Housing Finance

Housing Finance

Increasing the Availability and Affordability of Housing in Developing Countries

T.Y.B Com (BBI)

Housing Finance

CONTENTS

Sr.no 1 2 3 4 5 6 7 8 9 10 Introduction

Chapter

Page. No 1-10 11-15 16-22 23-29 30-34 35-41 42-43 44-45 46-48 49-50

Housing Finance Bank Current Event Types Of Housing Finance Products & Services Housing Finance Of Monetary Policy Housing Finance In India Case Study Conclusion Reference Bibliography

T.Y.B Com (BBI)

Housing Finance

T.Y.B Com (BBI)

Housing Finance

Meaning :In pursuance of National Housing Policy of Central Government, Reserve Bank of India has been facilitating the flow of credit to housing sector. During last three years, the housing sector has emerged as one of the sectors attracting a large quantum of bank finance. The current focus of RBI's regulation is to ensure orderly growth of housing loan portfolio of banks.

What is Housing Finance?

Housing finance is a broad topic, the concept of which can vary across continents, regions and countries, particularly in terms of the areas it covers. For example, what is understood by the term housing finance in a developed country may be very different to what is understood by the term in a developing country. Housing finance brings together complex and multi-sector issues that are driven by constantly changing local features, such as a countrys legal environment or culture, economic makeup, regulatory environment, or political system The purpose of a housing finance system is to provide the funds which homebuyers need to purchase their homes. This is a simple objective, and the number of ways in which it can be achieved is limited. Notwithstanding this basic simplicity, in a number of countries, largely as a result of government action, very complicated housing finance systems have been developed. However, the essential feature of any system, that is, the ability to channel the funds of investors to those purchasing their homes, must remain.

T.Y.B Com (BBI)

Housing Finance

Put simply, housing finance is what allows for the production and consumption of housing. It refers to the money we use to build and maintain the nations housing stock. But it also refers to the money we need to pay for it, in the form of rents, mortgage loans and repayments.

Why Housing Finance?

The housing finance market is among the most important in the economy. It accounts for a sizeable portion of the production activity of a country, activity of a country, through its backward linkages to land markets, through its backward linkages to land markets, building materials, tools, durable goods, and labor markets. Housing markets have significant forward linkages with financial markets, as well. Mortgage debt accounts for a large proportion of household debt and, thro-ugh secondary markets and securitization, supports the efficient functioning of functioning of domestic and international financial markets. Housing markets are routinely monitored as an important leading indicator of overall macroeconomic activity. The housing finance sector has a tremendous developmental impact, both in terms of providing social stability and in promoting economic development.

T.Y.B Com (BBI)

Housing Finance

Social Stability :Housing finance contributes to social stability by enabling households to purchase an asset which will represent their largest single investment. Personal residences account for 75% to 90% of household wealth in emerging market countries, which amounts to 3 to 6 times their annual income. Furthermore, housing income. Furthermore, housing represents 15% to 40% of the monthly expenditure of households worldwide.

Economic Development :Investment in housing accounts for 15% to 35% of aggregate investment worldwide. By supporting housing finance, the IFC promotes a successful econ-omic sector and frees personal savings which entrepreneurs can invest in small businesses. Housing construction and housing related sectors constitute appro-ximately 9% of the labor force worldwide.

Housing Finance and the World Bank :Housing finance plays an important role in the World Banks overall financial sector strategy and is clearly and inextricably linked to the overarching mission of reducing poverty and improve peoples lives. Given the rapid pace of innovation in this field, the Housing Finance group works closely with the Treasury Department closely with the Treasury Department of the IFC and the World Bank to develop an integrated approach to housing finance.

T.Y.B Com (BBI)

Housing Finance

Objectives &Challenges :The Housing Finance Group aims to increase the availability and affordability of residential housing in developing countries. It does so by introducing a steady source of new housing finance product ideas, strategic formulations, policy, procedures and effectiveness measures to better meet client requirements and leverage IFCs own resources.

This broad-based mandate spans the whole process from ensuring an adequate supply of appropriate housing stock to sustainable mobilization of capital. Numerous challenges must be overcome if the housing finance sector is to fulfill its objective of increasing the availability and affordability of residential housing in developing countries. These include:

Lending Restrictions :Mortgage lending is often narrowly restricted to a single sector, such as Government owned lenders or highly regulated private institutions.

T.Y.B Com (BBI)

Housing Finance

Infrastructure :Emerging markets often lack the infrastructure that is fundamental to the support of home ownership, such as untargeted subsidies and disincentives for the financial sector.

Regulatory Environment :Legal and regulatory reforms that are crucial to the development of a healthy private sector housing system are a prerequisite to the sectors growth. These include lien registrations, property rights and foreclosure practices.

