The US, India, Thailand, Germany and South Africa all have country-specific housing finance systems.
Each one contains a unique combination of privatised, deregulated finance and a public system of subsidies and funding. This podcast discusses each of them.
The discussion reveals the role that securitisation played in the financial crash of 2008 and shows which countries were fortunate to have financial systems that did not facilitate the growth of this secondary financial system.
Here is a 5 minute video introduction to what this podcast is about:
The speakers in this podcast are Dr Paul Hendler and Michael Macdougall of INSITE Settlements Network. Script notes with hyperlinks mentioned in the podcast are shown below.
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Transcription of the Podcast
This is a podcast discussion between myself, Mike Macdougall, and Paul Hendler, of INSITE Settlements Network.
Our discussion is aimed at creating a greater awareness about the pros and cons of funding affordable housing either through private or through public financial systems. INSITE intends to have more podcasts in a question-answer discussion format about other critical issues related to urban development strategies, in the future. And we invite you to listen to these and post your comments, to facilitate further discussion and awareness.
Paul, you and your colleague Arumugam Pillay have much experience in this area. Arumugam has worked in the private and development banking sector and the two of you have published several articles about housing finance. Before I address some specific question regarding the financing systems of different countries, could you give us a back-ground to your and Arumugam’s thoughts about the changing process of housing funding over the last 30 years?
During the late-1990s and early 2000s the attention of housing policy makers and practitioners globally, at all tiers of government, shifted from a focus on delivering housing products, to the provision of finance. Housing finance was seen as more than simply an aspect of the overall housing delivery system: it was regarded as a key factor enabling the effective and efficient delivery of housing products. But the provision of housing finance was – and still is – subject to the macro-economies within which the various housing finance systems are located.
Therefore Arumugam and I thought it useful to examine the structure and compare the features of housing finance systems in various countries in order to lay a basis for understanding what was meant by “the effective and efficient delivery of housing”. We first addressed this in a paper that we presented at an International Housing Finance conference held in Cape Town during 2003 [that original paper is here and the original PowerPoint presentation is here], and it summarizes the salient features of the Housing Finance Systems of five countries: the United States, India, Germany, Thailand and South Africa.
The paper we presented described the main trends in each country in respect of the role of the state, public and private financial institutions, bond originators, estate agents and developers, in the financing and provision of housing. The paper also described the extent of regulation, the way the financing structures affected interest rates, cost of capital, the type of loan products, underlying collateral and the legal enforcement of liens, as well as the degree of specialisation in services associated with housing finance.
In your 2003 conference paper you refer to the radical restructuring of housing finance in the US, from specialised Savings and Loans – or building society – systems to inclusion in investment banking where housing finance could be sold on into secondary markets as securities. What led to this, what were the perceived advantages and what was the downside?
In the United States, since the 1980s housing finance has increasingly been sourced from investors rather than from the Savings and Loans Associations, otherwise known as S&Ls. The S&Ls were much like the building society movement in Britain and its colonies and they were seen as restricting growth of the home ownership market. At the beginning of 1990s the global housing debt market was worth roughly $3,5 trillion, an amount far exceeding the $1,9 trillion US government securities market and $1,4 trillion corporate bond market.
The system that emerged in the US over the past 25 years is based on a secondary mortgage market, that is where financial institutions that would have held the loans for the entire period, secured against a mortgage bond, originated these loans and then sold them as securities to investment banks and investors. This is a process known as Securitisation.
So to get into detail, the starting point in this process is the origination of the loan by loan originators, mortgage lenders, real estate agents, banks and brokers. At the same time these loans are insured (or underwritten) against default – this is an important consideration because the loans were being issued to a range of borrowers including those who constituted what was termed the subprime-market, that is borrowers who because of their lower levels of affordability and job insecurity were more likely to default and therefore posed greater risks.
Once the loan had been originated it passed through a process that resulted in it being pooled with many other mortgage loans of better quality and lower risk and these formed the basis for security certificates which would be sold to investors. In these certificates, the securities being sold were rated in terms of the risk associated with the underlying pool of mortgage loans.
