Should underwriting be banned?
Some consider it a necessity while others demand a blanket ban
experts say underwriting ultimately means a win-win situation for all realty stakeholders. “Underwriting is required specifically as it also acts as a catalyst for the development of new and upcoming areas where the end-user is wary of investing. Therefore, instead of banning underwriting, regulating it is a good idea,” says Vishal Gupta, MD, Ashiana Housing.
What can make underwriting work is: a) It should be allowed only after a project gets all the proper approvals; b) the money should be used for the development of the project through escrow accounts and c) the government should have some regulation in place to protect developers by setting a minimum threshold level of capital that underwriters must give to the developers before they take over the housing units.
Shobhit Agarwal, managing director, Capital Markets, JLL India, says no practice is bad until it is done in excess and results in negative consequences for the concerned parties. “Underwriting as a practice is helpful for all the three parties involved – developers, underwriters and buyers. When underwriters pass on the partial discounts that they get from developers to buyers, it can work as a very good mechanism. A problem is created only when underwriters do their business with a view to earning considerably higher returns by unscrupulous practices,” he says.
Many property experts say that because of underwriting the basic need of housing is mistaken as an investment need. Due to this an underwriter is concerned about making as much profit as he can without bothering about the fact that housing is a basic requirement. So legal provisions must be cre-
ated to ban underwriting and developers must be forced to disclose the status of their unsold inventories on their websites.
“Underwriters must be thrown out of real estate. Due to the property market being unregulated, the entire sales process is chaotic as there is a big disconnect between a builder and his customers. Underwriting is getting to be a menace. Underwriters concentrate just on sales without taking any responsibility,” says Abhay Kumar, chairman and managing director, Grihapravesh.
Manish Agarwal, managing director, Satya Developers, says “Banning of underwriting will lead to more transparency in the system and add to the confidence of prospective buyers. The passage of the Real Estate Regulatory Bill will create transparency in the sector.”
Having said that, I’ll also like to add that when I made my investment in a Gurgaon project, the broker instead of issuing me a proper letter committing the 2% commission, gave me a bogus one that only went to show that there was a premeditated intention to cheat.
The case is currently with the Economic Offences Wing in Gurgaon. There have also been cases wherein brokers have given post-dated cheques to buyers and then filed a report of a cheque book theft with the police.
Buyers should, therefore, be very careful before choosing the broker to go along with as the rogue brokers cheat the customers knowing this to be a civil case and that not many investors will ever go to court or pursue the matter with the law enforcement authorities.