There may be little to recover in the $300 billion Evergrande debt saga

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On top of that, Evergrande was taking payments for properties they haven’t even built yet and didn’t have the cash flow to start, so there’s not much “there” there to be distributed.

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THE MORTGAGE BOYCOTT
As if the rural bank problems in Henan and Anhui weren’t enough, conditions were suddenly made much worse by a threatened mortgage boycott that seemed to spread very soon after the rural bank problems in Henan went viral. In China, it is pretty standard for property developers to sell apartments in developments long before the projects have been completed. According to Ting Lu of Nomura, Chinese developers have delivered “only around 60 percent of homes they [sold in advance] between 2013 and 2020.”

In early- to mid-July, perhaps taking inspiration from the activity surrounding the rural banks, an online crowdsourcing group (“WeNeedHomes”) began complaining about the failure of property developers to deliver apartments on schedule, even though many of the homebuyers had taken out mortgages to make the payment deposits on these yet-to-be-constructed apartments and were required to maintain their mortgage payments. The group soon organized and began to threaten to stop making payments on the mortgages unless something was done to guarantee the completion of the apartments. By the end of July, more than 320 projects in a multitude of cities were affected by the mortgage boycott.

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Although developers in many countries are allowed to sell homes before they finish building them, the practice in China is special in two ways. First, homebuyers have to pay in full when they decide to buy. Usually, they produce a downpayment for a mortgage and the bank covers the rest. But in other countries like the UK, buyers of presale homes only need to come up with a deposit to reserve a property. They don’t need to pay off a mortgage until their homes are delivered. This full-payment requirement has helped developers raise cash quickly, which they have burned to fund land purchases or expand their business, analysts said.

Second, until recently, Chinese developers had been allowed to use the bulk of their presale revenue for whatever they wanted. Although China has laws and regulations requiring developers to set aside enough money to finish construction on their housing projects, local governments and banks had allowed them to sidestep some of the rules, including the requirement that presale funds must be deposited into government-supervised escrow accounts. Instead, a vast amount of presale funds ended up in developers’ own account

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