Transparency and Trade-offs in Subsidy Design

Transcription

1 Transparency and Trade-offs in Subsidy Design Marja C. Hoek-Smit The Wharton School University of Pennsylvania 4 th Global Conference on Housing Finance in Emerging Markets The World Bank and IFC May 26-27, 2010

2 Mortgage and Micro Coverage Focus on Mortgage Expansion Covered by mortgage : formally employed; house mortgage-able. May need lender incentives and/or hh subsidies initially 32% Covered by mortgage: max 40% Microloans for rest; supply subsidies? Supply Subsidy blending; upgrading, new LIH Source: adjusted from David Porteous, Housing Microfinance Presentation, International Housing Finance Course 2007, The Wharton School

3 Macro-economic Stability in Past Decade Allowed private mortgage sector to expand Less need for government sponsored lending => Reform of old non-transparent subsidized finance systems improved targeting, PV calculation of interest subsidy Gradual phasing out of non-transparent real-side supply subsidies for middle income market Tentative move towards transparent on budget household subsidies and growth of entire system, e.g., post Asian crisis in Korea, Indonesia; Mexico, Peru

4 Pre-crisis Growth in Selected Mortgage Markets Policies Matter- Korea v Brazil & Mexico

5 Crises and Subsidized HF- Trade-offs Off-budget subsidized finance can deepen crises or can cause one USA GSEs, Brazil Yet irresistible as lenders/ funders of last resort Off-budget funding a plus crisis linked budget cuts Implementers of economic stimulus measures Fill void of weakened private sector b/c of elimination of capital market funding, increased margins/cost of funds, increasing NPLs/foreclosures Mexico, Brazil, USA former GSE s & FHA

6 Mexico s Provident Fund Mortgage Lenders Now Make 90% of Mortgages; Private Sector Mortgage Subsidies Sharply Reduced cuts & decline Colocación Créditos Individuales por Sector ( Número de Créditos ) A Septiembre 2008 A Septiembre , , , ,724 78,497 43,755 28,887 39,993 11,329 28,426 67,128 49,406 Source: Asociacion Hipotecaria Mexicana, November 2009

7 Frequent Outcomes Post Crises Non transparent subsidies jeopardize positive reforms that were underway including real supply side reforms price effects Continuation of special non-transparent privileges or demand for new ones Expose governments to increased risk Continue to crowd out private sector How to manage transition to transparent housing system with access for lower middle income?

8 Begin with an Affordability Problem and End with Copyright: Rube Goldberg Foundation

9 Korea: Housing Finance Reform National Housing Fund had a 50% market share in 1996; in 2007 it had 5% for deserving groups Private banks, depositaries and savings, dominate in the market >90%/ use ARMs (95%) In 2004, Korea Housing Finance Corporation was created; issues MBS(small market share 2%) KHFC also runs sizable mortgage insurance co. Initiation of private mortgage insurance in 2007; but little appetite with low LTVs Outstanding issue: inelasticity on the real supply side

10 Korea s Reforms after the Crisis of 1997/98 Increased Lending

11 Korea: New House Construction since 1951

12 Expansion of Household Credit and House-price Appreciation: Korea Source: Kyung-Hwan Kim and Man Cho, 2009

13 Egypt s transition Some facts Commercialized public banks no shadow subsidized housing finance system Mortgage sector small and recent Developer installment sale common practice

14 Complex Web of Old Supply Side Free land for social housing Subsidies Subsidized infrastructure and services Subsidies for construction costs by Local Gvts Upfront subsidy to developers (captured) Interest rate subsidies on mortgage and developer loans through govt banks Total subsidy up to 80 percent of the house price Poor targeting / lack of income information 75% of population requires subsidy for new formal house high standards

15 Private Mortgage Sector Expands- Increases Affordability Real Estate Finance Law 148 of 2001 Creation of MFA, whose functions were incorporated in EFSA in July 2009 Establishment of a mortgage liquidity facility Private credit bureau i-score Ongoing improvement in foreclosure procedures, property registration 3.5 Mortgages outstanding in LE LE billions Banks Mortgage Companies Dec 05 June 06 Dec 06 June 07 Dec 07 June 08 Oct. 08 Source: Mortgage Finance Authority, January 2009

16 Allows Private Sector Credit for Middle Income HH +use of Transparent HH Subsidies Middle and lower middle qualify for mortgages and developer built houses Middle: income constrained in early phase of mortgage repayment not savings constrained -- Lower middle: both income and savings constrained Separate programs for Low income; not yet able to access market provided housing: Public rental; Upgrading; Progressive new housing

17 New Upfront HH Subsidies Buy-down or upfront subsidy decreasing with income Buy-down subsidy decreases over time; limited to 4 to 7 years No house price cap Maximum down payment (33%) to cap effective house-prices and improve targeting Total PV of buy-down subsidy placed in escrow at lender Lender chosen by beneficiary House chosen by beneficiary; used or new

18 Declining Subsidy Buy Down with Fixed Total Monthly Installment Monthly Mortgage Payment Subsidy LE Years Notes: Mortgage Rate set at 15% Based on initial monthly household income of LE 1,250 Monthly payment fixed at 33% of Income in year 8 Annual Income growth set at 7.5% Subsidy fills affordability gap in first 8 years

19 Remaining: Reform of Old Supply Side Subsidies and Inefficiencies Transition to full Transparency over time? Phasing out land/infrastructure subsidies; complicated by state ownership of land Continued improvement of property registration and foreclosure procedures; legal transparency to gain trust of lenders Avoiding pressure to resolve old issues with new non-transparent subsidies e.g., resolving loss on old interest rate subsidies

20 Egypt: Move to Transparency but not without Contradictions From A Complex to A Simple Rube Goldberg Machine

21 Policy Implications Many countries successfully de-segmented their mortgage system when GDP per capita and macro econ allowed such Invariably housing lending and housing production/quality increased when done effectively Chile, Thailand, Korea Poor results when strategy is incomplete Poor results when supply in-elasticities remain Needs strong leadership to stay the course!

22 Contact: Marja C. Hoek-Smit International Housing Finance Program Wharton School University of Pennsylvania