Transcript Housing Finance

Housing Finance: Latin American
Issues and European Views
Chile: New Market Developments
Felipe Morandé
Deparment of Economics
University of Chile
Paris, June 2003
Main factors in the development
of the housing finance market in
Chile in the 20th century:
I. Inflation
II. Public Housing Policy
III. Capital Market Development
I. Inflation
• From the forties until the early nineties, the Chilean economy
was marked by high and variable inflation rates.
• Nominal interest rates did not compensate high inflation.
• In the sixties, indexation mechanisms were incorporated to
saving accounts and long term credits. The Unidad de
Fomento (UF, a daily unit of account indexed to past inflation)
was created in 1967.
• Savings and Loans Institutions (Associations, AAPs) were
inaugurated in the early sixties, following the American model.
They collapsed in the seventies after financial deregulation
and economic turmoil.
II. Public Housing Policy
• It´s main goal has been to facilitate
homeownership to low income people, which have
less chance of accessing the housing financial
market.
• As of lately, this policy has been increasingly using
demand subsidies (which decrease with income
levels) and has been gradually withdrawing the
State as a house supplier.
III. Capital Market Development
• The continuous development of the capital market
and the increasing macroeconomic stability have
allowed a greater sophistication in the housing
financial markets: long term loans (in local
currency), deep secondary markets (including
securitization) with active and large institutional
investors, housing leasing, etc.
• Thus, housing financial markets are mature enough
for new improvements in order to achieve greater
depth and development.
Housing Mortgage Operations
1.800
70.000
1.600
Amount (US$ MM)
1.400
50.000
1.200
1.000
40.000
800
30.000
600
20.000
400
Monto
200
Nº de operaciones
10.000
0
0
1990
1992
1994
1996
1998
2000
2002
Number of Operations
60.000
Housing Mortgage Operations
as % of GDP
2,5%
Share of GDP
2,0%
1,5%
1,0%
0,5%
0,0%
1990
1992
1994
1996
1998
2000
2002
Housing Mortgage Operations
as % of Total Banking Loans
20%
17,3%
18%
16,6%
15,9%
16%
14% 11,9%
12%
11,9%
10%
8%
6%
4%
2%
0%
1990
1992
1994
1996
1998
2000
2002
Proposals for Deepening
Housing Financial Markets
1) Increase the maximum loan-to-value (LTV) limit
for mortgage titles from 75% to 80%
2) Implement Mortgage Insurance
3) Reduce cost of housing leasing
4) Implement Property Title Insurance
5) Develop of “Pre-Building Approval Insurance”
6) Facilitate access of people over 60 years of
age to housing financing
7) Develop of Reversed Mortgage
1. Increase the Limit of Housing
Finance
• It does not increase the Banks´ risk, since today they finance up
to 90% with complementary credits.
• Price reductions in houses have been less than 20% in worst
recession.
• A 5% increase is not going to affect the problem of asymmetric
information.
• In most developed countries the average limit (explicit or implicit)
is 80%.
• Allows a reduction of credits costs.
• Would have a marginal effect on institutional investors’ current
holdings of mortgage titles.
• Would have a marginal effect on banks’ credit ratings.
2. Mortgage Insurance
• They protect both the lender and the
institutional investor in case that the debtor
does not pay and the value of the
guarantee (house) is not enough.
• Mortgage insurance requirements are
similar to credit requirements.
• It does not protect the borrower.
2. Mortgage Insurance
The benefits of this type of insurance are quite clear, the main
issue are the costs. Costs should be equal or inferior to the
combined cost paid today by the borrower who finances more
than 75% by using mortgage loan complementary credit.
International experience indicates that the cost of insurance
fluctuates among a 0.5 and a 5% of the mortgage value,
according to the country and the payment mode.
Under reasonable assumptions, an insurance costs estimation
in Chile would be of 4.8% of the property value.
3. Cost Reduction of House Leasing
House Leasings are today an alternative that
allow financing up to 95% of the property
value.
This alternative has been used primarily in
houses priced below US$ 35.000
However, costs in house leasings are higher
than what banks or mortgage loan
corporations (MLC) usually charge, since the
main financing source for leasing is
securitization which displays some problems.
