans at all or who take a small loan with little interest and owners who take long-term mortgages with a high component of interest payments. Let me see if I can root out that speech.... (an excerpt of the speech relating to the CPF issue can be found at the end of this post)

On first blush, this is a convincing line of argument and I found myself in agreement, initially.

It is an individual decision whether or not to:-
- take out a small or large quantum loan
- go for a short-term or long term repayment period.
- pay by CPF or cash (or a combination of both)

An owner (A) would chalk up the highest CPF charge with a large, long-term loan, using CPF.
An owner (B) would chalk up the least CPF charge with a small short term loan, using CPF.

An owner (C) might not use CPF at all and pay for his loan on cash
And of course, there is an infinite number of combinations in between.

So why should owner (B)/(C)receive less sale proceeds than owner (A) by virtue of being shrewd or more conservative or just plain wealthier?

The arguent is persuasive but on further reflection, I have two problems with this line of reasoning.

First, conversely, why should owner (A) be penalized for not being as shrewd, not as conservative or just plain poorer than owner B or C? He may be shrewd and conservative in nature but it simply may not be possible for him to take out a smaller, short-term mortgage and may not have the spare cash to service the loan.

Interest payments are part and parcel of servicing a loan. Does it really matter how much interest an owner pays? The fact is he HAS PAID and it should be considered part of the total cost of buying his home. It matters not than owner A has paid $xx + yy interest or that owner B has paid $xx + y interest - they all should get back what they paid to be on an equal footing.

Secondly, and most importantly; SUCH A RULING DISALLOWING INTEREST PAYMENT HAS TO BE APPLIED EQUALLY TO EVERYONE IN ORDER FOR IT TO BE FAIR.

(my understanding)...
As the rules stand now; this rational applies ONLY to those owners who have CPF 2nd charge; these owners have to wave goodbye to their hard earned money as the CPF Board doesn't care and the High Court has said it isn't financial loss. But owners who have CPF 1st charge continue to enjoy having their “high component of interest payments” covered! Not fair!
 

Owners who pay for their loans by cash have also forked out large sums in interest, they also lose out on having their interst payments covered.

Going back to a real life example in Tampines Court; following is one such lucky owner who benefits from this glaring anomoly in the legislation:

Blk 130 – Buy price $605k – CPF 1st charge a whopping $949,583 – no outstanding bank loan!! His top-up from sale price would have been $248,609!!! Sale proceeds are nearly a million bucks altogether!

A not-so -lucky owner:
Blk 123 – Buy price $615k – CPF 2nd charge at only $475k, - outstanding bank balance $194k, - long term mortgage paid mainly by cash. Interest componant not fully reflected in CPF . Sale proceeds S702k . Zip extra as a result.

Parliament should look at the real life negative consequences of this ruling. In their quest to make a flawed system seem fairer, they have instead skewed it to reward one group over another, and without achieving the objective stated by Minister of Law. They can fix this glaring anomoly by reverting to the CPF first, bank second and by allowing paid interest payments (not accrued) to be included in the cost of buying a home (which it undoubtably is).

I have been told the rational behind the 2002 change in order of charge was "a change in the bankruptcy law and the drive to pin personal accountability for financial failures."(The Pariah).

So, untold numbers of ordinary, tax-paying, diligent folk struggling to pay their mortgage have to suffer hundreds of thousands of dollars in losses so that Banks are assured their pound of flesh from a tiny few? In the whole of Tampines Court, there was only ONE reported bankrupt.

Is this a case of the law taking a sledghammer to swat a fly?

Parliament's second reading of the bill: The Deputy Prime Minister and Minister for Law (Prof. S Jayakumar):

"Mr Alvin Yeo asked whether the Bill should go the full way to list in the Fourth Schedule all the permitted deductions, in other words, instead of being inclusive, be exhaustive. The specific point that he made was about CPF monies. He said that there is no reason why CPF monies should not be counted as a financial loss.

Madam, the list in the Fourth Schedule is based on what the STB currently considers as permitted deductions. It is not meant to be exhaustive. Over time, additional items could be added if the STB comes across other permitted deductions while dealing with future applications. On the treatment of CPF monies, I think what Mr Alvin Yeo is, in fact, asking us to amend the law is to reverse the High Court's decision in the Waterfront case. My Ministry has no ground to disagree with the ruling in that case, and hence we have not sought to amend the law.

Perhaps, I should explain. In a property purchase, CPF funds can be used to pay for three components: (1) the lump sum for the initial purchase; (2) monthly repayments of bank loan principal; and (3) monthly repayments of the bank loan interest. I should explain that CPF funds used for the initial purchase - this is the first component - and for monthly repayments of bank loan principal - this is the second component - are factored in financial loss computation as they constitute part of the original purchase price. But CPF funds used to repay bank loan interest - this is the third component - are not taken into account, because if the law were to do that, then there would be no parity between an owner who takes a long-term mortgage with a high component of bank interest and an owner who pays totally in cash or an owner who takes a small loan and pays off the loan faster.

Some have asked if CPF interest forgone for the total amount of CPF money that has been withdrawn should also be taken into consideration. This component is not relevant because there is no actual financial loss in the CPF interest forgone."