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Approaches to housing finance in developing countries
Approaches to Housing Finance in Developing Countries HAROLD ROBINSON*
I. INTRODUCTION The crux of the housing dilemma is financing. The need for financing permeates all levels of income, from sites and services to sophisticated home banking. As I noted at last year’s Course, despite an old biblical saying that “Money is the root of all kinds of evil” money is the essential ingredient in the alleviation of the housing shortages and inadequacies that spawn the resulting evils of disease, crime, lowered productivity and social and political unrest. Social and physical housing programs can be devised with relative ease. Their imAlthough, it has become trite to plementation depends upon the availability of capital. say it, long term loans at reasonable interest rates and small downpayments are still the global key to placing housing within the reach of most income groups. Without proper financial financing, housing plans and programs are paper tigers. This means permanent institutions which can properly utilize public funds and support, and private institutions which can generate savings and other resources and channel those savings and resources into housing. The sources of money for housing are the same regardless of country: government, private lenders and private institutions, or a combination thereof. Every country, no matter how poor in financial resources, has some form of public housing agency directed toward low income families. These agencies funded from annual Governmental budgets, special tax impositions, bond issues and external borrowings. Most countries have public home financing agencies which either originate, hold and service mortgages on housing built by government or lend to purchasers of privately constructed housing. Most countries, too, now have some kind of private home finance arrangements. These may be formal or informal in nature. They may consist of individual lenders, usually at high rates of interest and short maturities; the private solicitors of the Caribbean; the building societies of Great Britain and the Commonwealth countries; multi-purpose banks; cooperative banks; the savings and loan associations of the United States and Latin America; and other such media. The common denominator is an insufficiency of funds for lending
and the high cost of borrowing. Almost a year and a half ago, the Center for Housing, Building and Planning of the United Nations conducted an Ad Hoc Meeting of Experts on the Financial Management of Government Housing Projects, for which I wrote a basic paper, to explore the problems resulting from government funding of housing. Four forms of government activity were *Prepared
for the EDI,
World Bank.
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examined: (a) government construction for rent; (b) government construction for sale; (c) government assistance to non-profit housing institutions; and (d) government insurance of mortgages. The three common problem areas were (a) problems caused by the source of funds, (b) problems resulting from the inadequacies of administration, and (c) problems due to the groups served. The obvious was confirmed: most housing, even
so-called “‘private” housing, enjoys some form of government assistance, whether it be public subsidies, tax benefits, or central bank support; that the problems and solutions are global in character and repeat themselves country to country. Because of this commonality, treatment
it was equally obvious that the experience of the problem in other countries.
II. NEED FOR ASSURED
CONTINUING
of one country
SOURCES
has relevance
to the
OF FINANCING
Demonstration projects financed by external agencies are not the solution to the housing problem. Demonstrations can illustrate better planning, minimum standards, and more efficient construction techniques, but without an assured source of continual financing, they are only of academic significance. This uncertainty of a continuing flow of funds plays havoc with programming and with financial management. “Stop and go” funding makes cash flows impossible to estimate. Institutions deteriorate for lack of activity. Construction and materials industries which must incur debts to be amortized over time depend upon a constant demand for their product or they cannot develop. Labor forces disappear. Prefabrication plants with their need for a permanent market to justify a fixed investment are particularly affected. For the public sector, particularly, lack of assured annual income for construction and lending leads to uneven borrowing practices with its concomitant mismanagement of cash flows and over staffing (agencies never reduce staff commensurately with reduction in income). To some degree, formulation of a national housing policy and long term allocation of resources to housing on a continuing basis can help resolve this problem. Generally, as in the developed countries, the public housing agencies have recognized this and have enlarged their horizons and programs. Whereas, earlier they were construction agencies housing authorioperating under such titles as “national housing institutes, ” “national ties,” or “public utilities companies,” now they tend to engage in the formulation of over-all housing policy and to bear the more grandiose title “Ministry of Housing” or “Ministry of Housing and Urban Development.” Where this is the case, it has been the result, generally, of external influences and a copying of the institutional framework of the countries of Europe and the United States. Lately, too, governments in the developing countries have become more cognizant of the need for sophisticated forms of housing finance and financial institutions and are giving lip service, at least, to the concept of housing within the context of urban, regional and national development and national housing policies which allocate financial resources on a recurring basis. There has been a decided trend toward consolidating the various housing activities under one roof. In Nicaragua, for example, the National Housing Institute which had been limited to construction of low income housing has merged with the savings and loan system to become a National Housing Bank. Chile has a full fledged Ministry of Housing and Urban Development which incorporates earlier agencies dealing with construction,
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middle income savings programs, and urban development. Brazil has graduated from the COHABS (local public housing authorities) and cuxias economicas (public savings banks) to a National Housing Bank whose title has become a misnomer with its venture into all kinds of urban development. In the Camerouns, a Ministry of Equipment, Housing and Land has taken the place of a variety of agencies. The Philippines is in the midst of consolidating its institutions dealing with housing and human settlements. This type of action should facilitate the resolution of some of the financial problems. III. THE PUBLIC SECTOR
Low income, subsidized housing has always been regarded as the responsibility of government because of the risks involved, real or imagined, the need for subsidies, and the lower rate of return on the investment as compared to commercial ventures. Consequently there is an avoidance of that income level by the private sector. A. Shiftfrom
rented to sales housing
In the past, government action in low income housing tended to be in the form of the construction and management of rental housing on a subsidized basis. This was the early experience of the United States. More recently, the policy of the United States has been to focus on forms of subsidizing private ownership, e.g. paying rent differentials to private landlords. In the developing countries, the policy has also tended to shift from rental housing to housing for sale in order to avoid-and evade-the problems of management and maintenance and the staggering delinquencies in rent payments, and to inculcate in the occupants a sense of ownership responsibility. In Latin America, particularly, this shift from rentals to sales has been noticeable due to the lending policies of the InterAmerican Development Bank (IDB) and the Agency for International Development (AID) under the Alliance for Progress. The World Bank’s loans for sites and services projects have had a similar effect. In Latin America the Social Progress Trust Fund of IDB emphasized “self-liquidating” projects, that is establishing a debt service that was based on the recovery of the full cost of housing. However, the term “self-liquidating” is susceptible to varying interpretations. AID’s housing investment guarantee program, for example, specifically refers to self liquidating projects. Yet, AID housing investment guarantee projects that approach low income, have substantial host country capital or interest subsidies which make it possible to absorb the high interest rates that the AID program demands. The same is true of World Bank funded sites and services projects. B. Enforced investment schemes A relatively recent trend is the use of enforced investment in housing and the imposition of special taxes whose proceeds will be devoted to home financing. In 1963, for example, Mexico revised its banking laws-with a loan incentive of $30 million from AID and IDBto require mortgage banks and the savings departments of commercial banks to invest a certain portion of new income from savings and bond issues in lower income housing. In the course of four years, over $600 million became available for housing through this device, although some was siphoned off for other developmental purposes. The Dominican Republic requires foreign insurance companies to invest a certain amount in housing bonds. For years, Chile has required industries to invest 5% of their income in housing or turn it over as a tax to the national housing corporation. In 1960, when the savings and loan
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system was established, industries were given the option of the earlier legislation of freezing their contribution in accounts in the savings and loan system. 1 am sure that an examination of the laws of other countries will reveal similar forms of compulsory investment. C. Special taxation measures Special taxes for housing is another form of resource for publicly sponsored housing. A number of Latin American countries also provide for severance pay for leaving private employment but permit early draw-downs for housing. In Brazil, a payroll tax has been responsible for the largest input into the Brazilian Housing Bank. El Salvador has followed suit. Mexico, too, has imposed a tax on employers that takes the form of compulsory savings and provides financing for INFONAVIT. Jamaica is a recent example of this form of tax. These tax devices have the effect of an increase in the minimum wage They since they are on employers and ultimately rebound to the benefit of the employee. are also easily collectable since the existing social security system is used. In Mexico, in addition, a check-off of debt service on housing loans based upon a percentage of income and an anticipated wage increase is estimated to result in accelerated repayment of debt service that will greatly increase the sums available for lending. About a year ago, while in the Philippines as a consultant on labor union housing, I suggested a similar tax but with the proceeds to be channelled through Workers’ Cooperative Home Savings Banks and used to subsidize interest rates on mortgages originated by such Banks and sold to private purchasers. This latter is a departure from the Mexican system which utilizes the tax proceeds for construction and long term mortgages. Used as interest subsidies, these funds can generate much more housing than when used for construction itself.