Pooling the loans and then slicing them up into marketable securities was done by organisational structures known as conduits. There were private issuers of securities and also government issuers, like the Federal National Mortgage Association known as Fannie Mae, the Federal Home Loan Mortgage Corporation known as Freddie Mac and the Government National Mortgage Association known as Ginnie Mae. Fannie Mae, Freddie Mac and Ginnie Mae were charged by the US Congress to create a secondary mortgage market through guaranteeing the pool of mortgages backing the securities issued. This meant that if there was defaulting on the payments of these mortgages, the US government would make good the losses of the investors.
As a result, the process of mortgage securitisation resulted in a rapid increase in mortgage lending across the spectrum of borrowers in the housing market. In the established housing market the loans were secured by the property but implicit government guarantees enabled originators to base the loan qualifications of borrowers on higher loan-to-value ratios (that is borrowers were qualified for loans that exceeded the conventional 80 per cent limit of the value of the property). In the sub-prime (or so-called ‘junk bond’) market loans were explicitly guaranteed by the US government.
So in 2008, the securities system for investments in housing in the US, faced a collapse because home buyers were unable to service their loans due to loss of jobs, their income not rising as fast as prices, and so on.
With all the insurance and government guarantees in place, which were then activated, why did the system simply not correct itself, and continue? And why has the US mortgage securities market become controversial?
The extent of the defaulting by sub-prime home owners left the insurers and the government conduits exposed to liabilities that they were unable to meet. This point was strongly borne out after the 2008 collapse of the subprime market when the US government had to bail out investment banks most exposed to the large scale default on home loan repayments.
The securities were sold by originators and conduits into the capital market, typically to institutions like Life Funds, Pension Funds, and Investment Portfolios of Investment Banks. With the collapse of the sub-prime market in the US during 2007/2008, many of these institutional assets lost significant value, and these losses were ultimately borne by pensioners, savers and investors.
In order to prevent the collapse of some of the world’s largest investment banks the US government initially paid out $850 billion, which was used primarily to rebalance the balance sheets of these institutions. The sub-prime market borrowers had not only over-borrowed but they took out extra loans against an assumed rising value of their real estate and their rising household incomes.
With employment and wages unable to keep up with inflation (turbo-charged by the rapid spike in oil prices in 2007) there was large-scale default on a mass of sub-prime loans. Property prices also fell significantly due to the collapse of sub-prime demand meaning that the underlying collateral values were less than the debt owed. This is what is meant by the expression that ‘mortgages were underwater’. Left unchecked this deleveraging process would have resulted in large-scale bankruptcies of financial institutions whose assets no longer equalled or covered their liabilities.
The $850 billion – also known as Quantitative Easing One (QE1) – was largely to rebalance their balance sheets. QE1 was followed by QE 2 and QE3. In this way the private losses of these banks were socialised. At the same time thousands of sub-prime homeowners had their homes repossessed. Between 2006 and 2014 there were 22 446 521 foreclosure filings, 17 751 442 completed foreclosures and 6 143 709 homes repossessed [www.statisticbrain.com/home-foreclosure-statistics]..
The repossessions were illegal because during the securitisation process the loans (debt) were sold on but the mortgages (underlying collateral) were not transferred to the new holders of the debt: i.e. the paperwork pledging the properties to the holders of the loans was not re-written to transfer the collateral to the new holders of the loans. Details of this are contained in this article: Foreclosure for Dummies. And there are still reports of foreclosure fraud eight years after the ‘Great Recession’, such as in this article: Foreclosure Fraud Is Supposed to Be a Thing of the Past, But It Happens Every Day.
The collapse of the sub-prime mortgage market led to severe criticism of the rating agencies for not undertaking proper research into the quality of the loans which underpinned the securities, and also for not checking whether the mortgages had been ceded to the new holders of the loans. The terms of the sale of the securities allowed the originators of the loans to continue providing a collection service, paying over the instalments each month to the new holders of the securities. However, they did not get mortgage cessions in the favour of the new holders of these loans, and when the loans defaulted it was the originators who foreclosed and repossessed the property collateral – something they were not entitled to do as they no longer were the mortgagees.
