1 / 10

State Housing Banks: Handle Carefully!

State Housing Banks: Handle Carefully!. Douglas Diamond 15 March 2006. What is a State Housing Bank?. Direct state intervention into the primary market, through a state-sponsored entity (usually specialized in housing; often not a real bank)

yuli-davidson
Download Presentation

State Housing Banks: Handle Carefully!

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. State Housing Banks:Handle Carefully! Douglas Diamond 15 March 2006

  2. What is a State Housing Bank? Direct state intervention into the primary market, through a state-sponsored entity (usually specialized in housing; often not a real bank) • A few are partly private, and/or run on commercial principles • Using market or special funding, maybe special instruments • In 1960s-80s, it was usually a bureaucratized, civil-servant mentality state lending window • Today, it may take many forms: • Secondary-market window taking on primary market risks • Sure sign: buying loans permanently with recourse • Public-private entity aimed towards lower income • Second round of SHBs because still no private options

  3. Where are/were State Banks? If you look hard enough, they have been almost everywhere (maybe > 100?): • Almost all of Africa, above and below the Sahara (not South Africa) • Most of South America, Caribbean, Mexico • Most of Asia (incl. Japan, Korea, India) and all of the Middle East • Some of the ex-Communist countries, but not all • Generally not in Europe and North America, although there are/were close cousins (CFF in France, BH in Spain, CMHC in Canada, GSEs and S&Ls in the US)

  4. Why State Housing Banks? In theory, it can pioneer the business of market-rate lending for housing. • The Imperfect Market Rationale In practice, it is usually a convenient shortcut in delivering housing finance without establishing proper macro or micro conditions in general, and/or for delivering major subsidies from special funding.

  5. Record of State Housing Banks • Majority suffered large losses and failed/froze • Some caused damage much larger than any possible system developmental benefit • e.g., 1-10% of GDP is common, like the US S&Ls • Most provided political benefit of making visible the “concern” of the state/politicians and supported housing construction when conditions were adverse • Maybe benefits were worth the costs?? • Some Not So Bad Cases (<10?) • Jordan (HBJ), Chile, and Thailand were able to keep theirs on commercial principles, and demonstrate potential for lending at lower middle income levels.

  6. Poor Performance of Housing Banks • Subsidized fund sources mean HBs are not disciplined by the market • Operating costs are therefore usually high • With rates subsidized, borrower selection may be politicized or automatic (entitled) • Actual borrowers often wealthier than intended • May crowd out other lenders • May seek special subsidies to survive if competition is permitted • Public prefers the lottery prize

  7. Fatal Performanceof Housing Banks • Credit losses are high • HB reluctant to enforce liens for social/political reasons • Borrowers often view loans from HB as grants • New lending comes to halt due to low recoveries • Funding is unsustainable or very distortive or deeply unfair • Budget-based or state-guaranteed debt, special tax fund, forced purchases, advantaged deposits • Mortgage instruments may be inappropriate • Fixed rates/dual indexes in an unstable macro-environment • Other market risks not managed • Is that the point, to “lend” in the face of likely adversity?

  8. Lesson 1:Think twice before creating state-sponsored entities Fix the problems in the economy, enable the private sector • But may have to address the political vacuum….try working through private sector instead Secondary market entities have a better risk/benefit profile as state interventions • Limited subsidies and risks; private role • But the latest trend is for state-sponsored secondary market entities expanding into the primary market • Philippines, Hungary (FHB), Kazakhstan (KMC), Ukraine (SMI), Fannie Mae

  9. Three More Lessons • Have a large private-sector role • Public/private entities are more likely to have strong commercial culture: Jordan, Ghana • Attitude of top management is key • Top management should be private sector, NOT political • Success of Jordan, Ghana, and Thai greatly due to management • Limit access to the lower middle-class • Leave room at the top for the private sector

  10. Even More Lessons • Avoid monopoly access to special funds or subsidies • Do not mix deep subsidies with market pioneering • May need to “bribe” private sector to enter, but that’s better than leaving state bank alone • If have to carry subsidies, separate from commercial activities • Avoid mixing development with special funding • Truly an effective but disastrous combination • Iraq: First idea to cross their mind for speedy impact • Move to full privatization ASAP • Try a sunset provision to state-sponsorship • No perfect substitute to getting the state out entirely • E.g., Fannie Mae messed up because it still has perverse incentives…and it always will tend do so

More Related