Capacity :The pool of skilled managers and field staff experienced in housing finance is limited in most countries.

T.Y.B Com (BBI)

Housing Finance

Outreach :While numerous institutions have learned how to profitably serve the housing finance sector, they have yet to rise to the challenge of massive outreach, except in a few countries.

Efficient Housing Systems :Solutions :The key to achieving the goals of the Housing Finance group lies in providing a range of products in support of developing well-functioning housing broad finance systems in emerging countries. To this end, the IFC is involved in all aspects of the housing finance market. The Groups objectives are executed through a variety of means such as equity participation, loans, and training.

T.Y.B Com (BBI)

Housing Finance

Primary Mortgage Markets :Financial assistance to primary mortgage market players (e.g. banks extending housing loans, specialized housing finance originators) through equity participation, loans, credit lines and warehouse lines

Development of standardized and prudent credit underwriting, mortgage origination and servicing standards, and advice on the use of technology to implement such standards In conjunction with the World Bank, advice on legislation/regulation regarding origination, standardization or servicing of mortgages Development of mortgage insurance or other peripheral services such as credit reporting, property appraisal and evaluation.

Secondary Mortgage Markets :Financial assistance to secondary mortgage market entities and conduit lenders through equity investments and warehouse lines Creation of Multi-Seller Conduit Vehicles for issuing Mortgage Backed Securities (MBS) or other bonds Credit Enhancement of MBS or other bonds such as guarantees & credit enhancement facilities Advice on legislation/regulation regarding MBS issuance/investment.

T.Y.B Com (BBI)

10

Housing Finance

T.Y.B Com (BBI)

11

Housing Finance

Housing Finance Bank

Housing Finance Bank Type Industry Founded Headquarters Private Financial Services 1967 4 Wampewo Avenue Kololo, Kampala, Uganda[1] Nicholas Okwir, Managing Director Loans, Checking, Savings, Investments, Debit Cards, Mortgages US$2.5 million (2009) US$130 million (2009)[2] Homepage

Key people

Products

Revenue Total assets Website

Housing Finance Bank (HFB) is a commercial bank in Uganda. It is one of the commercial banks licensed by Bank of Uganda, the national banking regulator.

T.Y.B Com (BBI)

12

Housing Finance

Overview :HFB is primarily involved in mortgage banking. Founded in 1967 as a housing finance company, Housing Finance Bank became a fully licensed commercial bank in January 2008, having acquired a commercial banking license. The bank is the leading mortgage lender in the country, with approximately 60% of all Ugandan mortgage accounts. As of April 2010, Housing Finance Bank is the 10th largest commercial bank in Uganda with an asset base estimated at US$130 million, representing about 3% of all bank assets in the country.

Ownership :The bank is 50% owned by the National Social Security Fund (Uganda). The Government of Uganda, through the Ministry of Finance owns 49.2%. The remaining 0.8% is owned by National Housing and Construction Company (NHCC), a parastatal company owned by the Government of Uganda.[6] The bank plans to list its shares on the Uganda Securities Exchange in 2011.[7] The current shareholding in the bank is depicted in the table below:

Housing Finance Bank Stock Ownership: Rank Name of Owner 1 National Social Security Fund (Uganda) Government of Uganda 2 National Housing and Construction Company 3 Total Percentage Ownership 50.0 49.2 0.8 100.0

Branch Network :Housing Finance Bank maintains its corporate headquarters at its newly constructed headquarters building on Wampewo Avenue, on Kololo Hill The

T.Y.B Com (BBI)

13

Housing Finance

bank's main branch is located in Investment House on Kampala Road. Another branch within the Kampala Central Business District is located in Nakasero, across from the Nigerian High Commission. There are two other branches in Kampala, one each in the suburbs of Namuwongo and Ntinda. In February 2009, the bank opened a branch in Mbarara in western Uganda. In March 2009, the bank opened its 6th branch is an area of Kampala known as Kikuubo. [10] In June 2009, the bank opened its seventh (7th) branch in Mbale promising, at the opening ceremony, to launch Internet banking and rural mobile banking later in 2009. In July 2009, the bank opened its eighth (8th) branch in Arua. As of September 2010, the bank maintains branches in the following locations: 1. Arua Branch - Arua 2. Bugoloobi Branch - Bugoloobi, Kampala 3. Garden City Branch - Garden City Mall, Kampala 4. Main Branch - Kampala Road, Kampala 5. Kikuubo Branch - Ben Kiwanuka Street, Kampala 6. Mbarara Branch - Mbarara 7. Mbale Branch - Mbale 8. Nakasero Branch - Nakasero Road, Nakasero, Kampala 9. Nakawa Branch - Nakawa, Kampala 10.Namuwongo Branch - Namuwongo, Kampala 11.Ntinda Branch - Ntinda, Kampala 12.Ovino Branch - Ovino Market Mall, Kisenyi, Kampala 13.Lira Branch - Lira 14.Gulu Branch - Gulu 15.Fort Portal Branch - Fort Portal (Coming in 2011)

T.Y.B Com (BBI)

14

Housing Finance

Directors :Housing Finance Bank is governed by a ten (10) person Board of Directors of whom three (3) are Executive Directors and seven (7) are non-executive. The Chairman of the Board is Keith Muhakanizi, one of the non-executive directors.