D. Continuing failure to reach low income groups In general, however, the very low income groups are not being adequately served by government because of the magnitude of assistance required. For a variety of reasons, the tendency is for the government agency to edge up in the income scale and serve a group for which the agency was not created or to build a low-income project as a particular agency demands. The one shot low income projects financed by external sources can only The answer, if one exists, is the capture of internal resources, a act as a demonstration.
reduction of standards, expansible housing and educating the beneficiary of assistance to his financial responsibilities. However, a real solution has yet to be devised. E. The effects of non-collection The high rate of non-collection of rents and debt service where government is the landlord or creditor is a phenomenon of government housing projects that deserves more attention. Not only does this result in unplanned subsidies and inequities, but it necessitates additional borrowings and increased governmental debt service for programs which had looked to a recoupment of purchase price for their continuance. Unfortunately, too many government agencies and public officials regard the goal as one of meeting a construction deadline or a promise to build a certain number of dwelling units. There is a tendency to “walk away” from collections of rent and debt service for political, social or public relations reasons or to adopt a policy that “low income people do not pay.”
Where government is directly involved a creditor, the issue oj’ high delinquencies will continue to plague the housing agencies. The solution rests with an insulation of govern-
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to Housing Finance in Developing
Countries
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ment from the home purchaser (or renter). One obvious means is to channel all mortgage funds through private lending institutions. Another is the use of the single mortgage cooperative in order to utilize the self policing power of the membership. Where feasible, a check-off of debt service at source of employment (as in Mexico) should be employed. IV. THE PRIVATE
SECTOR
Private home financing sources in the developing countries have traditionally favored the higher income groups so that, with government concentrating on the low income strata through public institutions and public funds, there has been a gap in the income groups served. As in developed countries, lower middle income families have tended to be neglected. Either their incomes have been too high to make them eligible for the subsidies of low income housing, or insufficient to obtain private financing. External assistance, with few exceptions, has stressed low income rather than middle or lower middle income housing. One exception has been AID’s concessional loans (not to be confused with the investment guarantee program) and technical assistance to savings and loan associations in Latin America. Housing for low income groups was the thrust of the U.N. and U.S. emphasis in the 1950’s on aided self help and of the Social Progress Trust Fund which provided over $600 million of low cost money for Latin American Governments. It is the thrust of the more recent sites and services loans of the World Bank. A. Savings and loan programs In the developing countries, middle and lower middle income families have had to “scrounge” for themselves or pressure low income housing governmental institutions to depart from their legislative objective. AID’s drive to establish home financing institutions in Latin America has had the collateral effect of “taking some of the heat” off administrators of low income programs and has demonstrated the feasibility of (1) home financing institutions designed to capture savings and make housing loans at reasonable terms, and (2) the ability to save where that ability and willingness were previously denied. This does not mean that these middle income financing institutions have developed purely with their own resources. They have had the advantage of considerable external technical and financial assistance at subsidized rates of interest, sometimes as low as 3/4% for 40 years, coupled with host country matching contributions. In short, they too, have been subsidized to make their initiation and early operation possible. The AID stimulated home financing institutions have taken the form of the savings and loan associations of the United States. These are the savings and loan associations which were derived from the building and loan societies of Great Britain and mutual savings banks. They are specialized institutions whose function is to make loans for housing. However, there is a trend in the U.S. to make these institutions more multi-purpose. Unlike the building societies of Great Britain and the Commonwealth countries, savings are not tied to shares and generally borrowers need not be members of the associations. In the United States, the associations chartered by the Federal Government fare called “mutuals”, that is, cooperatively owned and, in theory, cooperatively managed. State chartered savings and loan associations are generally stock companies which operate like mutuals in their lending practices and can take advantage of savings deposit insurance and mortgage insurance offered by the Federal Government. Partly because the early U.S.
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technicians recruited for temporary assignments were from “mutuals” and partly because the basis for U.S. assistance in Section 601 of the Foreign Assistance Act, which couples savings and loan associations with cooperatives, the U.S. stimulus was initially directed toward the creation of mutuals in Latin America. Then, too, mutuals carry with them the connotation of serving the “little man”. Nevertheless, AID has provided assistance both in the technical operation and financial support of stock companies as in Nicaragua and El Salvador and Honduras. In fact, there is now a movement in the United States among many mutuals to convert to stock companies. The ultimate objective of a savings and loan system is, of course, loans for housing, supported by mortgage documentation. The success of the system is based on the assumption-well founded in the United States and many developing countries-that there is a capacity to save in any economy given the proper incentives and savings institutions, and that savings and complementary internal resources must be the principal base for developing a home construction industry. This concept has been tested in the last fifteen years
in a dozen Latin American countries andfound
to be true.
