NationalVOLUME 16 ISSUE # 04

Mortgage financing: The key to housing development

Lack of finance is the main hurdle to the development of the housing sector in Pakistan. Most middle class and lower income groups suffer from lack of funds. If they buy land, they have no money to build a house. This means that Prime Minister Imran Khan’s plan of building a vibrant housing market is not possible without developing a portfolio of mortgage finance.

The Western world had recognised the need long ago and it developed a mortgage framework. By contrast, in Pakistan out of 32 million households, mortgage financing is availed by fewer than 100,000 borrowers. In terms of GDP, mortgage financing is less than 0.5 percent. The situation was the same in India until 15 years ago, but now mortgage financing is over 10 percent of the country’s economic output.

The present government is sincerely trying to fill the gaps in the housing finance sector. However, one of the major impediments for banks to go for long-term mortgage financing is the absence of matching tenure liabilities. A bank’s maturity profile of liabilities is short term as 80 percent of deposits are short term. Interest rates are highly volatile in Pakistan which create a higher risk of default in the absence of fixed rate mortgages. The debt capital market is also small, with not many liquid instruments to hedge against long-term lending.

It may be mentioned here that the Pakistan Mortgage Refinancing Company (PMRC) was formed a few years ago with funding received from the World Bank at concessionary rates. The company has also equity investment from the Ministry of Finance and National Bank of Pakistan. Recently, the International Finance Corporation (IFC) has also invested in the company. The PMRC is using World Bank funding of $130-140 million along with its bilateral funding of Rs1 billion to lend to banks and non-banking financial institutions for mortgage financing to consumers. It is similar to the role of mortgage refinancing performed by Fannie Mae and Freddie Mac in the US.

Available figures show that till now the PMRC has funded around Rs11.8 billion to financial institutions, including over Rs3 billion each to HBFC and Askari Bank. Other PMRC borrowers include JS Bank, Bank Islami, HBL, Bank Alfalah, and a few other micro-finance institutions. It may be noted here that the PMRC provides mortgage refinancing at a discount to prevailing market rates, which varies with the income levels of various classes of borrowers. With a view to encouraging mortgage finance, under the recent initiative of Naya Pakistan housing, the State Bank of Pakistan (SBP) has issued directives to banks to maintain at least 5 percent loan portfolio in housing finance which includes both mortgage borrowers and builders and developers.

This is sure to give a boost to mortgage instruments as the demand will grow for PMRC refinancing, especially for Islamic finance. According to a report, the company is planning to raise Sukuk from the market to raise more finance. Initially, the PMRC was planning to raise Rs2 billion. Encouraged by high demand from corporate, development finance institutions and high net worth individuals, the PMRC has been asked to increase the issue size to Rs3.5 billion. The issue rate is fixed at 7.7 percent for three years. Since it is tax-exempt – for all but banks – the effective bond yield translates into 10.27 percent. This is much better than the current three-year Pakistan revaluation rate at 8.25 percent. The issue is expected to attract both old and new investors.

It is no secret that the demand for housing mainly emanates from the middle and upper middle-income groups. Since the buying is on a cash basis or at 2-5-year installment plans by builders and developers, less affluent income groups remain out of the loop. Now with affordable rates being offered under the Naya Pakistan Housing Programme and growing penetration of PMRC, the supply of housing for other segments of society may increase as mortgage financing grows in volume. In the absence of bank financing, builders and developers were financing projects through installment plans from buyers. With no regulatory check on builders, there was no surety of deploying buyers’ money in developing projects. There is no rating architecture for builders and there is no mechanism to safeguards buyers’ payments. There are several incidents where builders and developers failed to deliver the project. On the other hand, delay is a perennial problem.

As the housing sector grows, the prime need is to regulate the working of builders and developers in order to develop a trustworthy and vibrant housing market as well as a builder finance market. In this regard, there is a consensus of opinion among experts that the establishment of a Real Estate Regulating Agency (RERA) is a must as is the creation of a mechanism of separate accounts for projects. To minimise the possibility of fraud and create confidence in the consumer housing finance market, two vital steps needed are: implementation of foreclosure laws and clarity of land titles. These are the two areas where the bulk of disputes arise.