Disclaimer






"I am a BLOGGER NOT an expert. This is a BLOG not a 'go-to' website for official information. I represent no one's view save my own. I have neither legal nor financial training, nor do I have anything to do with the real estate industry. My understanding of the Collective Sale Process is from a layman's position only. My calculations, computations and tables are homespun and may contain errors. Please note that nothing in this blog constitutes any legal or financial advice to anyone reading it. You should refer to your lawyer, CSC or financial adviser for expert advice before making any decision. This disclaimer is applicable to every post and comment on the blog. Read at your own risk."
Drop Down MenusCSS Drop Down MenuPure CSS Dropdown Menu
There is one thing worse than an Enbloc ----- and that is an Enbloc done badly. Since the majority have the necessary mandate to sell, then they owe it to all SPs to make a success of it. Minority SPs can only watch and wait, if they sell then lets pray it's at a price we can move on with, if they don't sell, then we are happy to stay for a few more years.

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!).
.
Enbloc Battles
Straits Times - 20 Aug 2008
.
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).
.
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.
.
Extra after full CPF redemption, bank charge +
.
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 .
.
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
.
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
.
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.
.
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.
.
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.
.
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.
.
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.
.
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."

2 comments:

  1. I believe there is a fundamental flaw in yr presentation. I will be very disturbed if yr inf is correct.

    Enbloc price: S$395 mil / 560 units = S$705k on average

    Beta sum: S$10 mil / 560 units = S$18k (assuming no claim)

    Total proceeds from enbloc = S$723k

    Each SP will receive S$723k more or less. The buyer will not pay you one single cent more, becos total sales px is S$405 mil.

    Regardless the order of charge, there will be financial loss; it is either a cash loss or a CPF loss.

    Illustration:
    Buy px S$580k
    O/s bank loan S$300k
    CPF refund S$500k

    1. Bank 1st charge CPF 2nd charge
    Enbloc proceeds S$723k - bank loan S$300k - CPF refund S$500k = CPF loss -S$77k (need not top up)

    2. CPF 1st charge Bank 2nd charge
    Enbloc proceeds S$723k - CPF refund S$500k - bank loan S$300k = Cash loss -S$77k (must settle b4 bank discharge)

    Personally, I feel CPF 2nd charge is more relevant in today context. It afford owner the option to downgrade without topping up CPF loss, which is not the case in CPF 1st charge becos one hv to settle loan shortfall....remember the aftermath of 97 crisis when many pple were trapped in negative equity situation and were forced to continue with heavy servicing burden as they cant afford to settle loan shortfall.

    Hence, the real life example you quoted in TC:-

    "Blk 130 – Buy price $605k – CPF 1st charge a whopping $949,583 – no outstanding bank loan!!"

    is highly unlikely as enbloc proceeds is S$723k only, instead of gain he will suffer CPF loss.

    If my understanding on above is correct, I hope you will keep your original posting but add on my findings for readers' benefit.

    ReplyDelete
  2. There are 20 pages to this A-2 table highlighting the financial details of 239 owners. This table was submitted at the STB by the en bloc lawyer; I have scanned a few pages to serve as examples.
    .
    "I believe there is a fundamental flaw in yr presentation. I will be very disturbed if yr inf is correct."

    My information comes from documents submitted at the STB. I am always looking out for flaws in my writing and understanding. I am a blogger not an expert. I welcome comments such as yours, we can all come to a better understanding through questions and challenges. I will NOT release the names and unit numbers of the owners whose financial information is listed in the A-2 Table. Even if someone requests to see the original documents, I would have to photocopy and remove the unit identification (Columns A,B,C) before release. This information, while it is a matter of public record, has not been disseminated widely, the minority group has only one copy and it is in my possession.
    .
    "Enbloc price: S$395 mil / 560 units = S$705k on average (nominal proceeds, column G)
    Beta sum: S$10 mil / 560 units = ~S$18k (assuming no claim, Alpha owners excluded)
    Total proceeds from enbloc = ~S$723k (assuming no claim, Alpha owners excluded)"
    .
    All calculations are based on the nominal proceeds. The total proceeds were not and could not be given at the STB, as the table was incomplete and many owners financial details were unknown. The costs & expenses of the sale were also not included as the final cost was indeterminable at the time. Waterfront View's C&E were approx. $20k, I would have expected TC's to be higher - with the Senior Counsels etc...
    .
    "Each SP will receive S$723k more or less."

    Not true. Each owner will receive their nominal sales proceeds (Column G) and the Omega owners only would have received the balance of the Beta sum
    .
    "The buyer will not pay you one single cent more, becos total sales px is S$405 mil."

    True -though he could make extra-gratia payments if so inclined.
    .
    "Regardless the order of charge, there will be financial loss; it is either a cash loss or a CPF loss."

    Financial loss (as defined by LTSA) calculation is based on your buy price. It is represented in column R on the Table and is recoverable from the Alpha sum. It is not dependent on order of charge as it has nothing to do with redemption of mortgages or charges.

