Vagaries of Consciousness
- We have to create a housing finance market in the country
We now reflect on some of the key aspects of implementation of the scheme, particularly its design and financing. At the outset, let us exclude the possibility that the scheme could depend on any fiscal support. There is no fiscal space. What is more, there are unrecognised liabilities, both at the federal and provincial level, as pointed out by the prime minister, which, once recognised, would further erode fiscal space. A peripheral contribution we would suggest, if at all it becomes inevitable.
Second, there should not be a concept of selling land as the country would not have enough land, particularly in urban areas where the demand for housing would be highest. Consequently, vertical development should be preferred to maximise land utilisation, but commensurate with the civic amenities available to support such living styles (i.e. proper lifts, emergency response, electricity, gas and water, etc.). Innovative ways should be developed regarding the property rights within the scheme. In many housing schemes currently in practice, developers have formed informal sale-purchase-transfer arrangements within the project, effectively skirting formal registration and building regulations. This may be hazardous without proper legal bases, but provides a model of how flexible and efficient regulations would look like to promote a well-functioning market. The legal framework for the scheme should, therefore, build provisions along these lines.
This means that individual schemes should be based on a given piece of land to be held in an appropriate special purpose vehicle (SPV), such as a Trust, only for the purpose primarily of housing development together with appropriate amenities and commercial areas. Mortgage and lien on the housing unit would be allowed along with sale-purchase-transfer provisions along the lines suggested above. The continued public ownership of land would enable cross-subsidisation within various alternative uses. Such an arrangement would ensure that the developers who would not carry the requisite skills and resources are prevented from jumping into the fray and dilute the interest of serious developers.
A promising avenue to lower costs and write mortgages based on profit sharing arrangements is possible through the Islamic modes of financing
The success of the above model would depend singularly on the selection of qualified developers through a competitive process consistent with the procurement law and rules. Any attempt to circumvent or short-circuit competitive award would risk jeopardising the feasibility of the scheme. Although there are many ways in which the competition can be held, we recommend that a dynamic list of pre-qualified developers should be maintained which could be periodically updated. For each scheme, only the pre-qualified bidders would bid essentially for a “concession” at a certain price implicit in the valuation of required facilities and schedule of completion – housing-units/commercial/parks/amenities. Foreign investment should be welcomed only through participation in the competitive process. Given our own self-sufficiency in this housing development, even government-to-government deals, that allow exclusion from competitive procurement, should be avoided.
The sustainable model of housing would call for approximation of market-based outcomes, which would truly reflect the underlying costs of resources involved, except to the extent of cross-subsidisation within the overall structure. There is a huge negative externality that government can remove because of its intervention and thus improve market performance and enhance efficiency. That alone is a huge economic and social gain. This is related to uncertain titles, tedious building regulations, cumbersome transfer procedures, unreasonable rates of multiple taxes and, above all, non-performance of developers. Federal and provincial governments through a common model would provide one-window solutions to all these rigmarole.
We now turn to financing which is indeed one of the most critical needs for the growth of housing in Pakistan. The current level of financing is 0.25pc which is virtually nothing. Housing is a sector effectively financed by personal savings of households and investments from the developers. The basic reason for lack of bank financing is poor security of asset in view of a host of imperfections that lead to unbearable risk, the most debilitating being the difficulty in foreclosing mortgages.
It is paradoxical that despite being the safest avenue housing finance has failed to gain a foothold in Pakistan. There are three conditions for the safety of housing finance based on mortgage. (1) There are strong and efficient foreclosure laws and rules with requisite machinery for enforcement; (2) The loan-to-value ratio (LTV) should be less than about 80pc, implying an equity of 20pc; and, (3), the ability of the borrower to meet the repayment obligations. A recent amendment in the Financial Institutions (Recovery of Finance) Ordinance, 2001 has strengthened the legal provisions relating to mortgage foreclosure, which can now be effected without recourse to any court of law. The other two conditions are transaction specific and will have to be met to qualify for financing.
Those designing the scheme and determining eligibility of prospective owners have to keep the three conditions in view. The way the people are flocking to secure a form under the scheme indicates that people are not aware of their own obligation to contribute. This would lead to unnecessary disappointment, which should be avoided. More than 80 percent banking assets are in the private sector. SBP doesn’t direct banks on lending policies nor on pricing. It would be unrealistic to assume that the banks would begin to support the scheme merely on the fact that it is patronised by the government.
We have to create a housing finance market in the country, where none exists at the moment. A model of how to create a housing finance market is furnished by the recent World Bank initiative that supports Pakistan Mortgage Refinance Company (PMRC), established by the Government with majority shareholding of the private commercial banks. An IDA loan of $145 million from the World Bank would help PMRC to expand its Tier-II capital from a 20-year sub-ordinated loan as well as for a credit line to participating financial institutions who would also write mortgages. PMRC besides refinancing mortgages would be issuing bonds in the capital market based on the its underlying portfolio of mortgages. A cycle of refinancing and issuance of more bonds would ensue that would provide new liquidity for the purpose of expanding housing finance.
The basic features of the project indicate that 15,400 mortgaged loans would be refinanced by PMRC over a six year period, of which 5,000 would be of Rs3 million or less. The value of total refinanced amount by PMRC would be $400 million. This gives an average size of Rs3.5 million for a mortgage. The total mortgages in the country would rise to 150,000. The mortgages are for 15 years, and attempt would be made for making it for 20 year and at a fixed rate.
These numbers should act at a reality check on the scheme designers. This model, no doubt, should be replicated but scaling up from a very low capacity would be a big challenge. Even when resources are available, effective channeling and controlling business risks would not be an easy task. Fixed rate loans are generally not available. Derivate markets are not well established. Government intervention along with State Bank would be needed to mitigate this aspect through some innovative method.
A promising avenue to lower costs and write mortgages based on profit sharing arrangements is possible through the Islamic modes of financing. The Islamic banks have excess liquidity and could well be made partners in the individual mortgages.