Housing Bank

Housing Bank

A government-owned or -affiliated lender that makes home loans directly to consumers.

With minor exceptions, government in the U.S. has never loaned directly to consumers, but housing banks have been widespread in many developing countries. In the first two decades after World War II, about 50 housing banks were formed in the same number of countries. At various times over the years I have had occasion to visit and consult with institutions of this type in Iran, Ethiopia, Indonesia, Pakistan, Portugal, Thailand, Brazil, and Fiji.

With one exception, these housing banks have been a disaster. Some have been terminated while others are looking to privatize.

One of the major problems of the housing banks has been high default rates. In some cases, half or more of the borrowers don't
repay their loans. Instead of administering “revolving” loan funds, where loan repayments plus interest provide the funds for new
loans, the housing banks have needed continuing cash infusions by the government. This is a major reason why governments have become disillusioned.

Chronically high default rates reflect poor loan selection practices and poor collection practices after the loans are made. With private lenders, the dominant criteria used to determine whether or not to make a loan is the likelihood of repayment. With government lenders, politics and favoritism are often involved in a major way. This is especially likely when loan rates are below the market and therefore a bargain, which is often the case.

When housing banks operate side by side with private banks, the housing banks are subject to “adverse selection.” The private banks who turn down loan applicants because of bad credit histories refer the applicants to the housing bank.

Housing banks also do very poorly at loan collections. In many cases, their loan collections systems are so poor that borrowers who stop paying do not receive a delinquent notice for six months or longer, by which time it may be too late to remedy the situation.

In dealing with delinquent borrowers, furthermore, housing bank officials usually shrink from exercising the ultimate sanction, which is to take away their house. It isn't their money, so why should they take the political heat? As a consequence, borrowers learn that they can get away with not paying and word gets around. In many cases, the distinction between a loan and a government grant becomes blurred.

The Housing Bank of Thailand is the exception to these comments because it has been well managed, its loan default rates have been comparable to those of private banks, and it has grown without need for continuing investment by the government. The secret of its success is that the government granted it virtually complete autonomy to operate in essentially the same manner as a private bank. The only major difference has been that dividends have been paid to the government rather than to private shareholders.