Executive Management :Nicholas Okwir is the Managing Director of Housing Finance Bank. There are twelve (12) other managers with whom the Managing Director supervises the dayto-day activities of the bank. Okwir is a graduate of Namilyango College, one of the most prestigious high schools in Uganda. He holds a Bachelors degree in Commerce (BCom) from the University of Nairobi. He is a Certified Public Accountant (CPA). He has worked at Housing Finance Bank since 1983 and has served as the Chief Executive at the same bank since 2002. The HDFC Advantage

Pioneers of Housing Finance in India with over 33-34 years of lending experience.

Widest range of home loan & deposit products. Vast network of over 294 interconnected offices which includes 3 international offices.

Most experienced and empowered personnel to ensure smooth & easy processing.

Online loan application facility at and across-the-counter services for new deposits, renewals & repayments.

Counseling and advisory services for acquiring a property.

T.Y.B Com (BBI)

15

Housing Finance

T.Y.B Com (BBI)

16

Housing Finance

Types of Housing Finance

Direct Housing finance: Indirect Housing finance:

Direct Housing finance :Direct Housing Finance refers to the finance provided to individuals or groups of individuals including co-operative societies. Banks are free to evolve their own guidelines with the approval of their Boards on aspects such as security, margin, age of dwelling units, repayment schedule, etc. Other Guidelines

Indirect Housing finance :Banks should ensure that their indirect housing finance is channelled by way of term loans to housing finance institutions, housing boards, other public housing agencies, etc., primarily for augmenting the supply of serviced land and constructed units. It should also be ensured that the supply of plots/houses is time bound and public agencies do not utilise the bank loans merely for acquisition of land. Similarly, serviced plots should be sold by these agencies to co-operative societies, professional developers and individuals with a stipulation that the houses should be constructed thereon within a reasonable time, not exceeding three years. For this purpose, the banks may take advantage of various guidelines issued by NHB for augmenting the supply of serviced land and constructed units.

T.Y.B Com (BBI)

17

Housing Finance

Housing Loans Under Priority Sector :The following housing finance limits will be considered as Priority Sector Advances:

Direct Finance :(i) Loans up to Rs. 15 lakh in rural, semi-urban, urban and metropolitan areas for construction of houses by individuals, with the approval of their Boards.

(ii) Loans up to Rs.1 lakh in rural and semi urban areas and Rs. 2 lakhs in urban areas for repairs to damaged houses by individuals.

(iii) Loans granted by banks in rural areas under the Special Rural Housing Scheme of NHB will also be considered as part of priority sector advances subject to the limits specified under (i) and (ii) above i.e. upto Rs. 15 lakhs for acquiring/ construction of a new house and upto Rs. 1 lakh for repairs/ upgradation of an existing house.

Indirect Finance :(i) Assistance given to any governmental agency for construction of houses, or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of Rs. 5 lakh of loan amount per housing unit. (ii) Assistance given to a non-governmental agency approved by the National Housing Bank for the purpose of refinance for reconstruction of houses or for slum clearance and rehabilitation of slum dwellers, subject to a ceiling of Rs. 5 lakh of loan amount per housing unit.

T.Y.B Com (BBI)

18

Housing Finance

Investments in Bonds :Investments already made by banks upto March 31, 2005 in the special bonds issued by specified institutions, including inter alia, NHB and HUDCO shall not be eligible for classification under priority sector lending with effect from April 1,2006. The investments that may be made by banks on or after April 1, 2005 in the bonds issued by NHB and HUDCO shall not be eligible for classification under priority sector lending.

RBI Refinance :Finance provided by the banks would not be eligible for refinance from Reserve Bank.

Rrporting :Banks should compile the data relating to Housing Finance at half-yearly intervals on the lines of format given in Annexure 1 and keep it ready for being made available to the banks internal inspectors/RBIs inspectors.

For the purpose of monitoring the macro-level performance of the commercial banks in disbursement of housing finance banks should submit, on a quarterly basis, details of disbursements made by them towards housing finance to Department of Banking Supervision, RBI, Central Office, World Trade Centre, Cuffe Parade, Mumbai 400 005, as per the format given in Annexure 2 within 20

T.Y.B Com (BBI)

19

Housing Finance

days from the close of the respective quarter Housing loans taken over from other banks should not be included in the quarterly statement as disbursements.

