Debate: Is mortgage refinancing a bad idea?

By Kazim Alam

KARACHI: Following in the footsteps of advanced economies, Pakistan is soon going to establish its first mortgage refinance company that – the government believes – will form the bedrock of a vibrant secondary mortgage market.

Notwithstanding the myriad inadequacies of the country’s housing market, policymakers seem poised to set up the mortgage refinance company with a paid-up capital of Rs6 billion and a broad shareholding of the government, commercial banks, development finance institutions (DFIs) and multilaterals.

The government expects the company will generate long-term liquidity for banks and DFIs. Like its counterparts in advanced economies, the proposed company will purchase housing loans from financial institutions engaged in loan origination – like House Building Finance Company (HBFC) – and package the same for their onward sale to long-term investors.

In theory, this will free up liquidity for mortgage originators and enable them to increase their housing portfolio in a short period of time. As a consequence, housing finance will become more accessible in the economy, as mortgage originators will not face liquidity shortages despite a rapid increase in their housing portfolios.

The general response to the proposed mortgage refinance company has been largely positive. From the Association of Builders and Developers of Pakistan (ABAD) to the banks and DFIs with footprints in the housing finance market, nearly all stakeholders have hailed the decision to establish the mortgage refinance company.

Speaking to The Express Tribune, HBFC Managing Director Pervez Said said liquidity shortage is one of the key constraints that the country’s biggest housing finance bank is currently faced with. “Mortgage refinancing is the need of the hour. We welcome the government’s decision to set up the mortgage refinance company,” he said.

However, some economists have raised concerns about mortgage refinancing in Pakistan.

“It is a donor-sponsored, bad idea. International Finance Corporation (IFC) is retailing it everywhere,” Planning Commission’s former deputy chairman Dr Nadeemul Haque said in an email to The Express Tribune. “I had killed it in the Planning Commission. Why can donors not take no for an answer?” he said while referring to the country’s principal public policy development institution where he served as deputy chairman between 2010 and 2013.

Haque says the IFC, which is part of the World Bank Group, took up the issue with the new government in 2013 and finally got it approved.

He disagrees with Said’s assessment that liquidity is a key constraint when it comes to popularising housing finance in Pakistan. “Liquidity is not an issue in the housing market,” he said. Noting that supply is the real impediment, Haque says it cannot be removed without addressing the land zoning issues first.

Similarly, he insists that housing demand will remain subdued until reforms in the bureaucracy take place. “Financial engineering will only magnify risks,” he said.

Referring to the global crisis of 2008, which was primarily mortgage-based, Haque wonders if it should be encouraged in Pakistan, given that the country is still in an early stage of development.

“Mark my words. This company will only create bad debts, and will have to be bailed out in five to 10 years,” Haque said, adding that banks love passing on their risks to taxpayers.

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