B. The Chilean experience Perhaps a chronological example of how the first savings and loan system in Latin America came into being will be instructive and demonstrate the way in which local support can be generated. In a sense this is somewhat biographical as well. In 1957, when I was transferred from Israel to Chile as U.S. Housing Adviser, the first fact that struck me was the concentration of government on low income housing (though often siphoned off into middle income families) and the lack of home financing at rates comparable to those in the United States. Housing credit in Chile was dominated by the Corporation de la Vivienda (Housing Corporation), a government corporation building housing for rent and sale, and the various (37) social security agencies. Private lending was virtually non-existent except at exorbitant rates of interest, ridiculously short maturities and oppressive downpayments. Moreover, inflation was taking its toll and the social security agencies which had been lending for housing were being decapitalized. Fortunately, Chile had been housing-conscious for many years and I found eight housing plans under discussion for which 1 tried to provide some catalytic action. Drawing upon the experience of the United States, I drafted sample legislation (I had had a legislative drafting background) and supporting memoranda providing for the creation of a governmental agency like the U.S. Federal Home Loan Bank Board to charter, supervise and assist financially private savings and loan associations, and with savings deposit and mortgage insurance powers. An innovation, drawing upon my experience in Israel, was the adjustment of savings and mortgage debts to an index (the wage
index, in this case) to offset the ravages of inflation which were deterring people from saving and decapitalizing the lending banks and social security agencies. The need for housing for middle income families was obvious and the ability to pay for housing, given reasonable repayment terms, was clearly indicated and backed up by a study made by the prestigious Chilean Steel Institute. There was also an acceptability of the Israel technique for adjusting to inflation and the transferability of that concept to the Chilean economy. In 1958, pursuant to an agreement between AID and the Chilean Chamber of Commerce of the Construction Industry, a two man team of U.S. experts in savings and loan associations and housing cooperatives was recruited to visit Chile and examine in greater detail
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the feasibility of a mutual savings and loan system and help in developing in detail the blueprint for such a system. Within a month a firm legislative proposal was outlined and Finally, in 1960, a legislative decree was enacted submitted for local consideration. creating a Central Savings and Loan Agency (Caja Central de Ahorros y Prestamos) with the power to charter private mutual savings and loan associations and financially assist them by making loans to them, depositing funds in them, and purchasing their mortgages. Savings insurance and mortgage insurance were included to protect the saver and induce him to save and permit the associations to feel secure in their liberal lending policies. Tax exemption on savings and mortgages was another incentive with the indexing of savings and mortgages being the most persuasive factor. An added source of funds resulted from allowing industries, which previously had been compelled to invest a certain amount of their returns in housing, to deposit those sums in a savings and loan account, frozen for 30 years but drawing interest during that period. In order to enable the system to begin operations early and absorb the starting up costs, AID made a “seed” capital loan of $5 million and a grant of $5 million, plus technical assistance, and the Government of Chile contributed $5 million. This ended up with 21 associations with 8~,~ savers. The system has accumulated $360 million in savings and made 155,000 home loans totalling $820 million. C. Spread of mutual savings and loan programs The Chilean system has now been duplicated in a dozen countries of Latin America: Bolivia, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Honduras, Nicaragua, Panama, Paraguay, Peru and Venezuela. Brazil’s national housing legislation includes both mutuals and stock companies. In Guatemala, AID assisted in installing a mortgage insurance system which helped the existing home savings institutions to expand. Bolivia, Colombia, Brazil and Uruguay have indexed savings and mortgages but Ecuador, whose legislation permits indexing, has never put indexing into effect. A not very consequential savings and loan association was created in Ethiopia and attempts in Morocco and Tunisia were abortive. AID has assisted these countries with technical assistance and capital assistance, except that no capital assistance was made available to Brazil. It had loaned a total of $78 million for so-called “seed” capital, matched in part by host country contributions. To date, these twelve countries have 120 associations with over 2 million savers and deposits totalling over one billion dollars. They have made over 250,000 mortgages for a total of over $1 billion. Capital assistance from AID has been further assisted by IDB loans totalling some $25 million, and the AID investment guarantee program has added further amounts. The development has been phenomenal although not entirely smooth. Mid-stream changes by ChiIe in the index caused some temporary qualms and disruptions. In PERU, the removal of tax exemption on savings reduced the inflow of savings at one point. Bolivia’s system is still struggling and needs additional capital. In Ecuador, the low rate of interest permitted on savings was a deterrent to savings until the rate was raised. Second “seed” capital loans were required-and obtained from AID-by Chile, Dominican Republic and El Salvador. In Colombia, AID made a $5 million loan for the establishment of mutual savings and loan associations but the Government decided to restrict its associations to stock companies and the loan was deobligated. Nevertheless, the Latin
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American experience underscores the fact that while success cannot be achieved over-night, internal savings can be generated and moderate income families housed. At the same time, while a certain amount of euphoria is justified, recognition must be given to the subsidies that were responsible for early success (one savings and loan association in PERU obtained an IDB loan at 2% and made mortgage loans at 12%) and to governmental inputs. In Chile the total AID loans at low rates of interest totalled $13.7 million, plus a grant of $5 million, matched by a Government contribution of roughly $10 million and IDB loans of $16 million. To the $78 million of AID loans made to the twelve Latin American countries should be added $25 million from IDB and host country contributions of about $50 million. Moreover, interest rates have moved upward along with rising sales prices and low income families have not been served. The adjustable mortgage may yet run into trouble, as in Argentina where incomes lag behind adjustments in mortgage debts. Actually, it is timely to make an objective review of the last fifteen years of Latin American experience to account for the successes and difficulties. Were interest rates, realistic ? Did they over optimistically maturities and downpayment requirements parrot the then U.S. experience? Are the systems in fact contractual? What elements of the contractual system can be adopted? How much of the savings were “under the mattress” savings and how much a diversion from other investment or expenditures? Has there been too little or too much Government interference ? Is savings deposit insurance necessary where there is mortgage insurance ? Are there advantages to the stock company system? Which is best for the developing country? Should there be interest subsidies as in the United States? Is it feasible to use a check-off? How can delinquencies be diminished? Are the subsequent loans guaranteed by AID justified? Do such guaranteed loans deter pressure for attracting internal capital? Should there be an adherence to the original “seed” capital concept that once a system is in the black it should not receive further external assistance but grow within the potentials of the country’s own resources? Finally, is it realistic to expect the savings and loan systems as now constituted to serve low income families?
