Financing for affordable housing

Millions on earth do not earn enough to afford a house. Housing prices have spiraled up, and would continue to do so as pressure of population and nuclearisation of families continues. As there is a humanitarian angle to affordable housing finance, this topic is very dear to me, and I wish to do much more work in this field... Here is a modest beginning.

Sound Housing finance systems:

Following are the generally acceptable features of a sound housing finance system:

• Efficiency in mortgage creation
  • The foremost requirement in efficient mortgage creation is the existence of clear land titling and registration laws. Almost in every country that recognizes land as private property, there exist some or the other system for registration of land. If the land registry records are properly organized, easily searchable, etc., it becomes easy to ascertain the title of the mortgagor.
  • In every country, there are tax implications on transactions in land. From a policy viewpoint, transactions in land are a lot different from transactions in other commodities, and therefore, it is perfectly understandable that governments/ local authorities should try to earn taxes on transactions in land. If transactions in land were easy and cheap, it would encourage speculative trading in land which may not be desirable for any country.
  • Creation of mortgage typically takes place by filing of a mortgage deed along with relevant other information with the registry office. In countries that adopt the Article 9 of UCC style laws, such filing is electronic. Whether electronic or otherwise, the ease in filing of a mortgage document is the feature of an efficient mortgage creation system. Once again, that there should be a tax/documentation tax or stamp duty to be paid at the time of creation of the mortgage document is perfectly understandable.
  • As the creation of a mortgage is registered, an assignment of the mortgage also requires registration.
• Efficiency in mortgage foreclosure:
  • This is the most important as also the most sensitive part of mortgage laws. The purpose of creating a mortgage obviously is to enable the mortgagee to look at the mortgaged property where he cannot seek repayment from the borrower. However, in case of house property, there are social considerations that overpower a purely legal perspectives.
  • An ideal mortgage foreclosure system should ensure balance between creditor rights and debtor equity. Recent security interest enforcement laws have favored self-help foreclosures; however, this may not be the ideal system. Mortgage foreclosure systems should require mandatory service of a series of notices on the borrower, followed by foreclosure, but then still preserving the right of the borrow to redeem the property within  a certain number of months after foreclosure. There must always  be an appellate mechanism allowing the right of redressal to the borrower.
• Sound mortgage refinancing system:
  • Origination of mortgages is intrinsically associated with refinancing of mortgages. Since mortgages are long-term, unless the mortgage originator has a regular source of refinancing, soon a mortgage originator’s balance sheet will get clogged.
  • Mortgage refinancing systems may include several secondary market sources that have been discussed elsewhere.
• Role of the State:
  • The State has the role of enabler, facilitator. The State may not be a player itself.
  • However, when it comes to affordable housing, the State may have to assume greater role. Purely market-based mechanisms may not serve the needs of low income groups.

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