Can development of Secondary Mortgage Market help fix the housing shortage in India?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta

As has been documented on numerous occasions about the shortage of housing in India, till 2012 (as per the census results) the housing shortage in urban areas stood at 18.78 million units**. About 99% of this housing shortage pertains to the economically weaker section (EWS) and low income group (LIG) categories. That’s a whopping number and constructing those many housing units for growing urban population will take enormous effort on the part of government, private businesses, and finance ministry.

Providing low cost housing finance to plug the housing shortage is seen as the key ingredient. However, most banks use traditional products such as using funds from deposits to finance long term housing loans. Therefore, to provide housing on a scale as large as in India, the concept of secondary mortgage market may well soon be adopted in India. In this article, we will briefly talk about the secondary mortgage market and why it is difficult to implement in India.

What is a Secondary Mortgage Market:

The secondary mortgage market is active in developed economies such as USA, Europe, Japan, Australia, etc. The primary function of this market is to provide a mechanism for refilling funds used by mortgage originators (Banks, Housing Finance Companies, etc.). This, in turn, enables them to maintain a flow of new mortgage origination during periods of rising and falling interest rates. They may accomplish this by selling mortgages directly to government agencies or private entities. Or they may form mortgage pools and issue various securities, thereby attracting funds from investors who may not otherwise make investments directly in mortgage loans. Hence, much like any corporation raising funds for doing business, the primary goal of mortgage originators in today’s market is to replenish funds by reaching broader investor markets.

In addition to direct sales of mortgages from originators to investors, many large mortgage originators found that they could place mortgages in pools and sell securities of various types, with mortgages in these pools serving as collateral. With the assistance and expertise of investment bankers, large mortgage originators can then issue securities in small denominations which would be purchased by many more investors. Firms with smaller mortgage origination volumes could continue to sell mortgages directly to government agencies, which in turn would create large pools of their own and issue securities.

Many types of mortgage related securities have been developed in recent years. The number and types of securities are continuing to increase as mortgage originators, investment bankers, and government agencies continue to innovate and reach investor markets that provide the ultimate sources for many of the funds used in new mortgage origination. Major types of mortgage backed securities are:

1. Mortgage backed bonds (MBBs)
2. Mortgage pass through securities (MPTs)
3. Mortgage pay through bonds (MPTBs)
4. Collateralized mortgage obligations (CMOs)

Why it is difficult to implement in India?

RBI recently came out with a report listing down the reasons for non-implementation of secondary mortgage market in India:

1. Low Investor Base
2. Cultural factors
3. Poor capital market infrastructure
4. Regulatory environment
5. Legal hurdles
6. Lack of proper accounting standards
7. Taxation
8. Poor quality of assets
9. System deficiencies
10. Lack of standardization

Road Ahead:
It is clearly evident from the discussion above that development of secondary mortgage market in India is inevitable given the scale of housing stock that needs to be provided. And sooner, we as a country fix some of the issues facing secondary mortgage market; the better it is for growing urban population and economic growth of the country. In 2011-12, the housing loan disbursed to individuals stood at Rs. 68221.12** Crores. With secondary mortgage market in place, this disbursed loan amount can achieve the global levels. And at the same time, provide a mechanism for transparent debt markets.

** Source: National Housing Bank

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