Seminar Housing Finance

(Hey now it looks short and crisp) Housing Finance presented by:Shankar Jha Isha Sharma 26-MBA-06 42-MBA-06 Why Housing Finance?  Engine of equitable economic growth  Meet a growing housing demand

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Prevent slum proliferation Reduce poverty

 Take part in the financial sector liberalization Traditional Structure of the Mortgage Market in India  Earlier a centralized structure.  In 1970, HUDCO came into being.  HDFC entered the market.  In 1988, the National Housing board was established.  LIC & GIC also mandated to support housing finance activities.  Commercial banks set up housing finance subsidiaries. Present scenario  Real estate sector growing at a rate of 30%  Second largest employer.  Forward & backward linkages.  Impact on economic growth. Types of loans  Home Equity loans  Home extension loans  Home improvement loans  Home purchase loans  Land purchase loans Funding of HFCs    

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The major sources of funds for the HFCs in India fall broadly under four major types: Deposits Domestic term loans Capital market NHB Refinancing Deposits Presently there are 44 registered HFCs. Out of these 22 HFCs have registration certificate with the permission to accept public deposits Minimum of 12 months and a maximum of 84 months, not repayable on demand/notice. Deposits repayable within a period not exceeding 12 months can be accepted up to a maximum of two times of their NOFs Domestic term loans Term loans represent a significant component of the lendable funds of the HFCs A maturity of up to 10 years, The sponsoring institutions extend such loans at a relatively lower cost generally not exceeding 13 percent at present ◦ LICHF- 8.5 %

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SBIHF- 40%

Canfin Homes – 43% Capital market 7.5% (Canfin Homes) 15.8% (Dewan Housing Finance). Around 15% of HDFC’s financial resources have been raised by way of Bonds. NHB Refinancing NHB has also been providing refinance support to banks and other housing finance institutions at concessional rates to encourage len In 2005-06 and 2006-07, nearly 50% of NHB’s total refinance was for housing in rural areas under the Golden Jubilee Rural Housing Finance Scheme (GJRHFS) launched in 1997-98 New Initiatives Mortgage-Backed Securitisation

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Mortgage: A mortgage is a pledge of real-estate to secure the payment of the loan originated for the purchase of the real property. The mortgage gives the lender, the right to foreclose the loan and seize the property, in order to ensure that the loan is paid off if the borrower fails to make the contracted payments.

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Securitisation: It is a process by which any asset can be converted into a liquid/marketable security or instrument. In the context of Housing finance the assets that can be converted are mortgages. Advantages of MBS to HFCs The conversion of illiquid assets like a mortgage has a positive effect on the balance sheet of the originator of the MBS, and makes The credit risk involved in the extension of loans is transferred partially or completely. Securitization helps the originator in generating additional funds without incurring any fresh claims/ liabilities on itself. However, Rigidities in the legal framework, high stamp duties and lack of uniformity in underwriting norms are some of the hindrances in the development of a secondary mortgage market II. Reverse Mortgage : The senior citizens (age 62) constitute an un-served segment of the society as far as housing finance is concerned. Reverse mortgages are adjustable-rate home loans that need not be repaid until the borrower dies, moves or sells his or her residence The money received from a reverse mortgage is not taxable as income The interest on the loan is tax deductible when it actually is paid Getting a HOME LOAN !!!

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Eligibility: Persons who are of 21 years of age with a regular income and a minimum two to three years of service are eligible to apply. Loan should be closed before the attainment of the age of 65 to 70 years

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Quantum: The quantum of loan is assessed based on the net monthly/ net annual income with a direct bearing on age factor. A person of age in the range of 21 to 45 years is eligible for a maximum amount of 60 times of his Net Monthly Income (NMI)/five times of Net Annual Income

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Margin: Normally the quantum will be limited to 80% of the project cost/estimates, varying in seasons of festivity some banks may go up to even 90%.

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Disbursements: In the case of construction, fund will be released according to stages of construction; 30% of the loan limit on completion of the foundation, next 40% on reaching the lintel stage and final portion of 30% on reaching the level where the project will finish within a month’s time. Repayment starts from the next month of release of the final installment of the loan amount.

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Tax Benefits: The home loan brings you fortune in the form of reduction in Income Tax. Interest payable on account of home loan is exempted up to a maximum amount of Rs.1.50 Lakh per year. The home loan installments can be included under investment under section 80 (c) for income tax benefits.

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Floating rates : Rates vary according to revision in the prime lending rates. The interest rate charged varies with a benchmark, which is generally the prime lending - rate (PLR). So, if the PLR were to move up, the interest rate on your home loan would move up and vice-a-versa. Your equated monthly installment (EMI) changes in line with the interest rate movement. For example, if home loan rates were to decline, your EMI will also reduce. You are exposed to interest rate risk i.e. if the interest rate were to move, you could be faced with a large unplanned expenditure. As a thumb rule, floating rate is beneficial in a falling rate scenario and becomes costly as the rates moves up.

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Fixed rates are applicable through out the period of the loan unchanged, but Banks insist for a reset clause also for charging interest in accordance with market variation. The interest rate on the home loan remains the same throughout the term of the loan. EMI remains fixed. Therefore monthly liability is known and fixed thus helping in better financial planning. Insulated from interest rate risk i.e. not impacted by a change in interest rates. This scheme is suitable in a rising interest rate scenario. Origin: Cause of Sub-Prime Crisis  The seeds of the crisis were sown long back by Alan Greenspan, ex-chairman of Federal Reserve Bank. The inflationary policies of Greenspan were largely responsible for the defaults in the US housing market. His plan to pump billions of dollars in the economy via lower interest rates paved the path for the economic slowdown.  The interest rates have declined from the high of 6.5% in 2000-01 to a low of just above 1% in 2003-04. US middle income class saw it as golden opportunity to expand its stagnated income.  When the dollar rises in value, U.S. exports become more expensive and import prices fall. Between 1995 and 2002, the dollar gained about 30% in value. This made imports costlier for US and they delayed their consumption expenditure and put the surplus money in non-tradable and since, they are not subject to international trade, their prices shot up. Here starts the creation of bubble in the US housing market. The excess demand in the market pushed the housing prices to new heights. Rising prices, in turn, have a substantial affect on the spending of the consumers. US consumers lured by the increasing value of their homes went on borrowing spree. They started borrowing money for consumption by mortgaging their property Crisis led by: 1. Interest rates increased 2. Home prices began falling Financial institutions holding mortgage-backed securities incurred losses and had to sell their assets