Models for Financing Mass Housing
- Mass housing
This refers to low-cost housing projects, which aim at providing a large number of houses to the poor at affordable prices or providing them on easy financing options.
It is to obtain loan from banks against submission of title to the property. When the loan is paid, the bank returns the title papers of the property.
- Equated monthly installment (EMI)
It is a monthly payment that is paid by the borrower to the bank till the loan is completely paid. The buyer of the house/flat pays EMI to the bank. EMI includes a component of principal amount and a component of interest.
- Down payment
When a person buys a house or a flat, some initial payment is necessary, which may be about 10% of the price of the flat or house. The remaining payment is financed by the bank, so thereafter the buyer of the property makes the payment to the bank in the form of EMI. It is also called margin because banks do not finance 100% of the value of the flat/house. Banks provide finance usually up to 90% of the price of the house/flat. Remaining 10% amount has to be paid by the borrower at the time of application as an advance payment.
- Postdated cheques
These are cheques that carry future dates. They are issued to the banker at the time of taking loan. The banks collect their EMI from these cheques. On the date mentioned on the cheque, the bank gets the payment that is mentioned in the cheque.
It refers to security for the purpose of loan. Banks give loan against collateral of some property (i.e., a house or a flat). If the loan is not paid timely, the bank may take over the collateral property.
When the property is under construction, only interest component of the loan is to be paid; this is called Pre-EMI. When the property is completely ready, the EMI has to be paid to the bank.
It refers to people from lower income segment. It stands for low-income group. There are some other similar terms also. EWS refers to economically weaker section. MIG refers to middle income group. The government generally subsidizes the interest component of loan given to people from LIG and EWS so that these people can afford a house.
It refers to interest subsidy scheme. In this, the government bears the interest burden on home loan provided to the people from economically poor category.
- Affordable housing
It refers to housing for the people who have lower income or income up to a median level. These houses are lower priced due to various reasons including smaller size, lower interest rate, government subsidy, lower land cost, etc. The primary purpose of affordable housing is to help the people from lower income segment to have their own house.
- Minimum size of houses
Governments have put certain requirements with regard to minimum size of houses. In some countries, the minimum size of houses is higher so that people are indirectly forced to switch to a better house. However, in the countries, where there is massive poverty, the governments have keep it low or not to make such requirements.
It refers to Real Estate (Regulation and development) Act 2016 of India, whereby the government tried to regulate housing. Earlier, there were many malpractices by housing societies or housing vendors. This act was enacted to make it mandatory for the housing vendors to stick to the schedule and provide house as per commitments.
- Credit risk
When a bank gives a loan, there is a possibility that the loan may not be paid, so there is a risk involved and this risk is called credit risk. This risk should be minimized with regard to the poor people so that the banks may comfortably provide finance to the lower income segment. Many governments try to create some systems to minimize credit risks associated with financing of houses.
- Credit appraisal
Banks assess a project before financing it. This is called credit appraisal. The banks study economic, financial, technical feasibility of the project and also the credit worthiness of the borrower. A borrower who has very low income may not be provided loan due to possibility of default.
This entry discusses the various factors with regard to financing mass housing and about various constraints with regard to financing of mass housing projects. There are multiple issues with regard to financing mass housing. Banks, financial institutions, and lenders have to face many challenges. Policy issues with regard to financing of mass housing are discussed in next sections.
Meeting the essential needs of the common people should be the priority of every government. There are some essential needs that everyone has including education, healthcare, housing, etc. There are some people who may afford these; however, some people are not able to afford these, and therefore, there is a need of government funding for such projects. There is a huge population in developing countries without houses. They have to lead their life without house either on streets or in slums. There is a need of well-planned approach to ensure that no one is without house. Housing is a basic need and therefore it is a priority issue.
The poor need support from governments in housing. There is a need of a plan for providing low-cost housing to everyone so that no one is without shelter. This plan may be implemented through proper financial plan. There is a need to involve private sector also in such schemes. Although it is primarily a government responsibility to provide low-cost housing to the poor, however, the private sector may participate in this as a part of their CSR or as a part of their initiative to spread mass housing. This depends on the model adopted by the governments.
Recent expansion of mass housing programs has occurred in emerging economies. The analysis of research on programs raises questions about what type of plan has been introduced and what its impact has been on mass housing. The Brazilian “My House, My Life” (Minha Casa, Minha Vida – MCMV) program demonstrates that more of the same type of mass housing has been produced. Three million homes have been built and the research community has examined the program’s social, economic, and environmental impacts.