Opening of Specialised Housing Branches :In view of the priority accorded to the development of housing as also to achieve greater professionalism, there is a need for establishment of specialised branches at certain centres exclusively to cater to housing finance. It is the intention that a housing finance branch should be established in each district. But this can be brought about gradually based on the policies and perceptions for greater involvement of commercial banks in the housing sector. Since the housing finance is a new concept to banks, initially the opening of such specialised branches may be restricted to semi-urban/urban areas and the number of such branches to be allowed will depend on the size and spread of the bank. Requests for this kind of branch in rural area will also be considered where there is a clear need and assured viability. While formulating their proposals, banks may, therefore, keep in view the following aspects for consideration: The housing finance branch of a bank should be in any of the districts for which the bank has lead responsibility or, in the case of banks having very nominal lead responsibility, in districts where they have a large presence. Banks should avoid opening of such housing finance branches at metropolitan Centres which are served by quite a few specialised housing finance companies like HDFC or housing finance subsidiaries of the commercial banks. The housing finance branches may be set up in areas where there is a concentration of branches of the same bank designated to handle housing finance business so that the expertise available in the specialised branch could be used for servicing the other designated branches.

T.Y.B Com (BBI)

20

Housing Finance

Home Loan Account Scheme (HLAS) of NHB :Foreclosure of Loans Obtained from Other Sources :Under the HLAS, a member of HLAS is eligible for a loan after subscription to the scheme for a minimum period of 5 years. The member has to declare while joining the scheme/availing loan that he/ she does not own a house/flat. However, a member may acquire a house or a flat from a public agency/co-operative/ private builder by obtaining a loan from a bank at the normal rate of interest or from friends and relatives or through a hire-purchase scheme of Housing Board/ Development Authority. Thereafter, when the member becomes eligible for a loan under HLAS, he/she may approach the bank for such a loan to repay the loan(s) raised earlier from other sources. There is no objection to bank loans under HLAS being utilised for foreclosing loans secured earlier from other sources, as a special case. Classification of Deposits/Loans under HLAS :Under HLAS, the participating bank is required to accept deposits on behalf of NHB and make use of these deposits by way of refinance under any scheme approved by NHB from time to time. The surplus funds, if any, not so utilised (i.e. excess of deposits over refinance) can either be remitted by the participating bank to NHB or retained by it, subject to compliance with the statutory reserve requirements as under:

T.Y.B Com (BBI)

21

Housing Finance

(i) The deposits under the HLA Scheme are on a recurring basis; and they should be treated as time liabilities, subject to reserve requirements under Section 42(1) of the Reserve Bank of India Act, 1934 as also under Section 24 of the Banking Regulation Act, 1949 and included under item II (a) (ii) of Form A.

(ii) In terms of sub-clause (ii) of clause (c) of the Explanation to Sub-Section (1) of Section 42 of the RBI Act, as amended by clause 3 of the Second Schedule to the National Housing Bank Act, 1987, liabilities will not include any loan taken from NHB. Hence, the deposits utilised as refinance from NHB should be deducted from the total deposits received under the HLA Scheme while including the amount under item II (a) (ii) of Form A.

Risk Weight On Housing Finance :Banks extending housing loans to individuals against the mortgage of residential housing properties are required to assign risk weight of 75% on such loans which are fully secured by mortgage of residential properties and investments in Mortgage Backed Securities (MBS) of Housing Finance Companies (HFCs), recognized and supervised by NHB. In the case of MBS of Housing Finance Companies to be eligible for 75% risk weight, securities issued by the SPV should be backed only by assets qualifying for 75% risk weight. In all other cases, it will be 100%. However the risk weight for commercial real estate exposure has been raised to 125% on July 26, 2005 and further to 150% on May 25, 2006.

T.Y.B Com (BBI)

22

Housing Finance

T.Y.B Com (BBI)

23

Housing Finance

Investment Services :-

IFC provides debt and equity financing to banks, primary mortgage originators, and secondary market companies. IFC also invests in capital market instruments, or provides credit enhancement for mortgage-backed securities (MBS) and similar funding vehicles. IFC offers the following investment solutions for housing finance: Loans for mortgage lending Collateralized mortgage lines of credit Warehouse lines of credit Credit enhancement for MBS Structured finance Equity investments Construction finance

T.Y.B Com (BBI)

24

Housing Finance

Continued Innovation IFC is developing an array of investment products for frontier markets including: Affordable housing finance products Housing microfinance Housing remittance Mortgage finance for energy efficient and sustainable development Housing finance products compliant with Islamic finance principles Financing tools for large-scale residential projects