Without an adequate due diligence, the underlying downside risk of the cash flows was not mitigated, causing a crash.
In contrast to the US housing finance system, the Indian system comes across as a suppression of private finance. Which public financing structures were active in providing housing finance in India? How did these public housing finance structures function? Would it be accurate to talk of “financial suppression” in this system?
Unlike the USA, where funding for housing finance was increasingly sourced from private sector investors, the source of funds for the Indian Housing Finance System during the 1990s (for example, wholesale funding) was the state-owned and funded National Housing Bank of India (NHB). The interest rate was subsidised in a highly regulated market. Because the lender’s claim on a property (which is a mortgage) was not effectively enforced in India, there were other, non-mortgage, forms of collateral, such as relationship lending where, for example, loans were made based on a person’s standing in the community and where family members could also stand as guarantors, and so on.
The State system of funding the housing finance system in India functioned mainly in the interests of a middle income home ownership market, although attempts were made to penetrate further down-market. A series of Housing Finance Companies (HFCs) operated as the retail arm of the National Housing Bank. Their functions were to initiate loans, insure against default and then ensure the timeous collection of monthly instalments. The HFCs also took deposits (which were savings from depositors) and made loans.
The National Housing Bank – the NHB – was created in 1998. It is a subsidiary of the Reserve Bank of India and is the largest state-owned bank in India. It was valued at 3,5 billion Rupees in 2000 and was fully capitalised by the Reserve Bank. Its mandate was to promote a self-sustaining housing finance system by establishing a network of financial services outlets. These outlets were to serve diverse population needs across the country. The NHB addressed serious gaps in the supply of housing, by intervening in the housing market to fund the supply of housing to its target groups.
In addition to the State’s assistance, India’s Life and General Insurance companies also made concessional loans to the NHB. These were to fulfil moral obligations because legislation had prescribed that these companies allocate a portion of their funds to housing.
The NHB is a wholesale bank that provides equity and loan funding to HFCs. The HFC’s, in turn, operate as retail banks, offering mortgaged housing loans to the middle income Indian public. The NHB monitors the HFC’s capital reserves. They need to ensure that HFCs hold adequate capital to cover loans they are writing, also that prudential norms prevail and that they also refinance some HFC loans.
Which classes in Indian society primarily benefitted from the National Housing Bank and the Housing Finance Companies? Could there have been a role for a system of privatised, securitised housing finance in India?
Besides funding the middle income groups the HFCs also tried to lend into the lower middle class and poorer segments of the Indian population, This was the same target market of the private banks in the United States through securitisation. In India, though, the predominant wholesale function of the NHB and HFCs in the country’s housing finance system restricted involvement of the private banking sector in providing mortgage loans. This obstacle prevented the emergence of a secondary housing finance market.
A further constraint on the development of a secondary market in mortgages was that collateral for loans was not in the form of properties themselves, but rather in the form of co-securities signed by family and friends of the borrower. But this form of collateral was seen as ineffective to manage the risks of foreclosure in a secondary mortgage market.
The role of the state as a wholesale funder, as well as the absence of mortgage property collateral, prevented the introduction and spread of securitisation in the Indian housing finance system. From a US securitisation perspective, this represented the notion of ‘financial repression’ but if the Indian housing finance system had gone the securitisation route, there would have been an even bigger crisis because of the original absence of mortgage collateral. So the public banking system in the Indian case actually mitigated the risks of contagion inherent in securitisation. However, it had limited outreach into poorer communities comprising the vast majority of the population.
What I found interesting about your section on the Bausparkasse, in the German Housing Finance System, is the interweaving of public, private and cooperative banks. The German economy is regarded as the strongest in Europe. Does the Bausparkasse system contribute to this? They also have a strong savings requirement before a borrower can get a mortgage loan. Is this a factor that we in South Africa would have to factor into our system in order to spread home ownership broadly amongst our population?
Several Central European countries, like Germany, the Czech Republic, Hungary, Poland and Slovakia, had similar housing finance systems during the 1990s. They were characterised by specialised mortgage banking that functioned to initiate (or originate) loans, insure against the risk of default and manage the repayment of loan instalments.