Affordable mass housing has been a term utilized to explain dwelling units whose cost per house is very low and may be afforded by those with median income. In the United States and Canada, a commonly accepted guideline has been set to ensure mass housing affordability. There has been reduced mass housing cost which ensures that it does not exceed 30% of an individual’s gross income; this type of mass housing may be built in the urban centers of developing countries to replace the growing number of slums, shanties, and informal settlements. The term low-income mass housing for the purpose of the research has been taken to mean that in which an individual has been able to pay developing countries shillings 3000 per month for the purpose of mass housing. Majority of the people from developing countries cannot re-pay the loan amount and its interest, if they buy a house on loan (mortgage), and this is the reason for mushrooming growth of slums. Many investors in the financing market in developing countries have termed the financing for the purpose of low-cost mass housing as a failure because of the high rate of default in paying by the borrowers of finance.
Jordà et al. (2016) finds that the share of mortgages on banks’ balance sheets doubled in the course of the twentieth century, driven by a sharp rise of mortgage lending to households. Household debt-to-asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms, which are followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern economies, and therefore, this is the sector which requires attention of policy makers. Warnock and Warnock (2008) examine the extent to which markets enable the provision of mass housing. Housing is a major purchase requiring the provision of long-term finance. They find that countries with better legal, policy, and institutional framework have better housing finance systems. They have also studied housing finance across emerging market economies and developed countries. Calza et al. (2013) document three facts concerning how the structure of housing finance affects the monetary transmission mechanism: first, the characteristics of residential mortgage markets differ markedly across industrialized countries; second, the impact of monetary policy shocks to residential investment and house prices is significantly stronger in those countries with larger flexibility/development of mortgage markets; third, the transmission to consumption is stronger only in those countries where mortgage equity release is common and mortgage contracts are predominantly of the variable-rate type. Kim (1997) present an overview of the knowledge and policy experience in housing finance and urban infrastructure finance taking note of changes in economic environment such as globalization, financial liberalization, and decentralization as well as progress made over the past two decades using cases of good practice. Green and Wachter (2007) assert that houses are expensive. Consequently, the availability and cost of housing finance are critical determinants of how well housing markets function around the world. Changes in housing finance mechanisms are drivers and countries like the United States have mortgage-backed securities (MBS) to provide finance to housing sector. McClure (2000) observes that in the United States, the Low-Income Housing Tax Credit program has been operating for over 10 years and has helped financing thousands of developments with units set aside for low- or moderate-income households. However, the program has been criticized for requiring additional layers of subsidy to leverage investment and for providing benefits to developers in excess of the amount necessary to induce them to invest. They find that the tax credits are syndicated, with virtually all of the syndication proceeds (about 33% of the financing) used to pay for development costs. Conventional lending provides another 44% of the financing. However, these do not cover all the costs; therefore, developers enter into a complex, costly process of layering additional subsidies, one on top of another, to fully finance the development. Thus, there is a need of innovations in this segment. Tomlinson (2007) finds that since the 1994 democratic elections, the South African government has been intent on encouraging the country’s financial sector to extend finance to low-income households as a means of delivering an acceptable standard of housing through its housing subsidy scheme. Tomlinson (2007) examined the history of lending to low-income black households beginning in the late 1980s and describes the problems encountered by the banks from the early 1990s onward and explained the status of housing finance and housing policy. Tomlinson (2007) discussed the effort to mobilize mortgage finance via the banks; the shift in focus toward the use of microfinance for housing purposes via nonbank lenders; the competition that has arisen between the banks and nonbank lenders; the attempt by government to compel the banks to lend through community reinvestment-type legislation and the banks’ response through the establishment of a Financial Sector Charter negotiation process aimed at transforming the entire financial sector. Shlay (2006) analyzed US policy to promote low-income homeownership. Shlay (2006) examined the ideology and assumptions with regard to housing policy and studied homeownership as a strategy for low-income families. Fernandez (2016) explained the absorption of capital by the housing sector and real estate sector suggesting in-depth historical-institutional analyses that not only focus on the development of the welfare state but also on national politics vis-à-vis international finance. Davis and Van Nieuwerburgh (2015) reviewed housing, business cycle, portfolio choice, and financing of housing sector and tried to study impact of housing outcomes on macroeconomic aggregates and vice versa. Gibb (2002) reviews social housing is organized in the EU and studies social housing finance, public spending, and subsidy mechanisms in detail. Mitlin (1997) has reviewed various models of mass housing financing.
