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The plan of General Insurance Corporation (GIC) and National Housing Bank (NHB) to float the country's first mortgage insurance company is about to gain momentum. This follows finance minister P Chidamabaram's budget proposal to put in place regulations to allow creation of mortgage guarantee companies.
Interestingly, GIC and NHB have started talks with Philadelphia-based Radian Insurance to float a joint venture mortgage insurance company. Though the shareholding pattern of the proposed JV is unknown, industry sources indicated that GIC is likely to hold the majority stake. Radian Insurance, on the other hand, being the foreign partner will only be allowed to hold up to 26 percent.
A number of issues are involved in floating such a company and GIC's proposal is at a conceptual stage, a senior GIC official told ET. But the official declined comment on the shareholding pattern. When contacted, NHB's executive director RV Verma was non-committal on NHB's equity participation in the proposed venture.
At this stage, we are only involved in structuring the product. The government has reaffirmed its support to develop a mortgage insurance market in the country. Now, we are waiting for further direction on structuring of the product from the regulators, Verma said.
Earlier in 2003, NHB had to abort its plans to float a mortgage insurance, along with four foreign partners, since it failed to get regulatory clearance. Therefore, if the new proposal materialises, it will be the first mortgage insurance company in India. According to sources, GIC has already submitted a proposal to Insurance Regulatory Development Authority (Irda). Irda, in turn, has referred the matter to the Reserve Bank of India (RBI).
I have something to add to the discussion.... which sheds light on advantages of mortgage insurance products.
In a market where rising property prices and high home loan interest rates are enveloping the customer , a mortgage insurance product may be the solution. The benefits of this product are phenomenal in that they are advantageous to the home loan borrower, lender and the market. The primary advantage of a mortgage guarantee product would be that it would enable the customer to get funds on easier terms, with not too much equity from his side.
Typically, mortgage insurance products are insurance tools that help an individual to buy a house with a low down payment - less than the usual average 20 percent that he is expected to provide from his pocket. A mortgage insurance product is now being launched for the first time in India, with the US-based Genworth Financial Inc introducing residential mortgage guarantee products . The company has received permission from the Foreign Investment Promotion Board (FIPB) to introduce these products with an investment of $50 million. Of this, $7.5 million would be brought upfront and the remaining within the next 24 months.
Earlier, the National Housing Bank tied up with four international corporations to form the India Mortgage Guarantee Company (IMGC) to bring in such a product in the market. However, the RBI has still to come up with the regulatory framework for such a mortgage insurance company to operate. The five partners in IMGC are the United Guaranty Company (UG), the Asian Development Bank (ADB), the Canada Mortgage and Housing Corporation (CMHC), the International Finance Corporation (IFC), and the National Housing Bank (NHB).
The company's primary product would be a mortgage guarantee , providing coverage to India's mortgage lenders in the event of a borrower default. The guarantee product will be a three-way contract between the borrowers, lenders and the mortgage guarantor (IMGC). The guarantee scheme is intended to allow lenders to penetrate broader market segments by offering increased access to more affordable mortgage terms and conditions and expand home ownership in the country. Indirectly , the credit enhancement aspects of the guarantee will allow lenders to access lower cost funds.
According to financial analyst Ravi Kumar, there is a huge need for such products in the Indian scenario, and they will be a huge success once launched. These products are purchased by the lenders and paid for by the borrowers. A typical borrower who finds it difficult to raise the down payment required for purchase of his property would find this product to his advantage. It would also serve to cater to segments which have hitherto been unserved or underserved . Such products help the housing finance institutions to serve segments which are perceived to be high risk, but which in reality may not be so. These include self-employed professionals , traders and other segments who do not have a predictable repayment pattern . It would also help borrowers who have less collateral guarantee and personal guarantee to get loans.
It is a risk mitigation tool for housing finance institutions in that the insurance or the guarantee company serves as a back-up institution to handle the risk more efficiently. Internationally, back-up institutions broaden the housing finance institutions and all high loan to value ratios are mandatorily insured . Here, even as many housing finance institutions are vying with each other to give high loan-to-value ratios in order to grab the market, there is an inherent risk. A guarantee company can mitigate the risk of the lending company while allowing for low equity from the customer . These guarantee companies with their overseas experience and norms will not allow the lending institutions to dilute their standards , just because the risk is being handled by somebody else.
National Housing Bank Executive Director R V Verma says this product would serve to give the housing finance segment the requisite stability, which would in turn bring stability to the entire financial system. The product may come to the borrower at a premium but it is also true that 15 percent of equity has a cost, which the borrower can now utilise elsewhere. In other words, the money that he would have to raise from his pocket could now be invested elsewhere.
The lending institution would now, with the guarantee available, be ready to enhance the loan amount given. This is because in case of default , the lending institution gets reimbursed by the guarantee company. Hence, there is no cash loss to the lender. In many cases, the housing finance institutions would also be prepared to absorb the cost of the guarantee premium.
In developed countries, loans which are guaranteed attract lower risk weight. With the reduced risk weights, the locked up regulatory capital will get released.
Thus, the lending institution would have that much more capital available to lend. The guarantee product enables the lending institution to lend to the borrower with greater comfort and less risk. The minute there is less risk, there are better prices. In other words, the lender provides funds at a lower rate of interest. Thus, even if you add the guarantee cost, the customer would be able to get cheaper loans. There could be different products appropriate for different segments . These guarantee companies specialise in risk in the housing sector. They have done their research and market surveys for different kinds of products.
The housing finance company could also securitise its portfolio and sell it to investors . Since it is guaranteed , it would be able to attract a finer rate. The lender would thus get more liquidity . Larger fund flow through securitising the portfolio means lower cost of funds accruing to the lender. This would also, in turn, have an impact on the housing interest rates, which will come down, and allow for risk diversification . The risk in the housing finance gets transported to investors and migrates from the housing finance companies to the capital market. However since these papers are guaranteed, it would be a credit enhanced paper for the investor. International investors would have an appetite for such papers , which would thus help bring international capital to the housing market.
Though housing finance has witnessed aggressive players, there is still a huge segment which is unexplored and under-penetrated . Housing finance contributes only three percent of GDP, and there is huge potential for this sector to expand.