3. Cost Reduction in House Leasing
Proposals:
Facilitate the securitization process by making
it cheaper and periodic. This would allow a
reduction in financial leasing costs.
Develop an interest rate swap market. This will
help reducing the interest rate risk of lending
institutions (banks, leasing companies and
others) in the credit accumulation process
before securitization.
4. Property Title Insurance
In Chile, “Legal Title Reports” by lawyers are used to
check for title validity and diminish title risk.
However, these reports:
• Delay the transaction beyond reasonable time (up to 15
days)
• Neither compensate nor guarantee in case of errors
• They are costly (approximately 0,2% of average valued
properties, US$ 50.000)
• Every loan renewal or property transaction requires a new
title report (with the same cost); there are not scale
economies)
4. Property Title Insurance
The implementation of Property Title Insurance implies the following
advantages:
 Protection of homebuyers
 Protection of lending institutions and institutional investors (collateral)
 Efficiency due to specialization (24 a 72 hrs.)
 Reduction of loan renegotiation (50% to 60% discount in the insurance cost)
 Economies of scale in case of real state developments
 Development of a secondary market for mortgage loans
These advantages imply savings for the economy of more than US$ 10 million per
year (or around US$ 200 million in present value)
5. Pre-Building Approval Purchase
(Pre-sold) Insurance
• Pre-building approval contract: is the sale which is carried
out before the definitive building approval by the city
government (Municipality). This contract is a legal
promise that involves some form of a down payment by
the buyer for the right to close the purchase and have the
property title when the building is finished and approved
by the municipality.
• An insurance policy guarantees the buyer that he will be
reimbursed of the amount paid in advance if the building
is not finished. It could also contemplate the coverage of
compensatory damages.
5. Pre-Building Approval Purchase
(Pre-sold) Insurance
•
At the moment, between 36% and 45% of properties are
sold with a pre-building approval purchase contract, but
less than a third is done by using coverage provided by
insurance companies.
•
The policies costs fluctuate between 0.8 and 5% of the
insured amount. Much more than in Spain (0.3 to 1.2%).
•
What is needed to be done to diminish the cost and
spread the use of this insurance? Apply a mechanism
already in use in Spain:the real estate company can only
use the incomes coming from pre-construction purchase
payments in the same project, restriction which can be
controlled by the insurance companies.
•
Social benefit: reduced cost of housing.
6.Mortgage Loans for People
over 60 years old
• There is a significant potential demand of people
over 60 year old for mortgage loans: those that buy
their first house, those that wish to move, and those
that want a second one.
• The main restriction for the elder in order to obtain a
mortgage loan, is to get a Mortgage Life Insurance
(which is granted only to people in good health
conditions).
• Banks and institutional investors require Mortgage
Life Insurance in order to issue mortgage loans.
6.Mortgage Loans for People
over 60 years old
Proposals:
• Old people usually have some wealth (perhaps a house) that
can use as collateral for a loan, or for a mortgage. So the
main point is that banks can lend them money with a low
loan-to-value limit and exempt them from having mortgage
life insurance. In case of death, the house should be
liquidated and the proceeds go to the lending bank.
• Leasing operations financed with leasing corporations own
capital can also be offered (although they would be more
expensive)
7. Reversed Mortgage
• The owner of a house requests a loan against his property
value. He/She can make liquid his/her property while still
living in it.
• Unlike a traditional mortgage, it does not require a
reimbursement of the loan while the applicant lives in the
house.
• The amount of the mortgage is determined among other
things by the applicant age: the higher is the age of the
applicant, the greater is the percentage than it is possible to
be borrowed.
• Cultural barriers? Bequest motive?
Goals to be achieved
• The first three proposals point towards facilitating
access to home financing to people that do not
have (yet) saving capacity to make the down
payment.
• Proposals four and five focus on reducing
transaction costs.
• The last two proposals look for more financing
opportunities for elder people.
• But overall, the seven proposals are for deeper
and more complete housing financial markets in a
environment in which this is feasible.