Advisory Services :IFC offers advisory services that are often linked to its investments. Priority areas include creating an enabling environment for housing finance, institutional capacity building, and staff training. These advisory services are funded jointly by IFC and donors. IFC works with the World Bank and other partners to provide housing finance advisory services to governments. Country Level - Policy & Infrastructure Improvements - Market studies/business indicators - Knowledge sharing through workshops and conferences - Housing policy advisory - Legal/regulatory environment advisory - Market infrastucture advisory

T.Y.B Com (BBI)

25

Housing Finance

Sector Level - Mortgage Toolkit & Training - Toolkit development for all aspects of mortgage finance (origination, underwriting, etc.) - Training material development - Toolkit delivery - Training delivery through partners and stakeholders Institutional Level - Capacity Building - Market assessments - Operational diagnostics - Strategy development - Mortgage toolkit implementation/ training - Process automation and standardization - Staff mortgage training - Risk management advisory - Long term funding advisory

The IFC Difference :IFC is a member of the World Bank Group, which comprises four related development institutions, each with its own budget, management, and governance structure: the World Bank; its insurance arm, the Multilateral Investment Guarantee Agency; the International Center for the Settlement of Investment Disputes; and IFC.

T.Y.B Com (BBI)

26

Housing Finance

Owned by 179 shareholder countries, we are globalfor more than 50 years we have focused on developing countries. We are localwith a full time presence in more than 80 countries and activities in many others. We put our clients first. We can work with you anywhere in the developing world, building long-term partnerships, exchanging knowledge, and growing together to achieve win-win results. Our broad range of Investment and Advisory Services support one goal: improving lives and raising living standards through sustainable private sector development. They are flexible and can be tailored to a clients specific needs.

In 2007, we invested approximately $8.2 billion from our own account in 69 countries, mobilized an additional $3.9 billion through syndications and structured finance, and provided advisory services in 125 countries. Since our founding in 1956, we have committed more than $64 billion of our own funds and arranged more than $27 billion in syndications for 3,760 companies in 141 developing countries. We have also provided more than $1 billion in advisory services in the past 20 years, funded primarily by our development partners.

Emerging Opportunity For Housing Finance :Housing finance plays an important role in the World Bank Groups overall financial sector strategy and is inextricably linked to the overarching mission of reducing poverty and improving peoples lives. Housing finance is one of the fastest growing areas of business for IFC, and is a priority sector. At the macro level, housing finance generates economic growth via job creation,

T.Y.B Com (BBI)

27

Housing Finance

entrepreneurship, and economic linkages. At the individual level, it makes it possible both for people to have shelter and a real asset, which might be the largest investment a family makes in a lifetime. In addition, housing finance activities spur expansion in financial and capital markets. For these reasons, IFC works with clients to increase access to housing finance in emerging markets and consequently, to increase affordable housing. In 2002, IFCs Housing Finance unit was created, through which IFC launched a more concerted effort to engage in innovative and value-added housing finance activities. These activities include investment services, advisory services, and resource support. IFCs approach is to strategically address each countrys needs in accordance with its financial sector development. Our clients benefit from long-term lines of credit; partial guarantees of local currency credit issues to foster local currency mortgage lending; and warehouse lines to support securitization activities. In addition, mortgage market development occurs from strong primary market competition, and, where appropriate, secondary market conduits, making institution building one of IFCs key goals .Because there is a critical need in many markets to foster the production of affordable housing, we are actively pursuing the establishment of construction financing facilities. Given the rapid pace of innovation in this field, the Housing Finance unit is constantly developing new products and services. It works closely with IFCs Treasury Department and the World Bank to develop an integrated approach to housing finance.

T.Y.B Com (BBI)

28

Housing Finance

Housing Finance Key Facts : Since 2002, IFC has directly financed more than 76 housing finance institutions (HFIs) worldwide, providing over $2.6 billion in financing to these institutions in developing markets IFCs advisory services portfolio of over 28 active projects spans the globe, facilitating access to finance worth $21 million as of June 30, 2008 IFC is the number one international investor in terms of outreach to HFIs, working with more than 76 institutions in 37 countries On the advisory side, IFC is active in several frontier and conflict-affected countries including Afghanistan, Ghana, Honduras, Iraq, Pakistan, and West Bank & Gaza.

T.Y.B Com (BBI)

29

Housing Finance

T.Y.B Com (BBI)

30

Housing Finance

Introduction :The role of housing wealth on economic activity has recently attracted considerable attention among academic researchers, policy-makers and press commentators.1 This attention is partly explained by the sizeable rises in property prices and household indebtedness in several industrialized countries over the recent years (Debelle 2004, Terrones and Otrok 2004), and the need to understand both the determinants of such rises and their potential implications for monetary policy and .nancial stability. The recent global .nancial turmoil allegedly originating from the residential property market in the US has strengthened the interest in these matters even further. Beyond the policy considerations, there is a growing interest in assessing the eects of changes in property prices on consumption decisions, given the predominance of housing in total household wealth (Campbell and Cocco 2003, Muellbauer and Murphy 2008).