Low-Cost Mass Housing Financing
Financing low-income mass housing has been deemed a challenge due to several factors that hinder its proper functioning. Several factors have hindered efficient financing of low-income mass housing. The biggest hurdle in financing of low-income mass housing has been the risk of default by the borrower because the low-income groups do not always have a guarantee of constant financing. These limitations have been the main cause of many financial institutions in developing countries avoiding to venture into the business of financing low-cost mass housing. Research conducted in other countries in the world that have been able to successfully finance low-cost mass housing such as Angola, Namibia, and South Africa have given an insight in how they have successfully managed to finance the low-cost mass housing segment and in reducing the number of slums and other informal settlements (Bah et al. 2018). The problems identified as major hindrance by the financial institutions in financing housing for low-income groups are discussed in next the few sections. Mitlin (1997) reviewed the government programs and schemes and their impact on the housing sector.
In developing countries low-cost mass housing has not been successful because the stakeholders who have the duty to undertake the projects have complained that the cost of building materials, land, and infrastructure, etc. are much higher and that make the project unviable for low-cost mass housing segment. The biggest problem with regard to low-cost mass housing has been the lack of requisite infrastructure. Although the government has encouraged developers to invest in low-cost mass housing projects with the promise of providing proper infrastructure, this has not been the case and most developers and finance institutions have opted to target wealthy households. The wealthy individuals may finance the mortgages where the infrastructure has been good and does not need government involvement because the wealthy individuals in developing countries do not believe that the government will be able to honor its pledge of improving the infrastructure in the urban areas where low-income structures may be built.
Lack of support by high-income groups has been one of the major problems affecting low-cost mass housing segment. In other parts of the world, according to Dr. Marc Weiss, most high-income households do not encourage the growth of low-cost mass housing buildings in the neighborhoods where they reside because according them that may interfere with the beauty of the neighborhoods by erecting low-cost structures; this has been a unique problem that has not been explored by any research in developing countries but has continued to hinder the growth of low-cost mass housing (Global Urban Development 2008).
Fear to invest due to high risk – According to modern portfolio theory, an investor is rewarded through a premium for the purpose of taking some additional risk, meaning the higher the risk, the higher the probability of good profits from an investment. This has been a good example that should be emulated by financial institutions when considering if they should invest in low-cost mass housing. Though the risk involved has been high and the history of financing low-cost mass housing has indicated a poor record in developing countries, yet the analysis shows that such investments have higher probability of giving good returns to the investor (Khanna et al. 2005). The financial institutions taking part in the mass housing market do not have a mechanism to relate the rate of return in the low-cost mass housing market because little, if any, study has been conducted to understand this problem; this has led to some financial institutions lacking the ability to forecast returns, hence avoiding investing in the market due to uncertainty.
The return on investment varies with risk, it is generally higher when the risks are also higher, and lower when the risk associated are also lower (Khanna et al. 2005). It has been observed often that losses by financial institutions have been a result of their own imprudent lending decisions, although even in the best regulated systems some losses have been inevitable and need to be recognized and built into pricing models, meaning financial institutions should be objective in their approach when dealing with matters related to finance for the purpose of low-income group financing (Tighe 2010). The risk return trade-off explains to the potential investor that potential high returns have been associated with the increase in the risk of low returns; hence when investing one has to be aware not to be over-expectant in the returns without having an alternative plan, but that should not be a hindrance to the potential investor who has set a target to invest in a potentially risky venture because such investments may lead to higher profits than less risky ventures. It has been through this relationship that finance companies in developing countries should be encouraged to invest in low-cost income mass housing because that has a potential to produce high returns for the purpose of their business despite the risk level involved (Tighe 2010).
Developing countries have observed that the major problems to low-cost mass housing finance in developing countries have been land, finance, building materials, and proper regulatory framework for the purpose of the projects to be undertaken effectively. Land has been a big problem because it has been highly valued mainly in urban areas where slums have been growing rapidly and mainly. It has been always the responsibility of the central government and the local authorities in any urban area. Due to these problems, land has become a major hindrance to growth of low-cost mass housing structures that would help solve the problems of low-income households (Makinde 2014).