V. SECONDARY
MARKETS
As in the developed countries, savings alone in the developing countries cannot service This has given rise to the term the need. Other financial resources must be tapped. “secondary markets”, not to be confused with “second mortgages”. A secondary market occurs when a mortgage is sold by an investor (the primary who originated the mortgage after previously determining that the value of the the and the credit of the borrower justified a loan. It, of course, presupposes of a primary market, in the case of Latin America represented by the savings associations. Such a secondary market provides liquidity to the primary market
market) property existence and loan
enabling it to maintain reduced reserves, helps meet cyclical imbalances in the flow of funds, and, in the larger countries, helps in a geographical distribu tion of funds. In the United States, the secondary market is composed of four public or quasi-public institutions: the Federal Home Loan Bank System which provides short term loans to its members based upon their projected cash flows through district banks which are owned by the users; the Federal National Mortgage Association (FNMA), formerly a Government
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organization created in 1938 but since 1965 a privately owned financial vehicle; the Federal Home Loan Bank Corporation (FHLMC), another so called privately owned institution created in 1970 to guarantee or trade in insured and uninsured mortgages or participations issued by financial institutions; Government National mortgage Association (GNMA), a government agency created within the Department of Housing and Urban Development to manage and liquidate FNMA’s mortgage portfolio and to purchase Government underwritten mortgages having an unconventional risk or below market interest rates, and to guarantee securities based on pools of mortgages. The largest of these institutions or agencies is FNMA with a mortgage portfolio of over $18 billion. It purchases mortgages over the counter or on advance commitments, the latter enabling the development of large scale projects not otherwise possible. Since it operates on a self sustaining basis and obtains its funds from borrowing on the securities market, FNMA must buy mortgages at a yield which, coupled with the fees it changes, will cover the cost of money to it, plus mortgage servicing and administrative costs. It also works closely with GNMA which buys mortgages at subsidized rates and sells those mortgages to FNMA, with GNMA absorbing the interest subsidy. FHLMC, on the other hand, is a relatively new institution created to serve the savings and loan industry. It, too, borrows money, and must therefore operate at a yield sufficient to make it self-sustaining. In the United States, the “secondary market” is undergoing changes in concept and operation. The original, simplistic idea of buying mortgages from mortgage bankers and other lenders when money is in short supply and they need more funds for originated additional mortgages, and selling mortgages so acquired when lenders have a surplus of funds, has gone by the board. Money is generally in short supply. The guarantee of pools of privately owned mortgages or securities backed by such pools is also a new venture for both FNMA and FHLMC. These changes in the form of the secondary market necessitate a capital market on a somewhat sophisticated level to a degree that does not exist in the developing countries. However, certain aspects of a secondary market are possiblein some developing countries. The AID loans to host country Federal Home Loan Bank Boards are used by those Boards to purchase mortgages from the members of the system. In several countries, such mortgages have been resold to private purchasers. In Chile, for example, adjustable mortgages have been resold by individual associations and by the Caja Central, albeit with a right of recourse, that is, a right on the part of the purchaser to recover his investment. In Costa Rica, because of the low interest permitted on savings accounts, participations in mortgages have been sold at the higher rates permitted on mortgages. In the Dominican Republic, by law, insurance companies must invest a certain amount in national housing bank bonds, and now the Bank is issuing mortgage participations whose higher interest rate and tax exempt feature adds additional attractions. In CentralAmerica, Jamaica and the Caribbean, AID has made loans specifically for the purpose of creating secondary market institutions. A loan of $10 million to the Central American Bank for Economic Integration (CABEI) in 1965, plus later guaranteed loans, was aimed at the establishment of a regional market but, unfortunately, the original concept was perverted and the Banks have yet to raise funds from private sources by using its portfolio as collateral. In Jamaica, a loan, also of $10 million, helped create the Jamaica Mortgage Bank (a FNMA for Jamaica) to act as a secondary market for the building societies and trust companies. While purchases of mortgages has progressed satisfactorily, high international lending
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rates have prevented adding to the JMB’s resources at the moment. In the Caribbean a $10.3 million loan was made to the Caribbean Development Bank, of which $4 million was earmarked for a regional secondary market activity in the Eastern Caribbean. Because of inaction by the CDB, the potential has yet to be tested. Over twenty years ago, Chilean sources suggested the creation of an Inter-American Mortgage Bank. This led to suggestions for revision of the domestic U.S. legislation to permit investment in such a bank by U.S. savings and loan associations, with a U.S. Government guarantee-a proposal that came to fruition in 1965 with Congressional authorization for the investment in Latin American Savings and Loan Associations by U.S. associations provided it was accompanied by guarantees by AID. During the 1960’s, there were several attempts to create an International Home Loan Bank under the auspices of the U.S. Federal Home Loan Bank Board but none of the various bills introduced in the Congress ever left Committee. The authorization to U.S. savings and loans to invest in Latin America, and later world-wide, and the extension of that authority to the U.S. Federal Home Loan Banks reduced interest in an International Home Loan Bank. Periodically, there have been attempts to establish an Inter-American Mortgage Bank to serve the countries of Latin America as a private institution. Finally, in 1968, representatives of the national housing banks of Latin America joined in a Declaration of Rio de Janeiro urging such a bank. Seven years later, in May of 1975, an Inter-American Savings and Loan Bank (Banco Inter-Americano de Ahorros y Prestamos) was established with pledges (now contributions) from a number of Latin American countries. As of this moment, however, the scope of its operations and the form of operation have still to be determined. On a Nations number of 1975
broader international scale, efforts have surfaced from time to time at United meetings to establish an International Home Loan Bank under U.N. auspices. A of studies produced suggestions for such a bank but it was not until the beginning that a Housing and Human Settlements Fund was authorized.
VI. THE ROLE OF THE WORLD BANK Now the World Bank has entered the picture with a policy, originally Urban Development Policy and repeated in its Housing Sector Policy, financing institutions with capital:
expressed in its to assist home
The Bank Group has a particular role to play in responding to requests for assistance Lending for low-income housing project in building housing finance institutions. beneficiaries is one avenue, but it is relatively limited. The Bank Group should continue to provide ‘seed’ capital for appropriate housing finance institutions with the objective of promoting better housing solutions for all income groups over time. In additon, it is recommended that ‘seed’ capital should be provided for mortgage insurance institutions to facilitate lending for housing and enable lower-income IBRD Housing Sector Policy Paper, 1975. groups to be reached.” How this is to be done and how the funds would be used is left undetermined and needs elaboration. In any event, before undertaking any such loans in fact, it would behoove the Bank to make an objective analysis of the Latin American experiences.
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The World Bank’s policy uses the term “seed” capital. AID, too, uses that term. The U.N. Fund repeats the term. If “seed” capital is to be taken literally, it is questionable whether the countries of Latin America would now be eligible for loans to their savings and loan systems. However, it is probably equally questionable whether the more recent users of the term “seed” thought through its implications. Just as “sites and services”
opened the door to an extension of the World Bank’s housing policy, so the term “Seed” capital may well result in massive and continued substitutions of external capital for in ternal savings. VII. SAVINGS
INSTITUTIONS
AND LOW INCOME FAMILIES
At the middle income level, the Latin America experience has demonstrated that, given the proper specialized institutions and initial capital from external or internal governmental sources, savings can be generated locally. However, these same institutions shun low income families. Experience has shown that even where external assistance is earmarked for low income families, lending terminates on usage of the external assistance.
The need is, therefore, for specialized institutions serving only the low income strata. One shot political or demonstration low income projects are only bandaids. The need of the low income strata, as for middle income families, is for continuous financing toward which these people can make their own financial contribution. That means a form of institutional framework used exclusively by low income families. Concomitantly with
such financial institutions, there has to be a political acceptance of lowered standards and amenities such as core housing, sites and services, shell housing and self help measures. Recently, I visited the Philippines to examine the feasibility of housing for union membership. In view of the comprehensive studies already made ad infinitum, I concentrated upon the mechanisms for creating an institutional framework for generating capital which would serve only the low income families able to afford a certain cost housing with the proper financing. I suggested the chartering of Workers’ Cooperative Home Savings Institutions which would make home mortgage loans only to workers’ housing cooperatives, using savings generated from such workers, supplemented by a secondary market composed of the social security agencies already making housing loans, and interest subsidies derived from payroll tax on employers. The latter would enable the Workers’ Banks to originate some mortgages at interest rates high enough to attract institutional investors. I recommended, also, that the social security agencies cease making housing loans themselves in order to insulate them from the mortgage debtors. Just as I was convinced in 1957 in Chile that savings and loan systems could work for middle income families in Latin America, so I feel that it is worthwhile and feasible to gamble on similar success for low income institutions, using modifications derived from fifteen years of experience in the Latin American countries combined with the usage of payroll tax proceeds as in Brazil, El Salvador, Jamaica and Mexico. Unfortunately, no action has yet been taken in the Philippines so there is no experience on which to rely as in the case of the savings and loan systems for middle income families.
However, IO continue to provide-or not provide--families oj low income with housing in the conventional governmental way will never solve the problem.
