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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)

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State Housing Banks: Handle Carefully!

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  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

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