This differed from the system in the United States’ where housing loans were integrated with retail and investment banking. There, the origination, insurance underwriting and loan servicing through collection of instalments were all outsourced services undertaken by specialised service providers. In the Central European countries just mentioned, things were different – these services were all bundled together.
Let’s take a look at the German housing finance (or Bausparkasse) system.The Bausparkasse is a savings collective and the principle is that a borrower should run a savings account with them in order to make a 40% deposit of the total value of the property being purchased. In practice, the 40% is made up of borrower savings of 20% and a Bausparkasse loan of 20%, at a contractually agreed interest for the entire term.
The Bausparkasse also had the discretion to give a further bridging loan to make up the 40%, but this was at market interest rates. Between 1948 and 1996, Bausparkasse loans totalled DM1,1 trillion. This represented 47% of total housing borrowings and more than 12 million housing units. By 2003 there were more than 33 million Bausparkasse loan contracts, valued at DM 1,2 trillion which represented 16% of total housing loans annually in Germany.
Following the securing of the first 40% of the value of the loan, a mortgage bank then lent the 60% balance required, which was secured through a first mortgage bond. Mortgage banks first emerged in the aftermath of the Prussian War (1756 to 1763) when landowners issued collective debt papers guaranteed by landed property. By 1852 these institutions had become financial intermediaries between borrowers and investors. Between the first and second world wars mortgage banks were established in the public sector and funded infrastructure and social housing projects.
By 2003 the Bausparkasse and Mortgage Banks were established as a tightly knit system through affiliates, joint ownership and packaged products. At the same time there was an erosion of the separation between this system and the capital investment markets. The role of the capital markets has been to provide funding for mortgage banks to create assets. The Bausparkasse have raised limited funding from the capital markets for the bridging loans to meet the 40% deposit requirement.
Part of the resilience in this system arises from the relatively stable economy that keeps employment levels high which then enables people to save for home ownership. Until we are able to realise full employment in our economy the savings requirement will remain unfeasible.
Analysts like Ellen Brown and Kurt von Mettenheim also have argued that the functioning public and municipal banking system in Germany, through its funding of the Small and Medium Enterprises which constitute the biggest chunk of the economy, is a precondition for the country’s economic strength. Here is a Chapter from Ellen Brown’s book, “The Public Bank Solution”, reproduced with her permission on our site: Public Banking in Germany.pdf The complete book can be found on Ellen’s Blog: https://ellenbrown.com/books/the-public-bank-solution.
Your and Arumugam’s paper points out that supporters of US style securitisation have an opinion that only the Government Housing Bank of Thailand – of all the public banks funding housing – can be regarded as a success. And they also qualify this success. We have seen the examples of public and cooperative banking in Germany as well as the role of the public sector in providing finance for housing in India. So it would seem that public banking is more widespread than we think. Two questions: How does public banking for housing work in Thailand? What do you think of the statement that the Thai Bank is the only successful public bank for housing?
In Thailand, during 2003, the Government Housing Bank (GHB) provided housing finance for the lower middle-income sector, as well as to developers delivering housing to this segment of the market. The Government Housing Bank originated the loans, insured them and also ensured that instalments were paid back timeously, so it played a full range of traditional mortgage bank functions. While commercial banks were the main providers of mortgage finance the Government Housing Bank, otherwise known as the GHB, had a 20% market share. Most mortgages in Thailand were at variable interest rates, over 15 to 25 year terms, and with loan to value ratios of 80% or less.
The state played an important role capitalising the GHB, providing a capital subsidy for infrastructure and also developing the housing through a public sector developer, the National Housing Authority which was established in 1972. In 2003 the GHB had 1700 staff in 120 branches all over Thailand. During the 1990s and early 2000s most mortgages in Thailand were provided by commercial banks. The GHB had a 20% share of the mortgage market, targeting mainly the middle and lower income groups for home ownership lending.
