Transcript The Sub-Prime Market, Predatory Lending, and

State Housing Banks:
Handle Carefully!
Douglas Diamond
15 March 2006
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What is a State Housing Bank?
Direct state intervention into the primary market,
through a state-sponsored entity (usually
specialized in housing; often not a real bank)
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A few are partly private, and/or run on commercial principles
Using market or special funding, maybe special instruments
In 1960s-80s, it was usually a bureaucratized, civilservant mentality state lending window
Today, it may take many forms:
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Secondary-market window taking on primary market risks
 Sure sign: buying loans permanently with recourse
Public-private entity aimed towards lower income
Second round of SHBs because still no private options
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Where are/were State Banks?
If you look hard enough, they have been
almost everywhere (maybe > 100?):
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Almost all of Africa, above and below the Sahara
(not South Africa)
Most of South America, Caribbean, Mexico
Most of Asia (incl. Japan, Korea, India) and all of
the Middle East
Some of the ex-Communist countries, but not all
Generally not in Europe and North America,
although there are/were close cousins (CFF in
France, BH in Spain, CMHC in Canada, GSEs and
S&Ls in the US)
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Why State Housing Banks?
In theory, it can pioneer the business of
market-rate lending for housing.
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The Imperfect Market Rationale
In practice, it is usually a convenient shortcut
in delivering housing finance without
establishing proper macro or micro
conditions in general, and/or for delivering
major subsidies from special funding.
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Record of
State Housing Banks
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Majority suffered large losses and failed/froze
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Some caused damage much larger than any possible
system developmental benefit
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Most provided political benefit of making visible the
“concern” of the state/politicians and supported
housing construction when conditions were adverse
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e.g., 1-10% of GDP is common, like the US S&Ls
Maybe benefits were worth the costs??
Some Not So Bad Cases (<10?)
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Jordan (HBJ), Chile, and Thailand were able to keep
theirs on commercial principles, and demonstrate
potential for lending at lower middle income levels.
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Poor Performance
of Housing Banks
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Subsidized fund sources mean HBs are not
disciplined by the market
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Operating costs are therefore usually high
With rates subsidized, borrower selection may be
politicized or automatic (entitled)
Actual borrowers often wealthier than intended
May crowd out other lenders
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May seek special subsidies to survive if competition is
permitted
Public prefers the lottery prize
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Fatal Performance
of Housing Banks
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Credit losses are high
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HB reluctant to enforce liens for social/political reasons
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New lending comes to halt due to low recoveries
Funding is unsustainable or very distortive or
deeply unfair
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Borrowers often view loans from HB as grants
Budget-based or state-guaranteed debt, special tax
fund, forced purchases, advantaged deposits
Mortgage instruments may be inappropriate
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Fixed rates/dual indexes in an unstable macroenvironment
Other market risks not managed
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Is that the point, to “lend” in the face of likely adversity?
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Lesson 1:
Think twice before creating statesponsored entities
Fix the problems in the economy, enable the private
sector
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But may have to address the political vacuum….try
working through private sector instead
Secondary market entities have a better risk/benefit
profile as state interventions
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Limited subsidies and risks; private role
But the latest trend is for state-sponsored secondary
market entities expanding into the primary market
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Philippines, Hungary (FHB), Kazakhstan (KMC), Ukraine (SMI),
Fannie Mae
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Three More Lessons
Have a large private-sector role
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Public/private entities are more likely to have
strong commercial culture: Jordan, Ghana
Attitude of top management is key
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Top management should be private sector, NOT
political
Success of Jordan, Ghana, and Thai greatly due
to management
Limit access to the lower middle-class
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Leave room at the top for the private sector
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Even More Lessons
Avoid monopoly access to special funds or
subsidies
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Do not mix deep subsidies with market pioneering
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Avoid mixing development with special funding
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Truly an effective but disastrous combination
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May need to “bribe” private sector to enter, but that’s better
than leaving state bank alone
If have to carry subsidies, separate from commercial activities
Iraq: First idea to cross their mind for speedy impact
Move to full privatization ASAP
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Try a sunset provision to state-sponsorship
No perfect substitute to getting the state out entirely
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E.g., Fannie Mae messed up because it still has perverse
incentives…and it always will tend do so
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