(Yicai) Nov. 25 -- Against the backdrop of continuously declining prices in the Chinese real estate market in recent years, some homeowners have to borrow money when they seek to sell their houses, as their mortgage balances are now higher than the property's market value.

For example, a person working in Guangdong province took on a CNY2.38 million (USD334,860) mortgage in 2021 to buy a CNY3.4 million home. The property's market value is now CNY2.3 million, but his outstanding loan balance is CNY2.6 million. Therefore, even if he sold the house, he would still have to pay nearly CNY300,000 (USD42,210) to make up for the shortfall.

The number of cases where the proceeds from selling houses are insufficient to repay the whole mortgages has increased significantly this year, according to a real estate agent in Shenzhen. "We come across two or three such cases almost every month," he said, adding that this trend is especially true for individuals who entered the market with high leverage around 2021.

Some of these individuals are seeking the help of friends and relatives to raise funds to pay the difference, while some take out bridge loans. Others are also considering applying for a mortgage forbearance, but the review process is strict and uncertain.

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

Yicai inquired at one of these agencies, and the staff explained that it mainly helps customers who defaulted on their mortgages buy time through legal procedures. Even though the outcome cannot be changed, the agency can prolong the litigation process to a year or more by means such as raising jurisdictional objections and questioning the calculation of interest.

Banks remain vigilant about this new trend. Most of these agencies make profits by taking advantage of information asymmetry, and some of them are likely fraudulent, a staffer at the credit loan department of a joint-stock bank said. Lenders do have response mechanisms for borrowers with short-term financial difficulties, so they do not have to go to intermediary agencies, the staffer added.

At the institutional level, many experts believe that there is still some room for adjustments in the system and mechanisms. The unique non-recourse loans in the United States, for example, provide a way out for individuals who are unable to repay their mortgages.

This means that when the house depreciates to the point where its value is insufficient to repay the mortgage, residents can give up the house without having to pay off the mortgage, Soochow Securities explained.

However, some claim that even though this model is beneficial for residents, it would increase the risks in the banking sector to some extent, so it should be carefully considered under the current circumstances.

Editor: Futura Costaglione