I. INTRODUCTION The crux of the housing dilemma is financing. The need for financing permeates all levels of income, from sites and services to sophisticated home banking. As I noted at last year’s Course, despite an old biblical saying that “Money is the root of all kinds of evil” money is the essential ingredient in the alleviation of the housing shortages and inadequacies that spawn the resulting evils of disease, crime, lowered productivity and social and political unrest. Social and physical housing programs can be devised with relative ease. Their imAlthough, it has become trite to plementation depends upon the availability of capital. say it, long term loans at reasonable interest rates and small downpayments are still the global key to placing housing within the reach of most income groups. Without proper financial financing, housing plans and programs are paper tigers. This means permanent institutions which can properly utilize public funds and support, and private institutions which can generate savings and other resources and channel those savings and resources into housing. The sources of money for housing are the same regardless of country: government, private lenders and private institutions, or a combination thereof. Every country, no matter how poor in financial resources, has some form of public housing agency directed toward low income families. These agencies funded from annual Governmental budgets, special tax impositions, bond issues and external borrowings. Most countries have public home financing agencies which either originate, hold and service mortgages on housing built by government or lend to purchasers of privately constructed housing. Most countries, too, now have some kind of private home finance arrangements. These may be formal or informal in nature. They may consist of individual lenders, usually at high rates of interest and short maturities; the private solicitors of the Caribbean; the building societies of Great Britain and the Commonwealth countries; multi-purpose banks; cooperative banks; the savings and loan associations of the United States and Latin America; and other such media. The common denominator is an insufficiency of funds for lending
and the high cost of borrowing. Almost a year and a half ago, the Center for Housing, Building and Planning of the United Nations conducted an Ad Hoc Meeting of Experts on the Financial Management of Government Housing Projects, for which I wrote a basic paper, to explore the problems resulting from government funding of housing. Four forms of government activity were *Prepared
for the EDI,
World Bank.
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examined: (a) government construction for rent; (b) government construction for sale; (c) government assistance to non-profit housing institutions; and (d) government insurance of mortgages. The three common problem areas were (a) problems caused by the source of funds, (b) problems resulting from the inadequacies of administration, and (c) problems due to the groups served. The obvious was confirmed: most housing, even
so-called “‘private” housing, enjoys some form of government assistance, whether it be public subsidies, tax benefits, or central bank support; that the problems and solutions are global in character and repeat themselves country to country. Because of this commonality, treatment
it was equally obvious that the experience of the problem in other countries.
II. NEED FOR ASSURED
CONTINUING
of one country
SOURCES
has relevance
to the
OF FINANCING
Demonstration projects financed by external agencies are not the solution to the housing problem. Demonstrations can illustrate better planning, minimum standards, and more efficient construction techniques, but without an assured source of continual financing, they are only of academic significance. This uncertainty of a continuing flow of funds plays havoc with programming and with financial management. “Stop and go” funding makes cash flows impossible to estimate. Institutions deteriorate for lack of activity. Construction and materials industries which must incur debts to be amortized over time depend upon a constant demand for their product or they cannot develop. Labor forces disappear. Prefabrication plants with their need for a permanent market to justify a fixed investment are particularly affected. For the public sector, particularly, lack of assured annual income for construction and lending leads to uneven borrowing practices with its concomitant mismanagement of cash flows and over staffing (agencies never reduce staff commensurately with reduction in income). To some degree, formulation of a national housing policy and long term allocation of resources to housing on a continuing basis can help resolve this problem. Generally, as in the developed countries, the public housing agencies have recognized this and have enlarged their horizons and programs. Whereas, earlier they were construction agencies housing authorioperating under such titles as “national housing institutes, ” “national ties,” or “public utilities companies,” now they tend to engage in the formulation of over-all housing policy and to bear the more grandiose title “Ministry of Housing” or “Ministry of Housing and Urban Development.” Where this is the case, it has been the result, generally, of external influences and a copying of the institutional framework of the countries of Europe and the United States. Lately, too, governments in the developing countries have become more cognizant of the need for sophisticated forms of housing finance and financial institutions and are giving lip service, at least, to the concept of housing within the context of urban, regional and national development and national housing policies which allocate financial resources on a recurring basis. There has been a decided trend toward consolidating the various housing activities under one roof. In Nicaragua, for example, the National Housing Institute which had been limited to construction of low income housing has merged with the savings and loan system to become a National Housing Bank. Chile has a full fledged Ministry of Housing and Urban Development which incorporates earlier agencies dealing with construction,
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221
middle income savings programs, and urban development. Brazil has graduated from the COHABS (local public housing authorities) and cuxias economicas (public savings banks) to a National Housing Bank whose title has become a misnomer with its venture into all kinds of urban development. In the Camerouns, a Ministry of Equipment, Housing and Land has taken the place of a variety of agencies. The Philippines is in the midst of consolidating its institutions dealing with housing and human settlements. This type of action should facilitate the resolution of some of the financial problems. III. THE PUBLIC SECTOR
Low income, subsidized housing has always been regarded as the responsibility of government because of the risks involved, real or imagined, the need for subsidies, and the lower rate of return on the investment as compared to commercial ventures. Consequently there is an avoidance of that income level by the private sector. A. Shiftfrom
rented to sales housing
In the past, government action in low income housing tended to be in the form of the construction and management of rental housing on a subsidized basis. This was the early experience of the United States. More recently, the policy of the United States has been to focus on forms of subsidizing private ownership, e.g. paying rent differentials to private landlords. In the developing countries, the policy has also tended to shift from rental housing to housing for sale in order to avoid-and evade-the problems of management and maintenance and the staggering delinquencies in rent payments, and to inculcate in the occupants a sense of ownership responsibility. In Latin America, particularly, this shift from rentals to sales has been noticeable due to the lending policies of the InterAmerican Development Bank (IDB) and the Agency for International Development (AID) under the Alliance for Progress. The World Bank’s loans for sites and services projects have had a similar effect. In Latin America the Social Progress Trust Fund of IDB emphasized “self-liquidating” projects, that is establishing a debt service that was based on the recovery of the full cost of housing. However, the term “self-liquidating” is susceptible to varying interpretations. AID’s housing investment guarantee program, for example, specifically refers to self liquidating projects. Yet, AID housing investment guarantee projects that approach low income, have substantial host country capital or interest subsidies which make it possible to absorb the high interest rates that the AID program demands. The same is true of World Bank funded sites and services projects. B. Enforced investment schemes A relatively recent trend is the use of enforced investment in housing and the imposition of special taxes whose proceeds will be devoted to home financing. In 1963, for example, Mexico revised its banking laws-with a loan incentive of $30 million from AID and IDBto require mortgage banks and the savings departments of commercial banks to invest a certain portion of new income from savings and bond issues in lower income housing. In the course of four years, over $600 million became available for housing through this device, although some was siphoned off for other developmental purposes. The Dominican Republic requires foreign insurance companies to invest a certain amount in housing bonds. For years, Chile has required industries to invest 5% of their income in housing or turn it over as a tax to the national housing corporation. In 1960, when the savings and loan
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system was established, industries were given the option of the earlier legislation of freezing their contribution in accounts in the savings and loan system. 1 am sure that an examination of the laws of other countries will reveal similar forms of compulsory investment. C. Special taxation measures Special taxes for housing is another form of resource for publicly sponsored housing. A number of Latin American countries also provide for severance pay for leaving private employment but permit early draw-downs for housing. In Brazil, a payroll tax has been responsible for the largest input into the Brazilian Housing Bank. El Salvador has followed suit. Mexico, too, has imposed a tax on employers that takes the form of compulsory savings and provides financing for INFONAVIT. Jamaica is a recent example of this form of tax. These tax devices have the effect of an increase in the minimum wage They since they are on employers and ultimately rebound to the benefit of the employee. are also easily collectable since the existing social security system is used. In Mexico, in addition, a check-off of debt service on housing loans based upon a percentage of income and an anticipated wage increase is estimated to result in accelerated repayment of debt service that will greatly increase the sums available for lending. About a year ago, while in the Philippines as a consultant on labor union housing, I suggested a similar tax but with the proceeds to be channelled through Workers’ Cooperative Home Savings Banks and used to subsidize interest rates on mortgages originated by such Banks and sold to private purchasers. This latter is a departure from the Mexican system which utilizes the tax proceeds for construction and long term mortgages. Used as interest subsidies, these funds can generate much more housing than when used for construction itself.