This paper studies the relationship between the structure of housing finance and the monetary transmission mechanism in several industrialized countries. We .rst show that there is signi.cant heterogeneity in the institutional characteristics of national mortgage markets across the main industrialized countries, and especially within the EU. Examples of such institutional characteristics include the typical duration of mortgage contracts, the required levels of down-payment (or inverse loan-to-value ratios), the existence (or lack thereof) of equity release products. We interpret these indicators as alternative measures of the degree of

development/.exibility of mortgage markets. There is in fact one channel, working from housing .nance to the macroeconomy, that we aim at capturing by means of these indicators: the extent to which mortgage contracts allow to translate the value

T.Y.B Com (BBI)

31

Housing Finance

of housing as a collateral into current availability of credit for households. In turn, this credit can be used not only to .finance new housing expenditure but also (nonhousing)

Housing finance in the industrialized countries :In this section we document that mortgage markets differ significantly across industrialized countries in terms of both size and key institutional characteristics, such as the prevailing contractual arrangements and the available product range. This heterogeneity is particularly evident within the euro area, where mortgage lending remains a predominantly domestic business activity, largely reflecting national traditions and cultural factors as well as the institutional settings of the local banking sector.

Table 1 summarizes some of the institutional indicators that have been identited in the literature as most likely to have a bearing on the relationship between housing wealth and consumption, as well as on the channels of monetary policy transmission (see, e.g., MacLennan et al. 1998 and Debelle 2004). We report data for a total of nineteen countries, including nine euro area countries, some European countries outside the euro area, Japan and the main Anglo-Saxon countries.

The indicators included in Table 1 are: (i) mortgage debt-to-GDP ratio; (ii) typical LTV ratio; (iii) type of interest-rate structure; (iv) typical mortgage contract duration, (v) disusion of home equity release products, and (vi) the IMF (2008) index of mortgage market development and completeness.

T.Y.B Com (BBI)

32

Housing Finance

Cross-country heterogeneity is pervasive in all indicators considered. Mortgage-to-GDP ratios vary widely across countries: values range between 13% in Italy and 116% in Switzerland. Among the large countries, Italy and France have the lowest ratios, while the ratios in the UK and the US are relatively high. Also typical LTV ratios vary significantly across countries, ranging between 50% in Italy and 90% in the Netherlands and UK.5 Cross-country variations in these ratios partly re.ect diferences in legal and regulatory frameworks.6 Hence, they re.ect - at least to some extent - institutional factors which are largely exogenous.

Housing Finance and monetary policy transmission The evidence :Institutional diferences across mortgage markets are often cited as a likely source of cross-country diferences in the speed and strength of the transmission of monetary policy impulses to the economy. The size and distribution of household mortgage debt, average maturity of contracts and type of interest rate adjustment are usually listed among the characteristics likely to determine the extent of the income and collateral efects induced by changes in interest rates (Debelle 2004).

BIS (1995) concludes that monetary policy could be expected to have comparatively stronger efects in Anglo-Saxon countries than in continental Europe (with the possible exception of Italy, where variable rate mortgages predominate). Borio (1996) notes that this split coincides with that between countries with more or less developed financial structures, though this does not amount to conclusive evidence. Iacoviello (2002) relates variations in the magnitude of output responses

T.Y.B Com (BBI)

33

Housing Finance

to monetary policy shocks across European countries to diferences in financial systems. Likewise, Angeloni et al. (2003) refer to institutional diferences in housing finance as one possible explanation for the more muted response of private consumption to monetary policy shocks in the euro area compared with the US. In recent years, the remarkable heterogeneity in private consumption developments between some continental European countries and most AngloSaxon countries at a time of (common) worldwide low interest rates has seemed to provide further confirmation about the importance of structural differences in mortgage markets across countries in determining the strength of the housing channel.

In this section we estimate a baseline VAR model for 19 advanced countries, including Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Spain,

Sweden, Switzerland, the United Kingdom and the United States. The data are quarterly and cover the 1970:1 to 2008:2 sample period. For a great majority of the time series the source is the OECD Economic.

T.Y.B Com (BBI)

34

Housing Finance

T.Y.B Com (BBI)

35

Housing Finance

Housing Scenario :The total housing shortage in the country in 1997 was estimated to be 13.66 million units, of which 7.57 million units were in urban areas. More than 90 per cent of this shortage was for the poor and low income category. Against this background, the National Housing and Habitat Policy (NHHP) was formulated in 1998 and stressed on:

removing legal, financial and administrative barriers for facilitating access to loans, finance and technology; ensuring that housing, along with supporting services, was treated as a priority and at par with the infrastructure sector; the creation of surpluses in housing stock; and providing quality and cost-effective shelters especially to the vulnerable groups and the poor.