The financial institutions in developing countries offer funds in the hope of making profit and declare dividends for the purpose of its shareholders because that has been the reason why the institutions have been in business. The high desire to earn quick profits has led to increase in interest rates for the purpose of borrowers of finance in the institutions and hence it has prevented low-income groups who cannot afford the high interest rates set by the institutions. The local governments have the duty to help the poor people who cannot manage to pay the high amounts of interest charged by banks and financial institutions. Developing countries like India have started schemes to provide support in interest rates to the poor. In India, the subsidy to the poor comes direct to the bank account of the poor to ensure that there is no corruption. The poor has to buy and the bank has to provide loan. The interest amount on loan can be reduced through the subsidies offered by the government. The government also reduces the land prices indirectly for the purpose of supporting mass housing project. The local bodies also launch their own schemes to support the poor by providing low-cost housing.
Kearl (1979) asserts that constant payment mortgages (imposed, in part, by regulation) lead to distortions in the housing market due to anticipated inflation. The author discusses the nature of this distortion in the context of the housing market.
Wallace (1995) discusses the problem of financing in affordable housing in the United States and the efforts being made to address the gap. At issue are the forms of federal financial support for affordable housing and the relative roles of private, for-profit suppliers; local public housing agencies; and nonprofit, community-based developers in providing affordable housing. The primary US vehicle for affordable housing production is currently the low-income housing tax credit. While this system has produced nearly 350,000 units of low-income housing, it has inherent inefficiencies relative to a direct capital grant and currently requires assembling mortgage financing from a number of sources. The author argues that the Congress and the Clinton administration have been reluctant to encourage much additional development by public housing agencies, and the capacity of nonprofit, community-based developers is still limited. Experiments are under way on a variety of credit enhancement and risk-sharing techniques.
Okpala (1994) discusses the issues of financing housing projects in developing countries in the context of the availability of long-term housing finance on a fairly large and sustainable scale. Policy approaches to realize this situation are still issues of continuing debate in professional circles. The central issues of focus are sustainable availability, affordability, and accessibility of housing finance to households. Evidence currently indicates that a dominant proportion of housing in developing countries is accounted for by informal noninstitutional sources, but it has been increasingly strongly argued that development of a formal institutional housing finance system is indispensable for effectively addressing the quantitative and qualitative housing inadequacy problem. One of the most strongly canvassed strategies is for housing finance to be integrated into the larger national financial system and for its operation to be based on pure market pricing mechanisms, free of government interference.
Financing Housing Projects
Any loan would involve some risk, so there is a need of a guarantee. In the case of housing projects, the loan is against the security of the property. The loan is generally given only up to 80% of the value of the property. However, the prices of property keep changing. If the property price falls, the banks would suffer in case of failure of the party in making payment. Thus, banks need some secure mechanism for financing the projects. There is a need of institutional mechanisms to ensure proper security of financers. These mechanisms would encourage development of healthy financial institutions for the purpose of financing mass housing.
There are also the cases of frauds by the property dealers. There is a need of transparent system with regard to property ownership, property sale, and the commitments by the sellers. In India, the government has institutionalized this system by introduction of RERA, which is an authority to look after commitments of the property sellers and to ensure that these commitments are properly followed. There is, however, a need of such institutions to look after the validity of the land records also. The land records need to be digitalized at the earliest in all the developing countries so that there is no possibility of any fraud with the buyer.
Commercial banks have been in the business of providing financial services to the bank clients; this exposes them to a number of risks due to possibilities of variability or uncertainties associated. Banking risks can be defined as uncertainties resulting in either problems with the balance sheet of the bank or its lending and borrowing activities. The banks undergo many challenges on how to manage the risk involved in banking effectively, and the best way to reduce this has been to identify the source of the uncertainty and magnitude of its potential adverse effect on profitability to the institution by identifying proper measures that ensure the bank has been protected effectively from such risks (Joel 2002, 19).
Credit risk in business has been commercial because it has been business-driven and has been a major source of loss to commercial banks. Credit risks take place when the borrower does not pay back. This is the most common type of risks the banks face. This risk has been very severe because a small number of clients may cause very big damage to the profitability of a bank and potentially lead to insolvency of the lender who has been the commercial bank (Joel 2002, 18).
There have been three main risks: namely, interest rate risk, market risk, and credit risk, and a few other related risks. Banks and financial institutions have to create strong measures to ensure that they are able to absorb risks associated with financing of mass housing.
