BOP Housing Finance Conference Miami, June Bridging the Gap MFH -- Mortgage Lending:

Transcription

1 BOP Housing Finance Conference Miami, June 2011 Bridging the Gap MFH -- Mortgage Lending: The Future of Low Income Housing Finance? Some international experiences The World Bank FPD /GCMNB Olivier Hassler Housing Finance Program Coordinator 1

2 The Missing Link Micro Credits for Housing fulfill a useful role Serve the poor, manages informalities But the scope is limited : Areas where land prices are not a factor (rural areas, slums) Partial or no title social collateral and group lending, which does not work for urban societies and long term maturities Incremental housing incompatible with density required by orderly urban expansion At the other end, mainstream FIs typically do not serve: HH below a certain income level (transaction cost and limited margins, few cross selling opportunities, higher loss given default, etc.) Informal sector HH - one explanation of the variation of HF/GDP between countries Raw land and self- construction, even formal Also, the housing supply in the LI is segment is constrained: land prices, developers upwards bias 2

3 The Market Gap in Mexico (source: Sociedad Hipotecaria Federal 2009) (1 USD = 12 Mex Peso) 3

4 The Informal Sector Population is often considerable Mexico: 46% informal urban HH India: > 60% informal urban HH Source: Sociedad Hipotecaria Federal 2009 Source : Monitor Group

5 Rationale for Intermediary Finance Options Matching the Affordable Housing Supply Housing shortages are concentrated in LI segments - major goal of housing policies prevention of slums Supply only develops if demand is made effective by finance Adjusting to income progression and emergence out of poverty Diversifying real estate risks: Large pent up demand, hardly any speculative motivation = stable market segment, little risk of deep price cycles or bubbles Ex.: India, Morocco reorientation of supply after excessive concentration on the thin top end segments fueled overheating (2008/09) Reducing pricing gaps Ex. Mexico: Micro credit rates typically >65% flat (+ commissions), Mortgage loans = 11% -12% Contributing to formalization (bancarisation, titles) 5

6 Upward Income Mobility Ex.: Brazil -- Household Income distribution (Br Real) (Source: CPS/IBRE/FGV, from Moody s) 6

7 Lending small amounts for affordable, formal housing: a market development in several countries 7

8 India & Mexico Countries Examples Non-salaried population: major gap of the housing finance Strategic priority of the second tier funder/market developer in both cases (NHB and SHF) MFIs engaging in mortgage lending: 4-5 Ahorro y Credito Popular entities in Mexico, a few MFIs and specialized housing finance companies in India On the supply side: social builders in particular for autoconstruction in Mexico. About 25 developers entered the US$ 6,000-14,000 units segments since 2008 in India Savings based cooperative networks with micro mortgage products in Africa, Indonesia Thailand: GHB/ CODI an example of mixed approach 8

9 India: Emergence of LIG / Informal Sector Mortgage Lenders Monthly income 1 HFC, focus on Self employed 400 $ middle class Mainstream Lenders 250 $ 150 $ Pionneer HFC + new HFCs 1 new specialized MAS: micro entrepreneur MFI, new mortgage business line HFC SEWA: diversified savings based MFI, new mortgage business line INFORMAL SEMI FORMAL FORMAL Cash based earnings, Salaried (Micro/SME) Salaried, undocumented Income Tax returns Source: Monitor Group 9

10 Thailand : Joint Program Community Organization Development Institute / Government Housing Bank CODI: public agency mandated to upgrade the standards of living of LI groups by supporting community organizations GHB: Commercially run housing bank Arrangement since 2007: GHB finances housing improvement projects initiated by cooperatives or savings groups Conditions much below market ( 4%, 20 years) Low interest deposits by CODI to fund the subsidy Good credit history with previous CODI loans required Partial credit guarantee (deposit by CODI,20% coverage) 10

11 Conditions of a Sustainable Expansion of LI Housing Finance 11

12 Institutional Conditions Strengthening grass root lenders Outreach in segments not served by banks, familiarity with the unorganized economy But prerequisites: Enhanced regulatory framework Ex. : Mexico Framework by the 2001 Ley de Ahorro y Credito Popular, strengthened in 2009 : formalization and prudential oversight of financial cooperatives and for profit entities Internal capacities (organization, processes, risk management, expertise) Accessing adequate funding Higher loan amounts Longer maturities Low income HH have little or no cushion against interest rates hikes Importance of fixed, or resettable interest rates Importance of savings bases, but also of external funding Soundness of lending activity critical 12

13 Adapting Lending Policies and Practices Serving LI/ informal sectors groups requires Affordability assessment first Informal sector: Capacity to estimate of income Know you customer principle: savings habits, micro enterprise loans Prior saving requirements (income proxy, creditworthiness assessment) Prudent assessment of collateral values (not independent of borrowers situation)/ low LTVs Consumer education and protection Counter example: US subprime /Alt A mortgage lending: Asset based Automated underwriting Layering of risks: deferred repayment schedules (teaser rates, zero amortization, etc.), high LTVs, reliance on price appreciation Incentives to lend at high rates (Originate to distribute model, broker based origination, fee structure) 13

14 Enhancing Risk Management Prior savings schemes Ex: Colombia FNA Ahorro Voluntario Contractual, for informal sector HH: 12 month savings, use of surveys, internal scoring, vintage analysis Access to credit information Counter ex.: recent overindebteness related MFI crisis in India Andhra Pradesh Guarantee schemes Ex.: Morocco FOGARIM, mainly targeting Informal sector mortgage borrowers Loan eligibility criteria: Price limit (USD$25,000) Installment limit: US$ 200 / month Debt servicing ratio limit (40%) Partial risk based premiums Guarantee enforcement: only once the foreclosure process has been initiated, at least > 9 months arrears 3% actual enforcement 14

15 Conclusion for (strong) MFIs Maintain and develop the expertise in managing informal sector, low income customers But diversify housing products: larger amount, longer term, and in general secured housing loans, to follow urbanization needs and upwards income mobility 15