The purpose of the GHB was to demonstrate to private banks that there was a viable sub-prime mortgage market for them to fund, and it did this on the basis of providing competitively priced loans, a very low rate of default and an effective collection of instalments service. The National Housing Authority undertook delivery of low cost and affordable housing projects, and the Thai Government also provided a capital subsidy.
By the early 2000s the GHB had some 440 000 borrowers and a loan book of some R35 billion.
An analysis from the International Housing Finance Course (Wharton Business School) (2001) evaluated the GHB as the only successful public banking institution because the GHB was driven by the principle of profit, had deep outreach to poorer communities and effective management of credit risk of the poor.
This is a viewpoint contradicted by Ellen Hodgson-Brown, of the Public Banking Institute, who has written about the history of public banking and described successful public banks, inter alia the Commonwealth Bank of Australia, the Bank of North Dakota and Municipal Banks in Germany. The essential feature of these banks is that they return profits to the public. Organisations like the World Bank are critical about the alleged inherent failings of public banking.
However, Following the ‘Great Recession’ of 2007/2008 and its persisting effects, new critiques of private fractional reserve banking, and its myths about the alleged problems of public banking, have emerged. Thomas Marois, from the School of Oriental and African Studies, London, has written an interesting paper about dispelling the myths of state-owned banks, which can be read here: State-Owned Banks and Development.
While his analysis is not specifically about government housing banks, many of the myths that he dispels are what inform the critique of government housing banks from a market fundamentalist approach.
Paul, you’ve studied and written several papers on the history of working class housing in South Africa. I think both your Masters Dissertation and PhD Thesis covered this and also the changes that were being brought in during the 1970s and 1980s. Could you bring us up to speed with some historical background, and give your opinion on how we got to where we are now?
Prior to the 1990s South Africa had a dual housing finance system. This formed part of the system of racial capitalism, known as apartheid. For people categorised as ‘white’, ‘Indian’ and ‘coloured’, who were able to own land in prescribed areas, mortgage finance was provided initially by specialised non-profit financial institutions known as building societies and later by banks, for home ownership. For poorer members of these communities, unable to afford home ownership, there were varying forms of housing welfare including rent control and state-funded council housing. Each of these population groups were confined to living in their “own” Group Areas, but the most affluent and largest and most comfortable homes were in the White Group Areas.
For people categorised as ‘bantu’ (or later as ‘black’), and who constitute the majority of the country’s inhabitants, there was an extremely limited form of ownership. It was on a 30-year leasehold and mainly strictly controlled rentals in council housing and hostels for migrants in dormitory townships. The 30-year leasehold arrangement was done away with between 1968 and 1975 . Funding for this was provided through a separate central government institution and the housing and hostels were built by local municipalities.
The changed political system of universal franchise in a single democratic state, implemented in 1994, ended the segregated system of housing finance and delivery. The new government’s Housing White Paper of 1994 set out the housing strategy as being market-led and state-supported. This meant that the banks would provide housing finance for the home ownership markets while the government would provide a once off capital subsidy for those unable to afford home loans.
In some cases the subsidy could function as a deposit for households that required assistance with making a down-payment. The reasoning behind this strategy was that government through its subsidies, as well as indemnifying mortgage lenders against political risks of default, could normalise the lending environment and thereby facilitate the rapid expansion of secondary home ownership markets. It was thought that in this way previously marginalised households would acquire assets against which to raise further finance to use to generate wealth.
So there is a combination of government and private sector funding for housing in South Africa, with the private sector as the lead sector and the government as the supporting sector. What are the main characteristics of the SA Housing Finance System in terms of these various private- and public-sector structures and instruments?
During the 1990s the South African Housing Finance System was established as – and still is – a private sector-led and state-supported system. This means that there are private companies (i.e. banks, non-banks and non-government organisations) which originate the loans, provide insurance to cover the risk of default in case of death or damage to property and also ensure that monthly instalments are collected regularly. Government provides a subsidy for defined income categories, usually representing the bottom 60 per cent of households. This subsidy was intended to be a proxy for a deposit and the thinking was that it would help to unlock private credit to enable access to home ownership for the poorer working classes.