D. Continuing failure to reach low income groups In general, however, the very low income groups are not being adequately served by government because of the magnitude of assistance required. For a variety of reasons, the tendency is for the government agency to edge up in the income scale and serve a group for which the agency was not created or to build a low-income project as a particular agency demands. The one shot low income projects financed by external sources can only The answer, if one exists, is the capture of internal resources, a act as a demonstration.
reduction of standards, expansible housing and educating the beneficiary of assistance to his financial responsibilities. However, a real solution has yet to be devised. E. The effects of non-collection The high rate of non-collection of rents and debt service where government is the landlord or creditor is a phenomenon of government housing projects that deserves more attention. Not only does this result in unplanned subsidies and inequities, but it necessitates additional borrowings and increased governmental debt service for programs which had looked to a recoupment of purchase price for their continuance. Unfortunately, too many government agencies and public officials regard the goal as one of meeting a construction deadline or a promise to build a certain number of dwelling units. There is a tendency to “walk away” from collections of rent and debt service for political, social or public relations reasons or to adopt a policy that “low income people do not pay.”
Where government is directly involved a creditor, the issue oj’ high delinquencies will continue to plague the housing agencies. The solution rests with an insulation of govern-
Approaches
to Housing Finance in Developing
Countries
223
ment from the home purchaser (or renter). One obvious means is to channel all mortgage funds through private lending institutions. Another is the use of the single mortgage cooperative in order to utilize the self policing power of the membership. Where feasible, a check-off of debt service at source of employment (as in Mexico) should be employed. IV. THE PRIVATE
SECTOR
Private home financing sources in the developing countries have traditionally favored the higher income groups so that, with government concentrating on the low income strata through public institutions and public funds, there has been a gap in the income groups served. As in developed countries, lower middle income families have tended to be neglected. Either their incomes have been too high to make them eligible for the subsidies of low income housing, or insufficient to obtain private financing. External assistance, with few exceptions, has stressed low income rather than middle or lower middle income housing. One exception has been AID’s concessional loans (not to be confused with the investment guarantee program) and technical assistance to savings and loan associations in Latin America. Housing for low income groups was the thrust of the U.N. and U.S. emphasis in the 1950’s on aided self help and of the Social Progress Trust Fund which provided over $600 million of low cost money for Latin American Governments. It is the thrust of the more recent sites and services loans of the World Bank. A. Savings and loan programs In the developing countries, middle and lower middle income families have had to “scrounge” for themselves or pressure low income housing governmental institutions to depart from their legislative objective. AID’s drive to establish home financing institutions in Latin America has had the collateral effect of “taking some of the heat” off administrators of low income programs and has demonstrated the feasibility of (1) home financing institutions designed to capture savings and make housing loans at reasonable terms, and (2) the ability to save where that ability and willingness were previously denied. This does not mean that these middle income financing institutions have developed purely with their own resources. They have had the advantage of considerable external technical and financial assistance at subsidized rates of interest, sometimes as low as 3/4% for 40 years, coupled with host country matching contributions. In short, they too, have been subsidized to make their initiation and early operation possible. The AID stimulated home financing institutions have taken the form of the savings and loan associations of the United States. These are the savings and loan associations which were derived from the building and loan societies of Great Britain and mutual savings banks. They are specialized institutions whose function is to make loans for housing. However, there is a trend in the U.S. to make these institutions more multi-purpose. Unlike the building societies of Great Britain and the Commonwealth countries, savings are not tied to shares and generally borrowers need not be members of the associations. In the United States, the associations chartered by the Federal Government fare called “mutuals”, that is, cooperatively owned and, in theory, cooperatively managed. State chartered savings and loan associations are generally stock companies which operate like mutuals in their lending practices and can take advantage of savings deposit insurance and mortgage insurance offered by the Federal Government. Partly because the early U.S.
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Harold Robrnson
technicians recruited for temporary assignments were from “mutuals” and partly because the basis for U.S. assistance in Section 601 of the Foreign Assistance Act, which couples savings and loan associations with cooperatives, the U.S. stimulus was initially directed toward the creation of mutuals in Latin America. Then, too, mutuals carry with them the connotation of serving the “little man”. Nevertheless, AID has provided assistance both in the technical operation and financial support of stock companies as in Nicaragua and El Salvador and Honduras. In fact, there is now a movement in the United States among many mutuals to convert to stock companies. The ultimate objective of a savings and loan system is, of course, loans for housing, supported by mortgage documentation. The success of the system is based on the assumption-well founded in the United States and many developing countries-that there is a capacity to save in any economy given the proper incentives and savings institutions, and that savings and complementary internal resources must be the principal base for developing a home construction industry. This concept has been tested in the last fifteen years
in a dozen Latin American countries andfound
to be true.
