After more than fifteen years of transition, many countries still experience only sluggish development of market-based housing finance, due to legislative hurdles as well as to low levels of financial affordability, especially on the part of lower and middle income groups. The goal of this study, therefore, is to assist Governments of countries in transition in designing working housing finance markets for their citizens. It is intended to enable decision makers to select appropriate measures for the implementation of different financing schemes. It is designed to show politicians, authorities, the banking community and other interested partners how housing financing policies could be developed and improved, which general housing finance systems could be applied, what experience of some specific solutions has shown and which criteria and information could be used in evaluating, preparing and selecting appropriate policy measures.
The study draws on experience from the most advanced economies of the various financing techniques. Given the heterogeneous experience of these countries, the systems and their application can not simply be copied. Properly adapted to local conditions, however, they are likely to help in laying the ground for new solutions, and thus deserve a closer look from all interested parties.
The report illustrates how over the years a great variety of distinct systems have emerged, each reflecting the historical, societal and economic particularities of a given country, and how in most cases no single type of housing finance exists. Generally, various techniques arise side by side, sometimes dominated by a typical feature. To a large extent, a combination of different financing tools is the rule, while no system can be regarded as the “best”. Whether a particular technique is appropriate for serving a given purpose depends as well on the individual benefits for borrowers and lenders, and also on the level of economic development, on the household’s capacity and willingness to make savings, and on the rate of inflation and overall monetary and fiscal policy. Other decisive factors are the legal and administrative infrastructure, and the lack or existence of primary markets for mortgages, as well as the fact that the financing of rental and home ownership units may require different approaches according to circumstances.
Common to all systems is the need for stable economic conditions and for a legal and fiscal environment conducive to an efficient allocation of capital. This requires first, and most importantly, a reliable legal system securing property rights and contractual freedom as well as rapid foreclosure procedures. Further prerequisites are modern systems of supervision of banking soundness and safety and as few obstacles as possible concerning property transactions.
Once these conditions are established, the appropriate housing finance institutions will emerge. Whether additional interventions by the government are necessary and justified to support some rather than others is a matter of endless debate. Put forward as a supportive argument is often a real or perceived public interest in the mending of market distortions, in the provision of low interest credits for disadvantaged households or in the protection of new branches against foreign competition etc. Some of them might be valid, others less. In any case, governments should be cautious and beware of ill-advised steps leading to inefficient institutional arrangements and ongoing political haggling over privileges and subsidies.
One possibility for minimizing the risks is to evaluate the policies at hand and to measure their impacts carefully. The present study, therefore, includes an analytical tool which illustrates how the various interests of lenders, borrowers and regulatory bodies can be structured, weighted and assessed, and how from the advantages and disadvantages of different finance instruments a conclusion can be drawn regarding their suitability in particular circumstances.
This evaluation method is illustrated by three distinct financing systems, whose selection must not be interpreted as an official bias towards any of these schemes. A multitude of other and often more widely applied practices exists throughout the United Nations Economic Commission for Europe (UNECE) region. The chosen formulas bear witness to the fact, however, that housing finance has evolved over the years and that new developments may still arise.
The study contains six chapters. The first chapter describes the actual situation and conditions of housing finance in countries in transition. It highlights problems and bottlenecks regarding the housing and capital markets, and main features of the existing banking systems, summarizing some of the efforts made so far to improve their effectiveness.
Chapter II recalls the basic elements, objectives and mechanisms of housing finance. It explains the interplay between the origination, ultimate holding and servicing of mortgage loans. It indicates the major sources and ways by which financial means are provided, and the various risks linked to this particular business.
The third chapter gives an overview of the main financing instruments used in the ECE region, subdivided into conventional and specialized deposit-based systems and systems based on bond markets institutions, securization, State funds and third-party lending.
Chapter IV describes three specific financing instruments used in different parts of the ECE region today, namely the “Bausparkassen”system representing a contractual savings scheme, the Danish mortgage bond technique and the United States variety of mortgage-backed securities (MBS). A standardized outline is followed, embracing the historical background of the formula, its legal framework, its relative position within the national context, its main characteristics as regards assets and liabilities, the role played by the State and a short outlook on possible developments.
The fifth chapter looks at ways in which policy can be evaluated in the area of housing finance. Decision makers faced with the task of choosing among different alternatives are offered a checklist for structuring the evaluation criteria which occur most, reflecting the differing interests of lenders, borrowers and other stakeholders. They are moreover made familiar with the basics of cost benefit analysis which, like many similar methods, has been developed over the years to be applied in the evaluation procedures. Its practical application is illustrated in annex IV where a rough assessment of the three finance systems of chapter IV can be found.
The final chapter contains conclusions and general remarks stressing once more the importance of a sound legal environment and of the existence of efficient institutions and a stable economy, and stressing the fact that no single financing scheme is likely to respond to the different needs and requirements of the different countries. Given the merits and deficiencies that all instruments have, their appropriateness evolves over time and differs for each country in accordance with economic, political and social development.
CONTENTS
Foreword
Preface
Introduction
Chapter I Present State of Housing Finance in Countries of Transition
Chapter II Major Elements of Housing Finance
Chapter III Main Financing Instruments in the UNECE region
Chapter IV Selected Three Private Housing Finance Instruments
Chapter V Evaluation of Private Housing Finance Systems
Conclusions
Annexes
Bibliography
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