Banks are defined as institutions that are licensed to accept deposits (savings) from the public and non-banks are the remaining financial institutions that are unable to raise capital through deposits and have to go to the capital market and/or public development financing institutions such as, for example , the National Housing Finance Corporation. The National Housing Finance Corporation’s role has been to provide funding in housing considered too risky by the private banks, in order to demonstrate the viability of private market funding (e.g. social rental housing) as well as to NGOs active in lending in rural areas (e.g. through the Rural Housing Loan Fund).
Banks secure their loans through a mortgage claim on the property in the event of default. Non-banks usually provide smaller loans for additions and alterations and their risk is covered by relatively high rates of interest. Besides providing housing subsidies for lower income groups, the State (through the National Housing Finance Corporation) also funds non-banks and NGOs that operate where the private sector regards risk as being too high. The state also plays a regulatory role, through Reserve Bank and National Treasury oversight on banks and non-banks, as well as spatial planning specifications that housing projects are meant to comply with.
How effective is the current SA Housing Finance System in addressing the housing shortage and general need for adequate shelter by the majority of the South African population?
22 years after the Housing White Paper, South Africa still has a divided housing finance system, which reflects two different categories of housing classes. One the one hand the banks (as mortgage lenders) provide funding for the top 15% of households, able to afford the entry level prices for the established primary and secondary home markets. We have a very interesting table, based on Stats SA’s 2011 Census, that shows graphically the distribution of household income in relation to thresholds for affordability of various housing finance options: SA Households Qualifying for Mortgages in 2011.pdf. While securitisation was slow to emerge in the South African system the New Economic Rights Alliance is reporting a rising quantity of mortgage loans that are being packaged and sold off by banks.
On the other hand the government provides a housing subsidy to enable households earning less than R3 500,00 per month to access a free basic house. However, these houses have been built on peripheral, cheaper land and do not provide a sustainable basis for people living in urban areas: they are relatively far from work opportunities and amenities. Consequently there is no effective demand for repurchasing these houses and so the development of a secondary housing market has been limited.
Government also provides subsidies for rental accommodation and as a contribution towards finance linked or ownership housing, for households earning between R3 500,00 and R7 500 per month. However, the supply of these forms of shelter has not kept pace with demand partly due to the high cost of well-located land and the low affordability of these households.
Thanks Paul. That was an interesting tour through the five different housing funding systems across the globe. What are the trends that we see when taking an overview of these five housing finance systems? What specifically are some of the challenges and risks inherent in these systems, and what lessons have we learnt?
If we sum up the trends we note that the policies in India, Germany and Thailand are for significant state provision of housing finance and funding, while in the USA housing finance has been primarily driven by the private market. South Africa represents a hybrid of state and private market provision of housing finance.
The provision of housing finance in the case of India, Germany and Thailand is highly regulated, whereas it is relatively unregulated by the government in the US. Some commentators opine that it was this absence of regulation that enabled the collapse of the US sub-prime market in 2007: mortgages were bundled and securitised without a proper assessment of their underlying risks and sold on to unsuspecting investors. Here is an interesting article related to that. Here is a further US Senate study that identified financial crimes and offenses in the sub-prime mortgage and other markets.
In South Africa the provision of mortgage finance is highly regulated and there is more rigorous regulation about the provision of the government housing subsidies. (Nevertheless, there are often claims of corruption around the waiting list for subsidised housing).
In all the countries, with the exception of India, mortgage interest rates are market determined. This means that they are set in competition between the major private mortgage lending institutions and they also reflect the central banks’ benchmark interest rates. Remember that central banks are independent of the governments of the day, meaning that they are essentially private institutions run by the major national banks acting in concert. In India the government subsidises the interest rate.
The housing finance products in the USA, Germany and Thailand are almost solely mortgage loans. In India they are almost solely non-mortgage housing loans, and in South Africa there is a mix of mortgage and micro loans. This explains the different types of intermediaries in each case. This also reflects the fact that in the USA, Germany, South Africa and Thailand there is a developed system (including proper titling of property rights and legal procedures on foreclosure) for securing the risk of default with the value of the property. In India there is no effective system for securing risk against the property and therefore there are non-mortgage forms of collateral. In South Africa collateral secures mortgage loans in the established primary and secondary home ownership markets, but micro loans related to housing are secured either through relatively higher interest rates, or a cession of retirement and insurance policies, or both.
