Mortgage Finance Opportunities and Challenges By Taimur Afzal, Chairman ASSOCIATION OF MORTGAGE BANKERS (AMB) March 25th 20131

Pakistan Population Population (2011) 187 Million World's sixth most-populous country Population Growth Rate 1.6 % Urban population35% Second most urbanized nation in South Asia Population below age of 25 Years100 Million Major Cities ◦ Karachi 21M Lahore 11 M RWP 3.5 M Faisalabad 3M ◦ Hyderabad 3M Multan 2.6 M GRW 2.5 M Peshawar 3.6 M ◦ Quetta 2M March 25th 20132

Pakistan Economy GDP Rs. 20,600 Billion GDP Growth Rate 3.67% Employment by Sector Industry13.7% Construction 7% Agriculture 45% Un-Employment rate 6% Inflation Rate11 % (2012) March 25th 20133

Pakistan Banking Assets (Rs. in Billion) SegmentAdvancesNPLs Infection Ratio Corporate Sector 2, SMEs Sector Agriculture Sector Consumer sector Commodity financing Staff Loans Others Total 4, Mortgage Financing Portfolio 53 B NPLs 17 B Inf. Ratio 31.4% Mortgage Financing Portfolio 53 B NPLs 17 B Inf. Ratio 31.4% March 25th 20134

Mortgage as %age of GDP  GDP Pakistan= Rs. 20,600 Billion  Mortgage portfolio= Rs. 53 Billion  Staff House Finance= Rs. 77 Billion  Mortgage = 0.7 % of GDP  International Comparables March 25th 20135

Potential of Housing Sector Housing Shortfall World Bank Estimation 8 million housing units (2009) Annual incremental demand 600,000 units. Annual housing needs 1.1 million Units (600,000 incremental demand and 500,000 units from the backlog) Total Funding requirement Rs. 3.3 trillion per year (average price of Rs. 3 million per unit) Funding DemandRs.330 billion (Assuming only 10% housing needs as effective demand) Mortgage Financing Requirement Rs. 231 billion per annum (At 70% LTV) March 25th 20136

Challenges 7

Impediments in growth of Mortgage Financing Growth Legal Framework & Infrastructure ◦ Title documents ◦ Foreclosure ◦ Legal Reforms: Securitization, credit contracts, stamp/registration duties etc. ◦ Poor infrastructure planning Funding Sources ◦ Channelization of long term funds ◦ Mortgage Assets securitization ◦ Refinancing institutions March 25th 20138

Impediments in growth of Mortgage Financing Target segment ◦ Bank’s focus on mid to high income segment only ◦ Funding for low to middle income segment ◦ Tier 2 cities Specialized mortgage finance companies High Risk Segment - Perception of banks ◦ Mortgage Insurance ◦ Credit Loss Guarantee Program March 25th 20139

No Developer – home buyer financing model Macroeconomic instability & fiscal policies Interest Rates Fluctuations Prudential Regulations High real estate prices Impediments in growth of Mortgage Financing March 25th

Success Stories March 25th

INDIA – Growth of Mortgage  Mortgage to GDP ratio 20129% %  Mortgages comprise the largest component in banks’ retail portfolio  Mortgages have grown from 1.5% of banks’ advances to 10% over the last 10 years  Projections 2020 Outstanding mortgages will increase 8 fold from Rs. 5 trillion currently to Rs. 40 trillion by 2020 Mortgage to GDP ratio projected at 20% by 2020 March 25th

Factors for Growth in India Established National Housing Bank performing functions of ◦ Specialized Regulatory Framework ◦ Refinancing ◦ Focus on low to middle income segment (affordable housing) ◦ Maintain Index to monitor city wise residential price movements Declared “Housing” as Priority Sector for economically weaker / low income group Implemented Foreclosure Laws(Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) Mortgage Registry ◦ The Central Registry of Mortgage based securities reducing frauds March 25th

Factors for Growth in India Leading role of Housing Development Finance Corporation Limited India – US$38 Billion Disbursements Promoted public – private partnership Tax Incentives ( Principal & Interest deductible) Tax Incentives on developers investments Focused rapid urbanized cities (Population > 1 million) Access to foreign currency borrowings Provisioning requirement relaxed for banks on residential mortgages March 25th

Solution March 25th

What can be done? Legal Reforms & implementation for foreclosure & Transfers Public sector facilitation of low-cost/low & middle income housing models Dedicated public sector mortgage financing institution Develop state land & manage costs through cross subsidy Long terms funds at fixed rate Development of a Model for Builders/Developers Finance Provide Funding support Link Mortgage financing & capital market through debt securitization Establish Mortgage Refinance companies March 25th

What can be done? Establish Mortgage Insurance companies Arranging a Credit Guarantee Scheme for low-Income Housing Finance Credit Rationing ◦ Mortgage lending to specific types of housing ◦ Lending to specific segments of the population Devise Housing Product peculiar to Salaried segment esp. Government sector Establishment of employees housing trust Monthly contribution towards funds for raising equity Bank financing for longer terms for making monthly payment affordable At source deductions through pay roll system Transfer absolute ownership after settlement of loan March 25th

Year GDP Mortgage Portfolio Mortgage as %age of GDP , % , % ,000 1, % ,000 1, % ,000 3, % Vision 2030 March 25th

Thank you March 25th