The draft National Urban Housing and Habitat Policy, 2005, while focussing on urban shelters, emphasised on the promotion of larger flow of funds to meet the revenue requirements of urban housing and infrastructure using innovative tools. It recognized that based on historical growth patterns, the urban population of India was likely to grow to 360 million in the year 2010 and to 533 million by the year 2025. The document noted the Planning Commissions projection of total

T.Y.B Com (BBI)

36

Housing Finance

requirement of urban housing during the 10th Plan period (2002-2007) of 22.44 million dwelling units including the backlog of 8.89 million units at the beginning of this Plan. With rising incomes, favorable demographic profiles, swelling middle class and rapid urbanisation, the demand is projected to rise to 73.96 million units for rural and urban areas during the 11th Plan period (2007-2012).

Role of the National Housing Bank :The National Housing Bank (NHB), a fully-owned subsidiary of the Reserve Bank of India, was set up in 1988 to accelerate housing finance activity in India and to promote the Housing Finance Companies (HFCs) by providing financial support to them. It acts as the apex institution and regulator of the housing finance industry.

The NHB has issued guidelines to the HFCs on prudential norms for income recognition, asset classification, provisioning for bad and doubtful debts, capital adequacy and concentration of credit investment. The NHB also conducts inspection of the HFCs to ensure proper compliance with the prudential norms and prevent the affairs of any of them being conducted in a manner detrimental to the interests of the depositors or their own. Guidelines for asset liability management system for the HFCs have also been issued by the NHB.

Scope of Audit :As on 31 March 2006, there were seven HFCs under the audit jurisdiction of the Comptroller and Auditor General of India. The performance audit conducted between June 2006 and January 2007 has covered the working of the following five HFCs for the five years from 2001-02 to 2005-06:

T.Y.B Com (BBI)

37

Housing Finance

Housing and Urban Development Corporation Limited (HUDCO) BOB Housing Finance Limited (BOBHFL) Cent Bank Home Finance Limited (CBHFL) IDBI Home Finance Limited (IHFL) PNB Housing Finance Limited (PNBHFL)

The two HFCs, viz., Indbank Housing Limited and Corpbank Homes Limited, were not covered in this performance audit; the former has stopped its lending operations since 1998 while the latter was re-merged in October 2006 with Corporation Bank, its parent and promoter bank.

Audit objectives :The audit objectives were to assess: the trends in housing finance activity vis--vis those of the Central public sector HFCs during the period 2001-02 to 2005-06; the overall performance of the Central public sector HFCs against selecte

benchmarks; that controls relating to appraisal of applications, sanction and disbursement of loans were sound and effective, and covered the risk of lending; and that adequate monitoring mechanisms existed especially for timely recovery of dues and resorting to timely legal action in case of default.

T.Y.B Com (BBI)

38

Housing Finance

Audit Criteria :Audit Criteria identified for the purpose of the performance audit for different critical activities of housing finance were: The cost of borrowings, net interest margin, and ratio of employee cost to the disbursements in one of the leading HFCs in the private sector, viz., Housing Development and Finance Corporation Limited (HDFC) has been adopted for measuring the efficiency of the five HFCs covered under performance audit; System to verify credentials of borrowers and pre-disbursement conditions as laid down by the HFCs; Mechanism to monitor actual utilisation of funds; Level of Non Performing Assets; and Strategic guidance to deal with continuous defaults.

Audit methodology :This performance audit covered the assessment of requirement of resources, method of scrutiny of applications/ projects, procedure of scrutiny of applications including feasibility appraisal, disbursement procedures, recovery, follow-up and

T.Y.B Com (BBI)

39

Housing Finance

other legal formalities in accordance with the Issue Analysis and Study Design Matrix prepared for this purpose. For selection of units, two risk parameters viz., level of NPAs /defaults in the unit and/or level of sanctions to private agencies were identified. Number of units selected is given in Table 1: Table 1: Selection of Regional Offices/ Branches HFCs Total number of Regional Offices or Branches 20 23 12 16 28 Number of Regional Offices or Branches selected for audit

HUDCO BOBHFL CBHFL IHFL PNBHFL

8 3 5 4 6

Individual cases at unit level were selected on random sample basis with the risk parameter of level of default as the key parameter

Acknowledgement :The performance audit started with an entry conference with the Managements of the HFCs in April 2006. The draft Audit Report was issued to the Managements in March/April 2007 and to their Administrative Ministries (Ministry of Finance and Ministry of Housing and Urban Poverty Alleviation) in