Interest rate risk has been the risk that occurs due to the decline in the movement and shift of interest rates in any financial market. This may be dangerous to commercial banks because commercial banks mostly generate revenues through interest rates and interest rates tend to be unstable. This means that when commercial banks lend money, they have been subject to interest rate risk, and when interest rates decline, the banks tend to be exposed to interest rate losses (Joel 2002, 18).
Interest Rate Risk
Foreign Exchange Risk
Other Risks: Country Risk, Settlement, Performance.
Market risk is associated with uncertainty due to changes in valuation due to fluctuations in market prices. During hard financial times such as liquidation periods, any decline in the value of transactions for the purpose of commercial banks leads to market loss. Market risk has been also referred to as systematic risk because it has been a risk that occurs more frequently and all businesses undergo through this type of risk because assets tend to change in value due to economic factors. Commercial banks and other microfinance institutions tend to estimate the impact of this type of risk in the performance of the financing activities that they have undertaken (Chomsisengphet et al., 2006). Default risk has been the risk that occurs in the event that a borrower has been unable to pay the amount borrowed as promised and signed when being given the loan. Default in payment of loans has risen due to recession; this has been caused by several factors such as loss of employment by borrowers, death of the borrower, or even bankruptcy by the borrower of finance. Default risk has been a major risk that most financial institutions undergo, but the financial institutions have been protecting themselves from losing much by acquiring insurance for the purpose of the loans they offer to their clients. This then enables them to recover the money they loaned incase a default in payment occurs (thefreedictionary.com 2010).
Financial institutions in developing countries have avoided investing in low-cost mass housing due to high credit risk involved, but some study has to be done to find a way of managing risks involved. There is a need to develop new products and instruments to encourage banks to undertake financing of mass housing. There is a need to develop good secondary markets for dealing the loans of mass housing. If a bank wants to exit from mass housing project, it should be able to sell its assets relating to this project in the secondary market and exit this market. However, this will still take some time. According to Chapman and Ward, all projects involve risks and any project with very small risk has been not worth pursuing, and hence, it should be a clear indication to the financial industry participants that risky venture should be able to generate a good amount of income if it has been managed well. Low-cost mass housing finance gives good returns; however, banks and financial institutions should employ suitable mechanisms to check the project, its viability and its legal issues and to check the status of the borrowers (Chapman and Ward 1997). Financers prefer to give loan to big borrowers and they generally avoid financing low-cost housing. However, they should realize that these loans are comparatively less risky. Risk cannot be completely eliminated, but through proper studies, the probability of risk may be minimized. There are various risks associated with financing any project and therefore mass housing projects are also risky projects. However, there is a need of institutional mechanisms, which may protect bankers and financers from such risks. There is a need of development of good rating and ranking institutions, which may rank the builders and real estate dealers. There is a need to rank and rate the borrowers. There is a need to develop good mechanisms for supporting the financing of the housing projects. Although mortgage loans have been long-term loans, the financial institution does not have a limitation on the amount of principal the lender may pay as prepayment of the mortgage payment; hence, when the lender chooses to pay higher prepayment on the mortgage, the finance institutions losses the amount of interest that they were expecting to gain from the long period of paying the mortgage. This has been also a major risk in mortgage financing. The prepayment risk has been not unique in any financial institution, and some institutions have devised means to ensure that they do not accrue losses due to prepayment risk (Choudhry 2003). Mortgage-backed securities have been utilized by financial institutions to gain capital markets for the purpose of funds from mass housing and to improve the accessibility and affordability of mass housing to allow lenders to better manage the complex risk of mass housing finance default. Mortgage-backed securities may make a major contribution to mass housing finance in the people from developing countries market where finance institutions have avoided the task of financing for the purpose of low-income groups due to the high risks they have been exposed to (Chiquier et al. 2004). Mortgage-backed securities provide a large amount of debt securities on the balance sheet of most finance companies, and it has been evident that some nonbanking institutions have been the major stakeholders in the mortgage industry, hence creating unfair advantage for the purpose of other financial institutions in the business who have not entrenched the mortgage securities in their daily business life (Calem and LaCour-Little 2004). Mortgage securities represent an ownership interest for the purpose of mortgage loans made by financial institutions to finance the borrower’s purchase of a home. They have been secured by a mortgage on real estate or other long-term assets of the borrower. This ensures