Govt plans mortgage refinancing to make housing more affordable

Infographics: TBS

A shot in the arm for Bangladesh's housing market is in the offing as the government has taken the initiative to form a Mortgage Refinance Company (MRC) to boost credit flow, unleash long-term investment and ensure affordable housing.

Operating under direct supervision of the Bangladesh Bank, the proposed MRC will raise capital through corporate bonds and mortgage-backed securities in the stock market. With that capital, it will then refinance banks and other lenders to provide more mortgage loans to this sector, according to finance ministry officials.

To lay the groundwork for the MRC, the Financial Institutions Division convened a workshop last October. The event explored cutting-edge housing finance models from around the world and within Bangladesh.

The Financial Institutions Division received a policy note on MRC management from the World Bank on 20 December.

The note, seen by The Business Standard, laid out the challenges of MRC establishment. It also cited real-world examples in India, Malaysia, the US, and France, as a guide for the development of Bangladesh's own MRC structure.

The World Bank will help conduct the feasibility study for setting up the MRC.

An official from the Financial Institutions Division, wishing not to be named, told The Business Standard that the initiative was taken to address two challenges: making housing more affordable and strengthening the financial sector's resilience.

He said the MRC aims to unlock fresh mortgage resources for banks and non-bank financial institutions (NBFIs), allowing them to offer more loans for housing, and eventually putting homeownership within reach for more people.

The MRC will also act as a shield, absorbing potential risks associated with long-term housing loans. It will also re-channel existing housing funds held by the central bank, freeing up capital for banks and NBFIs to diversify their investments, the official added.

Housing sector entrepreneurs welcomed the initiative saying the MRC, if formed, will reduce housing loan interest rates with long-term financing.

Purpose of MRC

A mortgage refinance company is typically a regulated financial institution whose main purpose is to provide long-term funds to primary mortgage lenders. The company supports the long-term residential lending activities of primary mortgage lenders by acting as an intermediary between lenders and the bond market.

According to the World Bank Note, the main purpose and benefit of establishing an MRC is to overcome the maturity mismatch present in banks that take short-term deposits and try to lend for longer maturities to improve affordability.

MRCs usually only refinance residential mortgage loans due to their lower risk profile compared to developers of infrastructure loans.

Officials of the Financial Institutions Division said for loans to qualify for refinancing by the MRC, they must be up-to-date, secured in favour of the MRC, and typically exceed the loan amount itself (over-collateralised). Lenders seeking participation in this program must also demonstrate financial stability.

Since an MRC has a strong corporate structure and low risk from its limited wholesale lending activities, its bonds are attractive to institutional investors and often can provide primary lenders with access to long-term funds at better rates, terms and conditions than acting alone, officials said.

Most MRCs have some form of government financial support in the early years. The primary source of debt funding for an MRC is a corporate bond issued in the domestic capital market against the MRC's refinance assets that are collateralised by conventional mortgages and have recourse to the primary lenders.

REHAB welcomes the initiative

Shamsul Alamin, former president of the Real Estate and Housing Association of Bangladesh (REHAB) told TBS that REHAB has long been demanding the formation of a mortgage refinance company for long-term financing in the housing sector. 

"Such a company can collect money from the capital market and invest in the housing sector in the long term. With this, the housing loan interest rate will be much lower than now. The dream of the middle-class people for housing will be fulfilled," he said. 

"Currently, banks do not give any loans to developer companies, they give loans to flat or house owners. Developer companies will also get loans if there is an MRC," he said.

Data from REHAB reveals a massive Tk1 lakh crore invested in the housing sector, highlighting its crucial role in fueling the wider construction industry. As cement, rods, and countless other sectors are intricately linked to construction, bolstering the housing market would create a domino effect of positive growth across the entire economy.

Experts for solving crucial housing issues first

Zahid Hussain, former chief economist of the World Bank's Dhaka office, told TBS that moving forward with the MRC initiative hinges on resolving the fundamental problems identified by the World Bank's note, such as housing market inefficiencies, land allocation challenges, and inadequate zoning frameworks.

"While the MRC's intention of raising capital through bond issuance is laudable, the lack of a robust bond market in Bangladesh casts a shadow over its feasibility. Even government bonds struggle with secondary market traction. Launching MRC bonds without a strong market would see banks as the primary buyers, ultimately offering no benefit to anyone," he added.

Insisting on fulfilling the prerequisites before forming the MRC, the economist said that forming the MRC without solving the problems would be like putting the cart before the horse.

Bangladesh underperforms in housing finance: WB note

In the note sent to the Secretary of the Financial Institutions Division, the World Bank said that over 4,32,000 new housing units are required every year in Bangladesh. This does not account for the existing backlog in the quality of housing or overcrowding. However, Bangladesh does not meet the expected level of housing finance development compared to similar countries.

According to World Bank data, Bangladesh has a much smaller housing finance sector as measured by mortgage debt outstanding relative to GDP when compared to countries with similar levels of GDP. Overall, total lending for housing finance amounted to Tk1,05,890 crore as of June 2022, equivalent to 7.8% of total private sector lending and just 2.7% of FY22 GDP.

Comparing countries with per capita GDP below $10,000, including Bangladesh, the World Bank said, some countries such as India or South Africa are significantly outperforming their expected mortgage market size, while others such as the Philippines or Bangladesh are under-performing.

"Bangladesh's expected level of mortgage debt based on a simple linear average is around 6.5% of GDP. The implication is that Bangladesh's mortgage market is less than half the size it should be, which would mean an additional Tk90,000 crore of mortgage loans," the World Bank note said.

Financial Institutions Division's officials said, Bangladesh's housing requirement in 2019 amounts to 4,32,002 new units per annum, entirely needed in urban areas given that the rural population is declining. The annual housing need peaked in 1990 at 5,80,000 units and has fallen back since then, and despite a slight upturn currently, it is expected to follow a steady downward pattern up to 2050.