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James Hokans January 2010

A Builders’ Warranty Scheme: Would it help Unleash Finance into the Lower-end of the Mortgage Market?. James Hokans January 2010. Some keys to a functional affordable housing finance market. Builders warranty scheme (BWS) can facilitate developer (debt) finance.

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James Hokans January 2010

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  1. A Builders’ Warranty Scheme:Would it help Unleash Finance into the Lower-end of the Mortgage Market? James Hokans January 2010

  2. Some keys to a functionalaffordable housing finance market

  3. Builders warranty scheme (BWS)can facilitate developer (debt) finance

  4. Vexing problems inurban low-income housing markets • Land security and affordability due to the limited supply of regulated land • Limited number of financial institutions delivering small mortgages at scale within acceptable risk parameters • How to attract reputable developers/builders? • Difficulty of developers accessing construction finance • Lack of standardization of acceptable building standards and processes • Lack of consumer education and protection against rectifying building defects • Others… Source: Monitor 2007

  5. Formal employment Title to land Housing finance segmentation (typical) Urban; Middle/upper National poverty line Informal income; no legal title Primarily rural; very poor

  6. Sources of developer finance • Developer equity • Pre-sales and/or buyer pre-payments • Equity investors • Conventional debt finance (banks/NBFCs)

  7. Limitsand other problemswith these first two sources: • Developer equity is limited in quantity • Fewer projects get developed • When homeowners finance construction via deposit payments to developers, results include: • Homebuyer bears construction (unmitigated) risk • Risk of developer fraud • Many creditworthy buyers don’t have ample savings  decreases effective demand

  8. BWS helps develop affordable housing finance marketsbyfacilitating developer access to conventional debt financing,*as in South Africa (discussed later) * The prospect of raising equity investment (from passive or institutional investors) is not discussed here. Such investment is unlikely to precede the leverage provided by conventional debt finance.

  9. Virtuous circle of BWS:

  10. What is a builders warranty scheme? • Two models: • Netherlands: Insure homeowners’ pre-payments in case developer defaults prior to completion • South Africa: Coverage for building defects for a certain period after owner occupancy • The latter is the focus of this presentation.

  11. South African Context • Post-Apartheid: President Mandela wanted to get the private sector involved • Capital subsidies available • Other institutional start-ups • National Housing Builders Registration Council

  12. Details of South African example • Administered by NHBRC, which: • sets national building standards • manages registration & rating of all developers • Independent inspection prior to occupancy • Covers major building defects for 5 yrs. • Covers minor building defects for 90 days • Threat of license revocation if developer fails to correct defect • Homeowner fee:1.3% of construction cost, and can be capitalized in loan or paid • Developer fee: $100 in Year 1; then $25/yr.

  13. Desirable outcomes of BWS in SA: • Standardized housing design  reduced cost • Better quality housing stock • Contributed to rapid development of 1 million new affordable houses (bank-financed)

  14. Analysis of BWS Fees (all in USD)

  15. Business Case for BWS can be positive:No Fiscal Contribution Big Assumptions: • 1.0% warranty fee • 1.1 m units under warranty yr 5 • Inspector salary $30k/yr., completes 12 per day • 1.5% make claims • $2,250 (50%) cost per claim, with half ($1,125) covered by developer and half by BWS ($1,125) • Other operating costs at 35% of revenues • Fiscal contribution $.5m 1st yr

  16. Concerns and potential downsidesto be carefully managed • Developer resistance (costs, admin.) • Insurer over-zealous resistance to pay claims • Does not address developer default pre-occupancy • Inadequate number of inspectors • Added development costs (~ 1%) • Insurer liability if unexpected claim rate

  17. Key elements of BWS: • Competent, well-positioned and politically supported institution to administer it • Setting appropriate building code standards • Low entry barriers & training for developers • Availability of inspectors • Efficient dispute & claim resolution process

  18. Contact: James Hokansjhokans@bankablefrontier.comwww.bankablefrontier.com 48 Grove Street, Suite 303 Somerville, MA 02144 USA USA Tel: + 1 617 628 – 0711India Cell: 00 91 971 762 7122 Thank you!

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