SPECIAL REPORT: Local Market Data, Resilience During Pandemic, Securitization, Land Title Systems Enable Housing Microfinance, Micro-mortgages

During European Microfinance PlatformEuropean Microfinance Week 2020, Maria Claudia Rojas of the Netherlands’ Triple Jump described her firm’s experience managing the MicroBuild Fund it created with US-based Habitat for Humanity in 2012. Compared with Triple Jump’s portfolio as a whole, MicroBuild has maintained higher asset quality, and that margin of superiority has doubled during the COVID-19 pandemic.

Lucie Astier Such of the French government’s AFD explained her agency’s role in providing technical assistance, loans and data to support housing finance in developing countries. Part of this effort involves connecting households and microfinance institutions (MFIs) with reputable builders and suppliers of construction materials. One tool for this purpose is the iBUILD app, which facilitates networking among lenders, contractors and households in five countries in Africa and Asia. Ms Such also discussed AFD’s work with the Center for Affordable Housing in Africa, which tracks 80 indicators, such as home prices and loan costs.

Regarding MFIs expanding from enterprise lending into housing loans, Ms Rojas discussed the importance of training loan officers on the basics of construction, such as region-specific building materials and contractor selection. To help with this, Habitat for Humanity developed agreements with materials suppliers to control prices and quality. Deborah Burand, who teaches at the New York University School of Law and sits on the MicroBuild Board of Directors, explained that the credit analysis of a mortgage applicant is quite different than for someone seeking a microenterprise loan, because a housing loan does not increase household income directly. She also noted the importance of the wholesale lender understanding this difference. In borrowing from investors, a housing lender generally is looking for local-currency investments with longer terms and lower rates than for microenterprise lending.

Brett Gwinner, formerly of the International Finance Corporation, reiterated that – unlike a working capital loan with a term of a few weeks or a few months – a housing loan is repaid over years. A home improvement loan – such as to install a toilet – might be paid over one to three years, whereas a home construction mortgage loan might have a term of 20 years.

Mona Kachhwaha of India-based Unitus Capital discussed the affordable housing market in India. Four of the 11 active lenders have been established in the past five years. These 11 firms serve a total of 750,000 clients with assets equivalent to USD 9 billion. To meet the need, Ms Kachhwaha says, “We need equity capital in large portions; the capital needs to be developmental capital.” This is despite her reports that: (1) the process of “underwriting informal incomes has been refined;” and (2) enough housing loans have closed over the last several years to prove that default rates are low. Going forward, she encourages investment in fintech to streamline micro-mortgage lending as well as proactive interaction with policymakers and regulators. As an example, she cited recent improvements in foreclosure laws as having resulted from collaboration among investors, lenders and government. Lastly, Ms Kachhwaha notes, Unitus is now raising money for a new housing fund that will prioritize serving women.

Vinod Kothari of India-based Vinod Kothari Consultants argued in favor of securitization to grow housing lending. Pools of housing loans can be divided into three tranches, for example, with a first-loss tranche and a mezzanine tranche increasing the rating of a senior tranche, which is where most investor interest lies. The senior tranche indeed can be made investible, given the 50-year safety record of prime mortgage loans. While defaults are slightly higher among affordable housing loans, the interest rate is significantly higher, more than offsetting the marginal risk.

To boost the micro-mortgage ecosystem, Mr Kothari underscores the need for improved bankruptcy laws as well as leveling the playing field for off-shore investors. Mr Gwinner, in looking forward, advocated for improvements to land titling systems. In West Africa, for example, title transfers often take two years or more.

This feature is part of a sponsored series on European Microfinance Week 2020, which took place online from November 18 through November 20. The event is held annually by e-MFP. MicroCapital has been engaged to promote and report on the conference each year since 2012.

Additional Resources

European Microfinance Platform (e-MFP) information on European Microfinance Week 2020
http://www.e-mfp.eu/european-microfinance-week-2020

MicroCapital coverage of European Microfinance Week, including the European Microfinance Award
https://www.microcapital.org/category/european-microfinance-week/

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