T.Y.B Com (BBI)

40

Housing Finance

April 2007. Replies from the Managements of all HFCs except BOBHFL have been received and suitably incorporated in the draft modified Audit Report, which was issued to the Administrative Ministries and Managements in September 2007. A presentation on the audit findings and recommendations was made during the meeting of the Audit Board with the representatives of the Administrative Ministries and Managements of HUDCO, CBHFL, IHFL and PNBHFL in October 2007. The replies from the Managements of all the HFCs, and from the Administrative Ministries have been received and suitably incorporated in the report. The Management of Bank of Baroda (representing erstwhile BOBHFL) replied that in view of merger of BOBHFL with it with effect from 1 April 2006, the submission of reply was not feasible. Audit acknowledges the cooperation and assistance afforded by the Managements and the Administrative Ministries at all levels at various stages of this audit.

T.Y.B Com (BBI)

41

Housing Finance

T.Y.B Com (BBI)

42

Housing Finance

Case Studies :Because of most nations focus on mortgage finance when considering housing finance policies and regulations, and mortgages often fail to reach the poor, the case studies will look only at microfinance environments. For that reason, we look at cases where : 1) microfinance is thriving (as in Peru); 2) where it is deficient or declining (as in Indonesia); and 3) where special experiments in housing microfinance are currently being undertaken (including India, Pakistan, Mexico, and South Africa). Since much has been written on microfinance policies and regulations in general, we will limit this discussion to those that disproportionately affect housing microfinance beyond traditional microfinance.

T.Y.B Com (BBI)

43

Housing Finance

T.Y.B Com (BBI)

44

Housing Finance

Conclusion

We have study in Housing finance has come of age in India. Today , over 20 major housing finance Companies have a mortgage loan Portfolio of over Rs.100 billion The total flow of funds for housing from all major Institutions, including the Insurance companies and provident funds, is estimated to be about Rs 194 billion over the period 1992-97.

The housing industry is being Viewed as an engine of economic growth with a major role to play in the distribution of economic resources, with recent developments in the financial sector, there is need in the country to think carefully on the overall direction of reform in the housing finance sector, focusing on expansion of financial intermediation, development of secondary mortgage markets, down marketing of housing finance on market-based terms, and overhaul Of the legal and regulatory System.

T.Y.B Com (BBI)

45

Housing Finance

T.Y.B Com (BBI)

46

Housing Finance

References
[1] Ahearne, A. G., Ammer, J., Doyle, B. M., Kole, L. S. and F. M. Martin (2005): "House prices and monetary policy: A cross-country study", Board of Governors of the Federal Reserve System International Financial Discussion Papers n. 841.

[2] Alvarez, L. J., Dhyne, E., Hoeberichts, M. M., Kwapil, C., Le Bihan, H., Lnnemann, P., Martins, F., Sabbatini, R., Stahl, H., Vermeulen, P. and J. Vilmunen (2006): "Sticky prices in the euro area: a summary of new micro evidence", Journal of the European Economic Association, 4 (2-3), 575-584.

[3] Angeloni, I., Kashyap, A. K., Mojon, B. and D. Terlizzese (2003): "The output composition puzzle: a dierence in the monetary transmission mechanism in the euro area and the US", Journal of Money, Credit and Banking, 35(6, Part 2), 1265-1306.

[4] Angeloni I., L. Aucremanne, M. Ehrmann, J. Gal, A. Levin, F. Smets (2006): "New evidence on in nation persistence and price stickiness in the euro area: Implications for macro modeling", Journal of the European Economic Association, 4 (2-3), 562-574.

[5] Aoki, K., Proud man, J. and G. Liege (2004): "House prices, consumption

T.Y.B Com (BBI)

47

Housing Finance

and monetary policy: a financial accelerator approach", Journal of Financial Intermediation, 13(4), 414-435.

[6] Aron J. and J. Muellbauer (2006), "Housing Wealth, Credit Conditions and Consumption", mimeo Univeristy of Oxford.

[7] Barsky, R., House, C. and M. Kimball (2007): "Sticky-price models and durable goods ", American Economic Review, 97(3), 984.998.

[8] Becker, R. A. (1980): "On the long-run steady state in a simple dynamic model of equilibrium with heterogeneous households", Quarterly Journal of Economics, 95(2), 375-82.

T.Y.B Com (BBI)

48

Housing Finance

T.Y.B Com (BBI)

49

Housing Finance

Bibliography
1. Newspapers referred to are :

The Economics Time Times of India

2. Websites visited are :

homeloan. Netazee. com. www. Dialbank.com. www. apnapaisa. com.

3. Books Referred :

International banking & finance - Dipak Abhyankar

T.Y.B Com (BBI)

50