that the financial institution may recover the money it financed from the asset of the borrower or the mortgage itself. This has been a clear means of reducing the risk of default by borrowers of finance (Ross et al. 2002). The most basic mortgage-backed securities, also known as pass-through securities or participation certificates, represent a direct ownership interest in mortgage loans (Gitman and Joehnk, 2002). As an investor in such securities, one holds an undivided interest in mortgages, implying that when a home-owner makes a monthly mortgage payment, the payment has been passed through to the investor. Although these securities give the borrower some relief, the interest has been paid monthly rather than semiannually. In essence, the monthly payments received by bondholders have been the mortgage payments comprising both the principal and the interest. These securities have been self-liquidating, since a portion of the monthly cash flow to the investor has been repayment of principal (Broadhurts 1996). Therefore, at maturity of the securities, there has been no big principal payment because the investor always receives back part of the original investment capital. Loan repayment had been a problem with mortgage-backed securities which led to the creation of Collateralized mortgage obligations (CMOs). CMOs have been derivate securities created from traditional mortgage-backed bonds placed in a trust. Participation in this trust has been then sold to the investing public in the form of CMOs. Investors have been divided into classes called tranches, depending on whether they want a short, intermediate, or long-term investment (Gitman and Joehnk, 2002). In the collateralized mortgage obligation, the interest has been paid to all bondholders and all the principal payments paid first to the shortest tranche until the principal has been fully recovered. The creation of mortgage-backed securities and CMOs in the mortgage industry has led to the development of a new market technology known as securitization. Securitization has been a common way of raising cost-effective finance for the purpose of a wide range of different assets that were previously difficult to finance. It had been initially developed in the United States and later introduced in the UK in the mid-1980s. Securitization should be popularized in developing countries also. Choudhry (2013) defined securitization as the creation and issuance of debt securities or bonds, whose payments of principal and interest have been derived from cash flow generated by separate amalgamation of assets. Financial institutions that wish to finance low-income groups may use securitization to get finance against their assets; this process will effectively gather a group of individual mortgages such that they may be utilized for financing purposes. According to Ross (1999), securitization occurs when the selling company sells its loan to a financial institution. The financial institution then pools together the loan with other loans and issues securities for the purpose of the financing process (Choudhry, 2003). Fabozzi and Modigliani (1995) mentioned about the schemes relating to securitization of mortgages. Obtaining a lower cost of funds that takes assets and uses them as collateral for the purpose of a security offering enables lower funding costs to be obtained by the financial institution. Property-based collaterals provide easy financing facilities. Banks are comparatively better placed in mass housing projects due to the fact that there is collateral of property here (Fabbozi and Modigliani1995). Many new financial institutions are coming up. Now the securitized loans and mortgage loans can be offered to these institutions as a secondary market. The development of rating institutions and the development of loan recovery institutions will also help in the development of this industry. Kim (1997) has suggested for not only financial innovation but also for good governance and political commitment for developing of financing models for mass housing projects.
According to Kotler and Armstrong, pricing recovers the costs and values of the sellers. Pricing is a major issue in housing. Due to higher costs of land and infrastructure, the housing costs are escalating. Financing of housing is a necessity due to high prices. Mass housing finance companies have to evaluate capability of finance seekers. However, with the number of low-income households rising, extensive research and innovations should be conducted on financing low-income groups. The low-income earners in the society do not have the high income that would be required by the financial institution and this automatically disqualifies them (Kotler and Armstrong 2008, 633). The mass housing finance sector in developing countries has been experiencing challenges of a complicated three-tier market that has been served by an elaborate financial system. At the top of the hierarchy have been households that may afford mass housing of high quality. In the middle category comprises the middle-income group (MIG) which has been predominantly composed of salaried workers as well as self-employed people. The third category which forms the majority of households has been low-income earners. They have been the most affected by mass housing problems arising from inadequate mass housing and the displacement caused by insufficient mass housing facilities for the purpose of middle-income earners (National mass housing policy 2004). The three financial institutions that offer financing and support for the purpose of the low-income mass housing segment in developing countries also have to consider certain important issues before setting prices of houses for the purpose of would-be tenants or those who have the desire to invest in low-cost mass housing or even informal mortgage for the purpose of the wealthy.
