Presented by

Neelutpal Saha (222012)

Introduction

• The Rs 9.7 trillion Indian housing finance market has grown at a steady rate of 19% CAGR over the last three years while reporting good asset quality indicators despite challenges in the operating environment.

• While the market continues to be dominated by the five large groups namely SBI Group, HDFC Group, LIC Housing Finance, ICICI Group and Axis Bank, accounting for 61% of the total housing credit in India as of September 30, 2014, there has been an emergence of quite a few new entrants in niche segments like affordable housing and self employed borrowers, given the high growth potential in these segments.

• While in the past, banks were mostly focused on corporate lending, over the last one and a half years, mortgage and specifically home loans have gained increased importance and have become key thrust segments for many banks. Consequently, the home loan book for banks has grown at a higher pace as compared to past years (15% in H1FY15 and 18% in FY14 as against 14% in FY13).

Application: Financing Eco-Housingin India

• Eco-housing is defined as “Environmentally benign and energy efficient buildings, sustainable construction practices, and healthy and productive indoor environment, with lower natural resource use”

Eco-housing financing mechanism:

• Micro-Finance

• Eco-housing mortgages

• Fiscal incentives

• EcoTRA: An innovative model to finance Eco-housing in existing buildings

EcoTRA- IIEC’s proposal is to establish Trust and Retention (escrow) Accounts to finance climate friendly interventions in common areas of Co-operative Housing Society (CHS)

• The model functioning is as follows: Banks lend to CHS for energy and water efficiency improvements in common areas. The bank places a lien on the general purpose account of the CHS for repayment of the loan. The repayment may be aligned with energy savings from the installation of Eco-housing measures.

• The escrow mechanism is expected to reduce the risk of lending, giving banks access to a large number of new clients. Co-operative housing societies will have increased access to finance and lower utility bills; energy efficiency service providers will receive additional business, and large-scale implementation will lead to lower energy consumption

Research Paper: Equity-Based Housing Financefor Low-Income Households

• The proposal offers a three-tiered instrument involving equity, mezzanine finance, and debt

• Potential homeowners save for equity through informal savings accounts that allow rotating lump-sum draws. Contingent on the size of their down payment, a mezzanine fund provides funding at closing.

• The return on the fund is from a premium over the conventional prime mortgage rate and either an equity position or a look-back second mortgage with no payment.

• The homeowner receives an interest in the mezzanine fund. The intention is to securitize the mezzanine fund, leading to tradable home equity, the last large illiquid asset in wealth.

• As a working case, five members agree to save $1,000 annually for 5 years, depositing $5,000 in the pool. The pool allows each member to buy a house by 5years, with sequential drawings allowing one borrower a year. The total required contribution over five years is $5,000. A low-bidding member bids $4,000 for having the first draw on the pool. The successful bidder, by adding $1,000 from savings has $5,000 toward a down payment. If the house has a price of $100,000 a total equity contribution of $20,000 is required to avoid paying for mortgage insurance.

• The remaining portion of the down payment of $15,000 comes from the mezzanine fund. Although these funds do not operate with insurance, a premium could be added to cover default risk, spread over many pools . Default occurs if a member fails to make a contribution, apparently a rare event in such arrangements.

• A borrower with a 5 percent down payment, the lowest equity contribution receives 15 percent in contribution from the mezzanine fund. The remaining 80 percent comes from a conventional mortgage. The mezzanine finance counts as equity, allowing the borrower to avoid formal mortgage insurance. The borrower pays the equivalent of the premium to the mezzanine fund.

• Another source of return to the mezzanine finance is as participating equity where payment is deferred until sale of the house. With sufficient pooling of the mezzanine finance, the issues can be securitized as a real estate investment trust. The transaction has a lower loan-to-value ratio, community support, and monitoring through the rotating equity fund, financial market monitoring through the mezzanine fund, and participation of government-sponsored enterprises purchasing the mortgages.

• The fund never requires the owner to sell a house. The liquidity event comes from the mezzanine fund having an offering. On a sale or cash-out refinancing, the mezzanine fund is entitled to its pro rata share.

• On a delinquency, the servicer informs the mezzanine fund. The mezzanine fund can maintain the loan current by making a payment in exchange for extinguishing or borrowing against the owner’s equity in the fund.

• Alternatively, the fund buys out the owner with a first right of offer. On a default with loss, the sequence is that first the owner loses all its equity, and then the fund begins to lose equity.

RBI asks bankers to be innovative on home loans

• Reserve Bank Deputy Governor R Gandhi asked lenders to be more financially innovative in designing home loan products and suggested creation of a periodic deposit-linked facility. "There is a need with respect to financial innovation, with respect to loan products. One such product would be savings-induced home loans or a home loan deposit“.

• The amount deposited by the customer can act as the margin money for the down payment or as a collateral, he said, adding, if implemented, the lender will get an exact idea about the repayment capacity of the future borrower based on the deposits made during the period.

RBI new norms for Home Loans

• Giving a boost to affordable housing, the RBI eased the norms for home loans for up to Rs 10 lakh by allowing banks to include stamp duty and registration charges to the cost of a unit.

• These charges form around 15 per cent of the cost of the house and place a burden on borrowers.

• The RBI also said that in cases of projects sponsored by government, statutory authorities, banks may disburse the loans as per the payment stages prescribed by such authorities, even where payments sought from house buyers are not linked to the stages of construction.

Government Initiative: Interest Subsidy Scheme for Housing the Urban Poor (ISHUP)

• ‘Affordable Housing for All’ is an important policy agenda of the Government of India. A major initiative has been launched for provision of housing for the Economically Weaker Sections (EWS) and Low Income Groups (LIG) through the Jawaharlal Nehru National Urban Renewal Mission (JNNURM).

• The Ministry of Housing and Urban Poverty Alleviation (MH&UPA), Government of India has designed an Interest Subsidy Scheme as an additional instrument for addressing the housing needs of the EWS/LIG segments in urban areas.

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