B. The Chilean experience Perhaps a chronological example of how the first savings and loan system in Latin America came into being will be instructive and demonstrate the way in which local support can be generated. In a sense this is somewhat biographical as well. In 1957, when I was transferred from Israel to Chile as U.S. Housing Adviser, the first fact that struck me was the concentration of government on low income housing (though often siphoned off into middle income families) and the lack of home financing at rates comparable to those in the United States. Housing credit in Chile was dominated by the Corporation de la Vivienda (Housing Corporation), a government corporation building housing for rent and sale, and the various (37) social security agencies. Private lending was virtually non-existent except at exorbitant rates of interest, ridiculously short maturities and oppressive downpayments. Moreover, inflation was taking its toll and the social security agencies which had been lending for housing were being decapitalized. Fortunately, Chile had been housing-conscious for many years and I found eight housing plans under discussion for which 1 tried to provide some catalytic action. Drawing upon the experience of the United States, I drafted sample legislation (I had had a legislative drafting background) and supporting memoranda providing for the creation of a governmental agency like the U.S. Federal Home Loan Bank Board to charter, supervise and assist financially private savings and loan associations, and with savings deposit and mortgage insurance powers. An innovation, drawing upon my experience in Israel, was the adjustment of savings and mortgage debts to an index (the wage
index, in this case) to offset the ravages of inflation which were deterring people from saving and decapitalizing the lending banks and social security agencies. The need for housing for middle income families was obvious and the ability to pay for housing, given reasonable repayment terms, was clearly indicated and backed up by a study made by the prestigious Chilean Steel Institute. There was also an acceptability of the Israel technique for adjusting to inflation and the transferability of that concept to the Chilean economy. In 1958, pursuant to an agreement between AID and the Chilean Chamber of Commerce of the Construction Industry, a two man team of U.S. experts in savings and loan associations and housing cooperatives was recruited to visit Chile and examine in greater detail
Approaches to Housing Finance in Developing Countries
225
the feasibility of a mutual savings and loan system and help in developing in detail the blueprint for such a system. Within a month a firm legislative proposal was outlined and Finally, in 1960, a legislative decree was enacted submitted for local consideration. creating a Central Savings and Loan Agency (Caja Central de Ahorros y Prestamos) with the power to charter private mutual savings and loan associations and financially assist them by making loans to them, depositing funds in them, and purchasing their mortgages. Savings insurance and mortgage insurance were included to protect the saver and induce him to save and permit the associations to feel secure in their liberal lending policies. Tax exemption on savings and mortgages was another incentive with the indexing of savings and mortgages being the most persuasive factor. An added source of funds resulted from allowing industries, which previously had been compelled to invest a certain amount of their returns in housing, to deposit those sums in a savings and loan account, frozen for 30 years but drawing interest during that period. In order to enable the system to begin operations early and absorb the starting up costs, AID made a “seed” capital loan of $5 million and a grant of $5 million, plus technical assistance, and the Government of Chile contributed $5 million. This ended up with 21 associations with 8~,~ savers. The system has accumulated $360 million in savings and made 155,000 home loans totalling $820 million. C. Spread of mutual savings and loan programs The Chilean system has now been duplicated in a dozen countries of Latin America: Bolivia, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Honduras, Nicaragua, Panama, Paraguay, Peru and Venezuela. Brazil’s national housing legislation includes both mutuals and stock companies. In Guatemala, AID assisted in installing a mortgage insurance system which helped the existing home savings institutions to expand. Bolivia, Colombia, Brazil and Uruguay have indexed savings and mortgages but Ecuador, whose legislation permits indexing, has never put indexing into effect. A not very consequential savings and loan association was created in Ethiopia and attempts in Morocco and Tunisia were abortive. AID has assisted these countries with technical assistance and capital assistance, except that no capital assistance was made available to Brazil. It had loaned a total of $78 million for so-called “seed” capital, matched in part by host country contributions. To date, these twelve countries have 120 associations with over 2 million savers and deposits totalling over one billion dollars. They have made over 250,000 mortgages for a total of over $1 billion. Capital assistance from AID has been further assisted by IDB loans totalling some $25 million, and the AID investment guarantee program has added further amounts. The development has been phenomenal although not entirely smooth. Mid-stream changes by ChiIe in the index caused some temporary qualms and disruptions. In PERU, the removal of tax exemption on savings reduced the inflow of savings at one point. Bolivia’s system is still struggling and needs additional capital. In Ecuador, the low rate of interest permitted on savings was a deterrent to savings until the rate was raised. Second “seed” capital loans were required-and obtained from AID-by Chile, Dominican Republic and El Salvador. In Colombia, AID made a $5 million loan for the establishment of mutual savings and loan associations but the Government decided to restrict its associations to stock companies and the loan was deobligated. Nevertheless, the Latin
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Harold Robrnson
American experience underscores the fact that while success cannot be achieved over-night, internal savings can be generated and moderate income families housed. At the same time, while a certain amount of euphoria is justified, recognition must be given to the subsidies that were responsible for early success (one savings and loan association in PERU obtained an IDB loan at 2% and made mortgage loans at 12%) and to governmental inputs. In Chile the total AID loans at low rates of interest totalled $13.7 million, plus a grant of $5 million, matched by a Government contribution of roughly $10 million and IDB loans of $16 million. To the $78 million of AID loans made to the twelve Latin American countries should be added $25 million from IDB and host country contributions of about $50 million. Moreover, interest rates have moved upward along with rising sales prices and low income families have not been served. The adjustable mortgage may yet run into trouble, as in Argentina where incomes lag behind adjustments in mortgage debts. Actually, it is timely to make an objective review of the last fifteen years of Latin American experience to account for the successes and difficulties. Were interest rates, realistic ? Did they over optimistically maturities and downpayment requirements parrot the then U.S. experience? Are the systems in fact contractual? What elements of the contractual system can be adopted? How much of the savings were “under the mattress” savings and how much a diversion from other investment or expenditures? Has there been too little or too much Government interference ? Is savings deposit insurance necessary where there is mortgage insurance ? Are there advantages to the stock company system? Which is best for the developing country? Should there be interest subsidies as in the United States? Is it feasible to use a check-off? How can delinquencies be diminished? Are the subsequent loans guaranteed by AID justified? Do such guaranteed loans deter pressure for attracting internal capital? Should there be an adherence to the original “seed” capital concept that once a system is in the black it should not receive further external assistance but grow within the potentials of the country’s own resources? Finally, is it realistic to expect the savings and loan systems as now constituted to serve low income families?
