As ineffective as governments
often are in regulating private activities, as lenders they are far worse.
In the first two decades
after World War II, the sentiment you express was widely shared,
especially throughout the developing world. The result was the creation of
about 50 "housing banks" in the same number of countries. These
were government-owned entities that made home loans directly to consumers.
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. Just last summer I was in Fiji helping to
develop a privatization blueprint for the troubled housing bank of that
country.
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 government. Which 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.
Because they charge market
rates, loan selection by the Fiji housing bank is not subject to
politicking. However, the bank does not consider an applicant's past
credit record in determining whether or not to make a loan. They view such
judgments as subjective and judgmental, and therefore subject to
second-guessing by politicians and the media. They make loan decisions on
the basis of objective measures of "ability to pay", and ignore
evidence bearing on the "willingness to pay". As a consequence,
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 6 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 usually viewed as the exception 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
government. The secret of its success has been that it has operated in
essentially the same manner as a private bank, the only major difference
being that dividends have been paid to the government rather than to
private shareholders. It has been able to do this because of strong
leadership in the early years when the culture of the bank was forming,
and because the government granted it virtually complete autonomy. A
singular success story based on emulation of the private sector does not
support the case for government lending.
Copyright Jack Guttentag
2002
