Business Solutions for Housing Finance at the Bottom of the Pyramid
Around the world, people want a home where they and their families can live in security and comfort. Poor families are no different, yet traditional housing-finance systems fail poor families in many ways. Mortgage lenders in most developing countries focus on the middle- and upper-market segments. Traditional mortgages are unaffordable and inaccessible for households with informal incomes and informal titles; government-sponsored programs, where available, reach only a fraction of those in need.
For some time, organizations within the microfinance industry have been promoting housing microfinance, and institutions have offered a variety of housing-related loan products. Nevertheless, housing finance for the poor has yet to take off. Why?
A Multi-Sector Approach to Housing Finance
In collaboration with Bankable Frontier Associates, the Center for Financial Inclusion and ACCION Interntational's Global Investments group broke through the typical sector-specific walls and brought together thirteen housing-finance professionals from Mexico, South Africa, Kenya, and India for a workshop on private-sector responses to housing finance in emerging markets. This mix of unusual suspects – developers, microfinance practitioners, and wholesalers – provided unique multi-sector approach to addressing housing finance needs. Each participant represents promising, creative solutions to some of the toughest challenges in low income housing finance.
Workshop participants identified a number of keys lessons new to the housing discussion, including a renewed focus on housing quality as a central issue for innovation as well as the importance of integrating all players in the housing value chain—from housing developers to housing finance professionals. For a complete list of the key lessons learned from the workshop, see below.
Housing Finance Models and Innovations
The table below highlights the three sectors of private-sector business models represented at the workshop as well as their own innovations in the housing finance arena.
Integrated Housing Development – The development, rehabilitation, management, and/or financing of community housing solutions. |
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Mexico’s Su Casita is a specialized non-bank mortgage lender focusing on financing for the purchase, construction, and remodeling of homes. It also offers developer financing.
Innovation:Integrating differing components of the housing value chain (bringing together developers and financiers in a one-stop solution)
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Kenya’s Housing Financeis a specialized mortgage lender offering developer finance and equity. Its property supply chain, dubbed The Property Point, offers a “one stop shop” for property developers, agents, suppliers of housing materials, prospective home buyers, and sellers. In addition, as a deposit mobilizing institution, HF allows low-income borrowers to build equity for a down payment.
Innovation: Integrating differing components of Housing Value Chain (bringing together developers and financiers in one stop solution) |
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Micro Housing Finance Corporation is a small mortgage company specializing in housing finance for the lower-income households of India, specifically the unorganized sector who currently have no access to housing finance.
Innovation: Integrating developers and financiers to develop workable housing finance solutions
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The Trust for Urban Housing Finance is a South Africa-based specialized non-bank mortgage financier of low- to moderate-income rental housing. This financing to small- and medium-sized property entrepreneurs is complemented by bridge financing, equity, construction, and cooperative-finance products.
Innovation: Promoting Housing Quality and using different financing instruments to promote housing integration
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A branch of the South African property developer SouthNet, SouthNet Cygnus is a residential-property developer focusing on the lower-income groups of South Africa.
Innovation: Integrating differing components of Housing Value Chain (bringing together not only developers and financiers, but municipal stakeholders and services)
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Quality Home Improvement – Specialist institutions that engineer in quality and permit scale, especially in rural or peri-urban areas |
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Mexicana de Servicios para la Vivienda is a technical-assistance provider, developer, and broker specializing in housing microfinance for communities. It offers programs for assisted self-building developments, delivers the materials needed for construction, and assists in the loan access.
Innovation: Integrating materials suppliers, community social capital & process engineering into housing microfinance to enhance quality and promote scale
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Por Fin Nuestra Casa is a technical-assistance provider and developer that converts surplus U.S. shipping containers into residences for Mexican export-factory employees. It collaborates with companies that serve as guarantors for financing, allowing PFNC to utilize existing sources of financing. |
Wholesale Finance – Regulated Specialist Institutions and Generalist Banks |
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Singapore-based Habitat for Humanity International is a specialized non-bank wholesale housing microfinance provider that partners will affiliates, microfinance institutions, banks, and non-governmental organizations to implement housing finance programs.
Innovation: Leveraging social capital to build and finance affordable housing solutions for the poor
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Sociedad Hipotecaria Federalis a Mexican wholesale mortgage bank and guarantor that provides short- and long-term funding to financial intermediaries and hedges the interest-rate risk. It works with private-sector partners to develop a secondary mortgage market. SHF also offers mortgage insurance and payment guarantees on bonds.
Innovation: Developing financing vehicles and enhancements to overcome short term market failures and create demonstration effects for sustainable private sector intervention
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South Africa’s Homeloan Guarantee Company provides guarantees to commercial lenders, sharing the credit risk to facilitate the making of loans to low-income borrowers.
Innovation: Providing credit enhancements to catalyze private sector investment in low income housing solutions
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Emerging Market Housing Finance Catalysts |
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Through a broad range of advisory and financial services, U.S.-based Shorebank International, Ltd. focuses on building access to finance for low- to moderate-income individuals.
Innovation: Combining rental and mortgage solutions to address housing finance bottlenecks more holistically
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U.S.-based Domus A.D., LLC, provides economic and financial advisory services for international urban planning, real-estate development, and infrastructure projects. Domus strives to participate in projects that sustainable, “green,” and executed in a socially responsible manner.
Innovation: Integrated housing solutions that address contextual, developer, and financing-related bottlenecks to build sustainable housing solutions |
Key Lessons Learned
A number of conclusions were reached during the workshop. While several reinforced previous discussions on the subject of housing microfinance, several were new to the ears of the participants and suggest new areas of collaboration and discussion. These include:
Housing Quality: Participants treated housing quality as a central point of innovation, rather than a side issue. Past treatment of quality as secondary has produced unintended consequences with respect to land utilization and urban sprawl. Innovations participants are currently using include development practices that avoid slum/sprawl creation, sustainable and “green” housing options, and an understanding of the innovations needed to address the problems surrounding the traditional “organic” development model vs. planned developments.
Housing Integration: The workshop served to bring together members representing all points of the housing value chain – housing developers, urban planners, housing-finance practitioners, etc. Even within these groups there exist silos – such housing-finance practitioners who focus on rental solutions vs. mortgages. Historically, these pieces of the value chain have worked in isolation, chipping away at their own part of the solutions. Integration, thought, can promote sharing of overall challenges and lessons learned or the identification of critical links.
Mixed Use/Diversification: There are historic lessons in housing, such as the of importance diversification by income levels (so that poor live side by side with middle class to catalyze aspiration vs. ghetto-ization) and usage (retail and residential, so that there economic engines in community). The workshop uncovered another type of diversification—financing vehicles. Rental properties as well as the traditional mortgage structures have proven successful in attracting different demographics critical for developing sustainable housing communities.
Contextual Bottlenecks: While problems surrounding titling, credit bureaus, and capital-market illiquidity are important, they are not as important as previously thought. Business bottlenecks including lack of housing stock, weak incentives for developers, and cost-effective underwriting for the informal sector prove to be the true deal breakers.
Clients’Secondary Markets: Clients’ inability to re-sell their homes fundamentally changes how we look at the economics of housing finance for the poor. We need to recalibrate the investment vs. expense equation when dealing with housing finance for the poor to address not only affordability but also the illiquidity of the low-income real-estate market.
Transferability of Lessons Across Regions: While housing solutions are local because of the unique regulatory, contextual, and geographic realities, there is indeed a strong commonality across regions in terms of challenges faced and the innovations discovered to address those challenges.