V. SECONDARY
MARKETS
As in the developed countries, savings alone in the developing countries cannot service This has given rise to the term the need. Other financial resources must be tapped. “secondary markets”, not to be confused with “second mortgages”. A secondary market occurs when a mortgage is sold by an investor (the primary who originated the mortgage after previously determining that the value of the the and the credit of the borrower justified a loan. It, of course, presupposes of a primary market, in the case of Latin America represented by the savings associations. Such a secondary market provides liquidity to the primary market
market) property existence and loan
enabling it to maintain reduced reserves, helps meet cyclical imbalances in the flow of funds, and, in the larger countries, helps in a geographical distribu tion of funds. In the United States, the secondary market is composed of four public or quasi-public institutions: the Federal Home Loan Bank System which provides short term loans to its members based upon their projected cash flows through district banks which are owned by the users; the Federal National Mortgage Association (FNMA), formerly a Government
Approaches to Housing Finance in Developing Countries
227
organization created in 1938 but since 1965 a privately owned financial vehicle; the Federal Home Loan Bank Corporation (FHLMC), another so called privately owned institution created in 1970 to guarantee or trade in insured and uninsured mortgages or participations issued by financial institutions; Government National mortgage Association (GNMA), a government agency created within the Department of Housing and Urban Development to manage and liquidate FNMA’s mortgage portfolio and to purchase Government underwritten mortgages having an unconventional risk or below market interest rates, and to guarantee securities based on pools of mortgages. The largest of these institutions or agencies is FNMA with a mortgage portfolio of over $18 billion. It purchases mortgages over the counter or on advance commitments, the latter enabling the development of large scale projects not otherwise possible. Since it operates on a self sustaining basis and obtains its funds from borrowing on the securities market, FNMA must buy mortgages at a yield which, coupled with the fees it changes, will cover the cost of money to it, plus mortgage servicing and administrative costs. It also works closely with GNMA which buys mortgages at subsidized rates and sells those mortgages to FNMA, with GNMA absorbing the interest subsidy. FHLMC, on the other hand, is a relatively new institution created to serve the savings and loan industry. It, too, borrows money, and must therefore operate at a yield sufficient to make it self-sustaining. In the United States, the “secondary market” is undergoing changes in concept and operation. The original, simplistic idea of buying mortgages from mortgage bankers and other lenders when money is in short supply and they need more funds for originated additional mortgages, and selling mortgages so acquired when lenders have a surplus of funds, has gone by the board. Money is generally in short supply. The guarantee of pools of privately owned mortgages or securities backed by such pools is also a new venture for both FNMA and FHLMC. These changes in the form of the secondary market necessitate a capital market on a somewhat sophisticated level to a degree that does not exist in the developing countries. However, certain aspects of a secondary market are possiblein some developing countries. The AID loans to host country Federal Home Loan Bank Boards are used by those Boards to purchase mortgages from the members of the system. In several countries, such mortgages have been resold to private purchasers. In Chile, for example, adjustable mortgages have been resold by individual associations and by the Caja Central, albeit with a right of recourse, that is, a right on the part of the purchaser to recover his investment. In Costa Rica, because of the low interest permitted on savings accounts, participations in mortgages have been sold at the higher rates permitted on mortgages. In the Dominican Republic, by law, insurance companies must invest a certain amount in national housing bank bonds, and now the Bank is issuing mortgage participations whose higher interest rate and tax exempt feature adds additional attractions. In CentralAmerica, Jamaica and the Caribbean, AID has made loans specifically for the purpose of creating secondary market institutions. A loan of $10 million to the Central American Bank for Economic Integration (CABEI) in 1965, plus later guaranteed loans, was aimed at the establishment of a regional market but, unfortunately, the original concept was perverted and the Banks have yet to raise funds from private sources by using its portfolio as collateral. In Jamaica, a loan, also of $10 million, helped create the Jamaica Mortgage Bank (a FNMA for Jamaica) to act as a secondary market for the building societies and trust companies. While purchases of mortgages has progressed satisfactorily, high international lending
Harold Robinson
228
rates have prevented adding to the JMB’s resources at the moment. In the Caribbean a $10.3 million loan was made to the Caribbean Development Bank, of which $4 million was earmarked for a regional secondary market activity in the Eastern Caribbean. Because of inaction by the CDB, the potential has yet to be tested. Over twenty years ago, Chilean sources suggested the creation of an Inter-American Mortgage Bank. This led to suggestions for revision of the domestic U.S. legislation to permit investment in such a bank by U.S. savings and loan associations, with a U.S. Government guarantee-a proposal that came to fruition in 1965 with Congressional authorization for the investment in Latin American Savings and Loan Associations by U.S. associations provided it was accompanied by guarantees by AID. During the 1960’s, there were several attempts to create an International Home Loan Bank under the auspices of the U.S. Federal Home Loan Bank Board but none of the various bills introduced in the Congress ever left Committee. The authorization to U.S. savings and loans to invest in Latin America, and later world-wide, and the extension of that authority to the U.S. Federal Home Loan Banks reduced interest in an International Home Loan Bank. Periodically, there have been attempts to establish an Inter-American Mortgage Bank to serve the countries of Latin America as a private institution. Finally, in 1968, representatives of the national housing banks of Latin America joined in a Declaration of Rio de Janeiro urging such a bank. Seven years later, in May of 1975, an Inter-American Savings and Loan Bank (Banco Inter-Americano de Ahorros y Prestamos) was established with pledges (now contributions) from a number of Latin American countries. As of this moment, however, the scope of its operations and the form of operation have still to be determined. On a Nations number of 1975
broader international scale, efforts have surfaced from time to time at United meetings to establish an International Home Loan Bank under U.N. auspices. A of studies produced suggestions for such a bank but it was not until the beginning that a Housing and Human Settlements Fund was authorized.
VI. THE ROLE OF THE WORLD BANK Now the World Bank has entered the picture with a policy, originally Urban Development Policy and repeated in its Housing Sector Policy, financing institutions with capital:
expressed in its to assist home
The Bank Group has a particular role to play in responding to requests for assistance Lending for low-income housing project in building housing finance institutions. beneficiaries is one avenue, but it is relatively limited. The Bank Group should continue to provide ‘seed’ capital for appropriate housing finance institutions with the objective of promoting better housing solutions for all income groups over time. In additon, it is recommended that ‘seed’ capital should be provided for mortgage insurance institutions to facilitate lending for housing and enable lower-income IBRD Housing Sector Policy Paper, 1975. groups to be reached.” How this is to be done and how the funds would be used is left undetermined and needs elaboration. In any event, before undertaking any such loans in fact, it would behoove the Bank to make an objective analysis of the Latin American experiences.
Approaches to Housing Finance in Developing Countries
229
The World Bank’s policy uses the term “seed” capital. AID, too, uses that term. The U.N. Fund repeats the term. If “seed” capital is to be taken literally, it is questionable whether the countries of Latin America would now be eligible for loans to their savings and loan systems. However, it is probably equally questionable whether the more recent users of the term “seed” thought through its implications. Just as “sites and services”
opened the door to an extension of the World Bank’s housing policy, so the term “Seed” capital may well result in massive and continued substitutions of external capital for in ternal savings. VII. SAVINGS
INSTITUTIONS
AND LOW INCOME FAMILIES
At the middle income level, the Latin America experience has demonstrated that, given the proper specialized institutions and initial capital from external or internal governmental sources, savings can be generated locally. However, these same institutions shun low income families. Experience has shown that even where external assistance is earmarked for low income families, lending terminates on usage of the external assistance.
The need is, therefore, for specialized institutions serving only the low income strata. One shot political or demonstration low income projects are only bandaids. The need of the low income strata, as for middle income families, is for continuous financing toward which these people can make their own financial contribution. That means a form of institutional framework used exclusively by low income families. Concomitantly with
such financial institutions, there has to be a political acceptance of lowered standards and amenities such as core housing, sites and services, shell housing and self help measures. Recently, I visited the Philippines to examine the feasibility of housing for union membership. In view of the comprehensive studies already made ad infinitum, I concentrated upon the mechanisms for creating an institutional framework for generating capital which would serve only the low income families able to afford a certain cost housing with the proper financing. I suggested the chartering of Workers’ Cooperative Home Savings Institutions which would make home mortgage loans only to workers’ housing cooperatives, using savings generated from such workers, supplemented by a secondary market composed of the social security agencies already making housing loans, and interest subsidies derived from payroll tax on employers. The latter would enable the Workers’ Banks to originate some mortgages at interest rates high enough to attract institutional investors. I recommended, also, that the social security agencies cease making housing loans themselves in order to insulate them from the mortgage debtors. Just as I was convinced in 1957 in Chile that savings and loan systems could work for middle income families in Latin America, so I feel that it is worthwhile and feasible to gamble on similar success for low income institutions, using modifications derived from fifteen years of experience in the Latin American countries combined with the usage of payroll tax proceeds as in Brazil, El Salvador, Jamaica and Mexico. Unfortunately, no action has yet been taken in the Philippines so there is no experience on which to rely as in the case of the savings and loan systems for middle income families.
However, IO continue to provide-or not provide--families oj low income with housing in the conventional governmental way will never solve the problem.