FROM THE OFFICE OF PUBLIC AFFAIRS
Remarks for the African Development Bank Round Table on the Role of Mortgage Finance in Developing Capital Markets
May 25, 2004
The development of mortgage markets is important for the overall development of a country. It contributes to employment, the development of commercial banking and ultimately to the development of capital markets. Most importantly, it increases the well-being of households by providing superior shelter and helping establish personal wealth - wealth that can be leveraged for creation of more wealth.
Yesterday my colleagues made the point that housing is a significant component of the economy of the United States. I think that this point should be emphasized. Housing and its related industries contribute roughly 20% to the U.S. GDP. This number is large because housing affects not only home building but it also stimulates other varied parts of the economy such as banking, professional services, building materials and even the production of furniture and appliances. The mortgage finance industry alone generates $7 trillion in new mortgage originations a year and contributes to a robust market in mortgage-backed securities and other capital markets products.
The mortgage market in the U.S. was not always so successful. In fact, 70 years ago it was virtually non-existent. If someone wanted to buy a home, the options were very limited. A person could either pay cash or, if he was very lucky and had a good relationship with a local banker, could obtain a short-term loan – usually less than 10 years in duration.
This situation changed almost overnight when in 1934 the U.S. Congress created the Federal Housing Administration, also called the FHA. FHA mortgage insurance made 30 year mortgage loans possible by providing comfort to commercial lenders to lend long term. Essentially the government assumed the credit risk of mortgage lending thus creating a new market for commercial banks.
After the creation of the FHA, the U.S. mortgage market began to grow. It was not, however, until after the second World War that the mortgage market’s growth surged. Soldiers returning from the war were in need of housing. To help the private sector meet the increased demand, Congress again enacted legislation now commonly know as the GI Bill. Among the provisions of the legislation was a new mortgage insurance program and down payment assistance for veterans. The result of the GI Bill was to make homeownership accessible to even more Americans. The GI Bill directly helped me and my family. My father was one of those veterans returning from the war who was able to purchase a home through the GI Bill. Using the Veteran’s guarantee he bought our first home in Levittown, New York.
Acknowledging the critical contribution of housing finance to the development of economic well being, President Bush announced last summer in Abuja, Nigeria his desire to see mortgage markets developed in Africa. He requested that the Treasury Department lead a US government effort to assist African nations develop their respective mortgage markets. We are using institutions such as the Overseas Private Investment Corporation (also known as OPIC) as well as USAID and its Development Credit Authority to create mortgage and micro finance programs. In addition, with assistance from Ginnie Mae, my organization is developing technical assistance programs focused on both primary and secondary market development in a number of African countries.
Before I go on, it is important to point out that before we can expect development of a mortgage market, some prerequisites need to be in place. These include, (1) defined property rights and the ability to transfer title of real estate; (2) a legal system that supports the enforcement of contracts as well as support the ability of lenders to foreclose on defaulted loans and efficiently seize and resell collateral; and (3) stable macroeconomic environment that is favorable to long term mortgage lending. The primary focus of our work, however, is not these prerequisites but rather the development of lending programs as well as the institutions that are required for lending. Such institutions include liquidity facilities and credit risk management programs.
The success of the FHA in part guides our work in Africa. We have taken the position that effective management of credit risk is critical for the introduction of long-term lending and requires a threefold approach of loan underwriting, loan servicing and mortgage insurance aimed at the unique needs of low-income and informal sector households.
Since President Bush’s announcement, the U.S. has been very active in developing mortgage programs in a number of African countries. We have commitments for funding almost $50 million in mortgage market related programs though OPIC loans and USAID grants. In addition, my department is working on policy and institutional design of credit risk management facilities and a secondary market transaction. Some of our projects include:
$8 million OPIC loan for the construction of 500 single family homes in Uganda. The program is particularly interesting because once the construction loan is repaid, the funds will be re-loaned to a local financial institution which will on-lend the funds to households for 15 year mortgage loans.
$5 million OPIC loan for the guarantee of local bank financing for the construction of 500 low income apartments in South Africa.
$4 million USAID grant for the establishment of a micro lending facility for housing and small business development in Nigeria. An innovative feature of this project is that the facility will rely primarily on local private sector financial institutions for liquidity.
$3.5 million OPIC loan for the construction of 175 middle income homes in Nigeria. We are looking into the possibility of adding a mortgage component to this program.
$5.3 million in OPIC loans for the construction of 300 middle income housing units in Ghana. While this is currently a construction program, we are looking into the possibility of extending it into a mortgage lending program.
$5 million OPIC loan for the construction of 750 low income homes. The program also includes a lease-purchase program which will act similarly to a mortgage lending program.
My staff is currently working with the government of Botswana helping them to develop a mortgage-backed securities program to provide liquidity to local banks.
These programs and others that the United States is undertaking are a start in developing mortgage markets in Africa. I am encouraged that the African Development Bank has also taken an interest in the topic and hope that it will be able to fund similar programs. To this end, I propose that the Bank adopt firm goals for the development of mortgage markets. Success can be measured by the ratio of mortgage debt outstanding to GDP.
For many African countries the time is right to seriously address the issue of mortgage finance. I look forward to collaborating with the Bank on this important issue.