    CPF loss is NOT considered financial loss (Waterfront View High Court decision).
    .
    "Illustration:

    Buy px S$580k - O/s bank loan S$300k -CPF refund S$500k. "

    This is a hypothetical case, I am dealing with real figures.
    At such a low buy price, this owner would most definitely NOT QUALIFY as a financial loss owner in the meaning of the LTSA rules.
    .
    "1. Bank 1st charge / CPF 2nd charge
    Enbloc proceeds S$723k - bank loan S$300k - CPF refund S$500k = CPF loss -S$77k (need not top up)"

    Sale proceeds are NOT $723k. As can be seen from the en bloc lawyer's A-2 Table, calculations are done on the nominal sum (G). Hypothetically, the owner would have indeed suffered an unrecoverable loss of $95k to his CPF account (a hole in his account). This is NOT financial loss.
    .
    "2. CPF 1st charge Bank 2nd charge
    Enbloc proceeds S$723k - CPF refund S$500k - bank loan S$300k = Cash loss -S$77k (must settle b4 bank discharge)"

    Ditto to above. Yes, the $95k would have been recovered from the Beta Sum. Had there been no nBeta sum, then the money would have had to come from either the majority owners or the buyer. The STB could not grant the sale unless this outstanding bank charge was satisfied.
    NOTE: THESE TWO SCENARIOS ARE NOT CONSIDERED FINANCIAL LOSSES. THEY ARE INSUFFICIENCIES, SHORTFALLS - WHICH ARE COMPLETELY DIFFERENT.
    .
    "Personally, I feel CPF 2nd charge is more relevant in today context. It afford owner the option to downgrade without topping up CPF loss, which is not the case in CPF 1st charge becos one hv to settle loan shortfall....remember the aftermath of 97 crisis when many pple were trapped in negative equity situation and were forced to continue with heavy servicing burden as they cant afford to settle loan shortfall."
    .
    " it affords the owner the option to downgrade" - no, it forces the owner to downgrade against his will. CPF second may mean he loses a large sum of money in his CPF account. The owner may be at an age where he can't take out a new bank loan, or just a small one with only a very short repayment period, so his CPF cache becomes very important. So if he takes a hit in his CPF, how is he to pay for a new home? This is not 1997, and an enbloc sale is supposed to ENRICH you not IMPOVERISH you. There should be no talk of 'losses' or 'holes in CPF accounts' or 'enforced downgrading'! If there is, then the sale price is way too low!!
    .
    The bank's shortfall will always have to be covered in an enbloc sale, if not, then the STB can rule no sale, so CPF first is the best. Your CPF is fully redeemed AND your bank loan is fully redeemed. You then have the option to downgrade if that is your desire.
    .
    The CPF will waive outstanding amounts in an enbloc sale. I believe the owner will still be liable to top up the outstanding amount in an individual sale - but I am not 100% sure of this fact. perhaps the CPF will waive on a case by case basis.
    .
    "Hence, the real life example you quoted in TC:- "Blk 130 – Buy price $605k – CPF 1st charge a whopping $949,583 – no outstanding bank loan!!" is highly unlikely as enbloc proceeds is S$723k only, instead of gain he will suffer CPF loss."
    .
    Please refer to the Table A-2. It is an actual case. This person does not qualify for financial loss in the meaning of the LTSA rules as his buy price is too low. But because he is CPF first charge - he would have gotten $248,609 from the Beta sum as can be seen from the last column (W).
    .
    The second to last column (V) is 'CAPPED CPF REDEMPTION IF BANK IS 1ST CHARGE' and if a figure is bracketed eg ($222,552) then that means that loss will not be covered. (CPF hole)

    .
    Here is another example of an owner in similar circumstances:
    Nominal proceeds $698,406 , Buy price $486k, no bank loan, CPF $792,421. Cpf first charge
    Top up from beta sum: $95,916
    .
    "If my understanding on the above is correct, I hope you will keep your original posting but add on my findings for readers' benefit."
    .
    I understand your viewpoint perfectly. It indeed seems logical that the outstanding amount owed to the CPF would be waived in cases where the CPF is first charge and there is no Bank loan . If I didn't have the figures in front of me, I would actually be agreeing with you! But the table says differently, these shortfalls were covered by the Beta - so it must have been necessary to do so. Hence, my conclusion that CPF shortfalls in first charges have to be covered. If they didn't why was 'free money' given out to these 2 cases? It really was a surprise to me, too. What say you?
    .
    Even I find this whole issue of financial loss confusing sometimes and must backtrack to do a rethink! People must realise there are 2 calculations to be done:
    .
    1) Are you a financial loss under LTSA rules ? - If your buy price is above $640k, then maybe (and I'm only talking about this enbloc's sale price here). This has nothing to do with order of charge.
    .
    2) Do you suffer from insufficient funds to pay outstanding charges? This has NOTHING to do with 1). You don't have to be a financial loss sufferer (Alpha) to have insufficiencies. The order of charge is super important in this calculation - it determines whether you are a CPF loser or winner. The bank charge will always be covered.
    .
    The failed enbloc sale should be a lesson to all of us. If we don't understand and learn from our mistakes then there is a chance we will have to go through this all over again. This is an opportunity to go through every detail, reappraise preconceptions, clear misconceptions and come to a better understanding of the nitty gritty details.
    .
    I am very sure the effected owners who signed did not realise their CPF would take such huge hits - as indeed the CPF ruling to waive did not come out until many months after they had signed. But it was too late for them then to rescind anyway, even if they had wanted to, and signing the CSA means you can never appeal to the STB, no matter what happens. I really, really hope people will educate themselves on the many, many pitfalls of en bloc and go into the next round, if and when that happens, with their eyes wide open.

    ReplyDelete