(Yicai) Nov. 25 -- An increasing number of homeowners in China are having to borrow funds when selling up, as falling prices have reduced the value of their homes compared with their outstanding mortgages.

One such owner working in Guangdong province took on a CNY2.38 million (USD334,860) mortgage in 2021 to buy a CNY3.4 million apartment. But now its market value has dropped to CNY2.3 million, and he still owes CNY2.6 million on his mortgage. So even if he sells, he will need to find nearly CNY300,000 to make up the shortfall.

The number of cases where a property’s sale does not cover the remaining mortgage is rising sharply, according to a real estate agent in Shenzhen. "We come across two or three such cases almost every month," the person said, adding that this is especially true among individuals who bought with high leverage around 2021.

Owners are scrambling for solutions. Some borrow from family and friends or take out bridging loans, while others consider pausing repayments. But applications for mortgage payment holidays are handled strictly and are uncertain.

Meanwhile, a number of intermediary agencies have emerged, claiming to be able to help owners keep their properties while they deal with the banks.

Posing as a buyer, Yicai contacted one of these agencies. A staffer explained that it mainly helps mortgage defaulters buy time through legal procedures. Even though they cannot prevent eventual foreclosure, the agency can drag out the litigation process to a year or more by raising court objections, challenging interest calculations, arguing over legal jurisdiction, and using other such tactics.

Banks are wary of these agencies. Most profit by taking advantage of information asymmetry, and some are likely fraudulent, according to an employee in the credit loan department of a joint-stock bank. Lenders already have systems in place to help borrowers in short-term financial difficulty, so they do not need to resort to these agencies, the staffer added.

On a policy level, some experts argue there is room for reform. Dongwu Securities pointed out in a research report that the non-recourse loan system used in the United States, for example, provides a way out for individuals who are unable to repay their mortgages. Borrowers can hand back the keys if their mortgage exceeds the home’s value, without owing the remainder.

But other analysts warn that while such a model may help households, it shifts financial risk to lenders. Given China’s current circumstances, they point out that any similar reform should be carefully considered.

Editor: Futura Costaglione