In the US mortgage-backed securities market the collateral pledge is broken with the sale of the loan to investors, and there is a document at this link that explains this: Does “the Mortgage Follow the Note”? by Deborah L. Thorne and Ethel Hong Badawi of Barnes & Thornburg LLP; Chicago.
Similar cases have arisen in the emerging South African mortgage-backed securities market, and there are likewise reports in South Africa of similar problematic practices with regard to the mortgage collateral in cases of loan foreclosure, which can be viewed here: ACTS Online – New Economic Rights Alliance brings heat to the Banks.pdf.
While it is difficult to get disclosure of the value of securitised debt in South Africa, including and especially with regard to mortgage debt, some data has emerged – we have some further links to documentation about both the reluctance of banks to reveal the extent to which they have securitised their original loans as well as the emerging evidence that this has been happening on an expanding scale: Securitisation – A Conspiracy of Silence.pdf, supplied to us by the New Economic Rights Alliance, South Africa, along with these two spreadsheets: SA securitisation 2013-1.xlsx and SA securitisation 2013-2.xlsx.
In all the countries surveyed, with the exception of India, the legal and administrative systems for implementing the collateral pledges are effective. While the legal and administrative systems might not be functional in India, nevertheless most loans are repaid with a low default rate. However, secondary housing markets are not as buoyant as in the other countries: owner-occupation and generational inheritance is a strong feature of that system.
Ensuring that instalments are regularly collected and deposited in the lenders’ accounts is a critical feature of sustainable lending. These services can be bundled together with loan origination, insurance etc, and implemented by the financial institution originating the loan. This is the case in Germany, India and Thailand, where the servicing of the loan is undertaken in-house by the loan originators. By contrast, in the US mortgage-backed securities market, these services were outsourced to specialised entities.
Finally, the impact of these housing finance systems on the ground in each of the countries surveyed, is as follows. In Germany and the USA, with fully developed mortgage funding systems, the houses produced are conventional structures (i.e. either bricks-and-mortar or timber products subject to formal building standards and regulations). In India and Thailand the structures of shelter are largely unconventional and are financeable.
South Africa has an established housing market with formally regulated conventional bricks-and-mortar structures as well as a smaller segment of informal structures: about 12 per cent of households in South Africa live in free-standing informal settlements on the peripheries of major cities, or in informal structures which they rent in the backyards of formal housing in townships. A further seven per cent live in traditional structures in the former homelands. Informal housing in South Africa is funded by micro-loans.
Paul, thanks for joining me and sharing this information. Could you sum up for us? Given the challenges that we face in housing all South Africans adequately, speedily and affordably, what have we learnt that might be useful for implementation here in South Africa?
If we look at the trend summary we do not see a model that could be implemented in South Africa. There are very different housing finance systems that attempt to emulate the US scale and volume outcomes. None of these systems have enabled acceptable housing on scale in developing countries.
The German system is interesting in achieving impressive volumes of conventional housing shelter. The following appear to be the preconditions for a German-type system:
- Relatively high levels of employment
- Relatively high levels of social welfare security
- An established savings culture and significant extent of savings
- A housing finance system that is structured to achieve housing as a social outcome for those excluded from established private markets
What South Africa and other countries with social housing challenges require is a housing finance system that functions effectively to address the housing challenge at scale in developing economies.
To our listeners, thank you for listening. If you have any questions or would like to engage with us on this or any other topic, please contact us via our website at: www.insite.co.za. Goodbye!
Thanks Paul. Thank you very much for joining us and thank you, our listeners, for joining us. Goodbye from me!
This podcast was based on a paper delivered to a Housing Conference by Dr Paul Hendler and Dr Arumugam Pillay. The podcast was a jointly produced by Dr Paul Hendler and Michael Macdougall.