Most financial and mass housing companies in developing countries want the cost at different levels of construction in the mass housing industry to be considered when pricing the houses for the purpose of low-cost mass housing segments. However, this does complement growth of low-cost mass housing. Due to this development, some of the stakeholders in this field of financing have concluded that low-cost mass housing has been not a wise project to go into and does not offer returns of profit to the investor. When marketing low-cost mass housing projects, the strategy employed by financing companies should be commensurate with the target market. Financing companies need to also remember the exact levels of demand for the purpose of low-cost mass housing and ensure that they may provide for the purpose of the demand and not provide too much or too little, as this would result in shortage or in excess of supply. The main stakeholders in the field of low-cost mass housing believe that competitor strategy and prices should be a big factor when offering financing to low-cost mass housing customers, because to be successful in pursuit of service delivery, individual finance companies have to remember the strategies that will ensure they have been better than their competitors in service delivery and finance options to customers (Philip Kotler et al. 2008, 639–644). The mortgage market however has evolved over a period of time due to subprime lending, which has introduced a substantial amount of risk-based pricing into the mortgage market. This has been due to lenders imposing prepayment penalties for the purpose of those who extend the duration of loans and request a larger deposit before they may advance financing. This ensures lower credit exposure from high-risk loans; this has been one of the most effective means to reduce the risk of default (Souphala and Anthony 2006).
Mode of Financing Mass Housing
Low- and middle-income earners and even most upper-income groups in society need a mortgage to be able to construct or purchase good mass housing facilities. In Africa, Asia, and Latin America, it is different as low-income group of people cannot afford to buy or build good-quality house so they are forced to take it on rent or build in illegal settlement areas (Sommers and Marc 2003). This has been due to lack of sufficient income and proper documentation that many mass housing and finance companies require in order to finance a mortgage. Many financial institutions however have made progress in the last 15 years to try and solve the problem of mass housing for the purpose of low-income groups all over the world; this has been done through becoming less concerned with direct provision of mass housing and more interested in working with financing the whole population to ensure greater choice for the purpose of the beneficiaries. The examples mentioned below show how countries that have been successful in financing low-income houses effectively reduced the level of poverty. Sommers and Marc (2003) observes in Tanzania an example of renters of low-cost mass housing projects. In South Africa, the Kuyasa Fund set up by the residents of South Africa, offers them loans for the purpose of improving the shelters they have been residing in. This has been very successful because 65% of the members use the fund to save money which they use in improving their lives by acquiring better mass housing facilities. Such programs have been established in Malawi and Namibia also where self-help groups set up by the people living in slum areas have helped achieve success in improving lives of the people in those settlements by helping them save money.
Microfinance agencies in Angola offer small loans for the purpose of mass housing improvements; the loans have been given to households who have guarantee of tenure of a certain piece of settlement, adding a room, toilet, or bathroom within the shelters they inhabit. These programs have also been practiced in the Philippines where the institutions have provided loans for the purpose of mass housing improvement. Group lending has also contributed to improving the living conditions of inhabitants in Namibia; it includes loans for the purpose of fund investments in land and infrastructure. The Namibian mass housing action group has developed a program that regulates land purchased from local authorities and extends the infrastructure and construction. This has proved to be very affordable to very low-income groups in Namibia (Marc 2008). In the Philippines, the community mortgage program also provides state support for the purpose of loans given to low-income groups. There is a need of innovative products for financing mass housing. There is a need of efforts on the part of both financial institutions and on the part of governments to evolve better methods of financing the low-cost housing. Companies may be asked to create some funds to help their employees in taking houses on finance. Financial institutions may be asked to contact the companies in selecting the lenders and they may be asked to prepare scheme for mass housing in collaboration with companies which may solve these problems. Kim (1997) has suggested financial innovations and policy innovations for financing mass housing.
Financing mass housing requires a good system with regard to real estate sector. There is a need to create a healthy system for bankers, financers, and institutions to provide finance against houses. There is a need to create a policy for supporting mass housing projects. Governments have to provide some financial support to the poor. Governments may provide subsidies in the form of reduced rate of interest or may provide credit risk coverage by assuring that the government would support in case of default by the borrowers. This will help the banks and financial institutions and this will strengthen this sector. Governments must allocate some funds for the purpose of supporting mass-scale housing. Banks and financial institutions are reluctant to finance in this sector due to higher probability of credit risks. However, there is a need to create suitable mechanisms to protect banks and financial institutions. There is a need of innovations in the sector of financing for mass housing.
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