Mortgage emulators: pro-poor housing finance innovations (Part 2)

by Matt Nohn, AHI Senior Advisor

 

[Continued from last week’s Part 1.]

 

To answer these questions—and to solve the 5-dimensional puzzle—MHT has put in place the following mechanisms:

 

1.      To screen the loanee’s probability of repayment

 

As this has been done innumerous times I will not describe it here in detail. Notably, MHT also requires two approved guarantors/co-signers.

 

india_loan_application

Loan application form listing identification details, income, wealth status, etc

 

2.      To screen the security of the collateral (part 1),
proofing tenure of the land (and home), as in case of a mortgage.

 

MHT basically checks the history of land, comparing official record in the land registry with informal papers documenting the (never officially recorded) transfer of land. In the best case, the informal transfer document is acknowledged through a lawyer (even if not recorded in the land registry) while the land registry shows the name of the informal seller. In that case, it is proven that the land was not invaded and it will be virtually impossible for the formal owner (who’s name is registered in the land cadaster) to repossess the property.

 

india_sales_contract

The sales contract (Kabja Rasid) proofing the informal transaction

 

india_7_12_form

7-12-Form documenting the formal possession of land (by the formal owner, not the loanee!)

 

Sometimes MHT needs to go back in time to check if the ancestors of the present formal owner have sold the land to an ancestor of today’s informal owner. If the informal owner is paying property tax (another important indicator for who is responsible for the land) and if landownership is not disputed, MHT considers the land to be at least in adverse possession of the informal owner. In that case, MHT and the credit cooperatives would give green light, as it is virtually impossible that the informal owner would get evicted from the land. (Adverse possession is recognized by India’s civil code.)

 

india_prop_tax_bill

Property tax bill

 

On the other hand, if the land were under dispute MHT and the cooperatives would not permit the loan. The decision is marginal if the land was not disputed but formal landownership had changed through multiple channels over time or the informal owner could provide little evidence for peacefully obtaining the land.

 

3.      To screen the security of the collateral (part 2),
eliminating potential conflict with the urban planning regime

 

In order to check whether or not the collateral is potentially in conflict with future development, MHT checks the provisions of urban development plans and town planning schemes. Key information obtained is whether the collateral is affected by future infrastructure development (particularly roads and road widening) and which land use is established. Especially if the determined use is “residential” or “residential with a social purpose” it is virtually impossible that the collateral is negatively affected.

 

town_planning_scheme

Provisions of the Town Planning Scheme

 

However, the fact that many town planning schemes are not yet finally sanctioned is complicating the approach because their content could still change. MHT considers the likelihood of such an event by checking how far the town planning scheme process has advanced. As soon as the scheme has a final draft status, it is considered very safe. Changes negatively affecting people living in the area are hardly possible.

 

town_planning_scheme_status

Status of the Town Planning Scheme (TPS): the more the process has progressed, the higher the

security of provided information

 

4.      To establish contractual proceedings that, in case of default, allow the lender to take possession of the collateral—even without mortgage.

 

Finally, this is the crucial part in order to “emulate” the mortgage. MHT and the credit cooperatives let the loanee sign an advanced power of possession. The document is signed with presence of and certified by a notary. The effect of the advanced power of attorney is simple: basically it states that the lender is allowed to sign any transfer on behalf of the loanee. Thus, in case of default, the lender is able to transfer the property to herself. (Of course, this document is signed before loan closure and before construction starts.)

 

india_advanced_pot

Advanced Power of Attorney

 

5.      To screen the security of the collateral (part 3),
proofing the physical qualities of the collateral

 

To check the structural safety of the house (and to also proof that the money is invested into the collateral) MHT sends an engineer on site to document the construction progress in at least 4 steps. Each step is documented and only after successful completion the respective installment of the loan is disbursed.

 

awaas_sewa

technical_checks

Technical checks are documented with photos and brief reports by the responsible engineer. Here the report at the plinth level and photos at the slab level

 

Finally, after all checks have been passed successfully MHT and the credit cooperatives place a hypothecation board at the new home.

 

mht_housing_recipients

Just as lenders in the formal market do, MHT and the credit cooperatives use a hypothecation tablet in order to demonstrate their achievements and to advertise their product.

 

Then the loanee and her family can move into their new home.

 

shakuntalaben_family

Shakuntalaben and her family in front of their new home financed by Surat Mahila Cooperative Mandali’s innovative loan

 

 

MHT’s achievements are significant. We estimate that the market niche (if “niche” is still appropriate) that could be served with such mortgage emulators may be of over 1 trillion Indian rupees (or approximately USD 200 billion). However, to serve that market lenders need to understand the intricacies of the land management and urban planning regimes. MHT originated as a technical, rather than a financial organization and, therefore, displays of this knowledge.

 

The intent of our study is to share this knowledge and enable others to copy MHT’s approach. You can read the full story here. If you need anything else please do not hesitate to contact us at AHI and/or MHT.

 

Matt Nohn, AHI Senior Advisor

February 11, 2013

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