Housing finance,post sub-prime

Presentation at

NHB – APUHF –APMCHUD Conference

12 April 2013, New Delhi

Mythili Bhusnurmath,

Consulting Editor,

Economic Times

Responsible borrowing &lending

Three tenets:

• Responsible borrowing & lending are two sides of the same coin

• Neither is possible unless you have a stable macro-economic environment

• Third, while the first tenet seems to have been learnt somewhat, on the second, we still have a long way to go: eg repeated bouts of quantitative easing

Valuable learnings: for policy makers & financial sector players

• Black swans are not a figment of the imagination; tail events do happen and then can cause untold havoc.

• Financial crises are inevitable in free market economies

• Human beings cannot be reduced to equations; days of rocket science are over

• Economics is a social science NOT a physical science : There is no pat thumb rule for bubbles

Lessons for policy makers

Markets are poor judges of impending crises; they often ignore warning signals

• Macro-economic stability is a public good & onus rests on policy makers

• Policy makers are part of the problem

• Regulators should get rid of their inferiority complex vis-à-vis players; re-naming a product doesn’t make it new

More Lessons for policy makers

• Build in checks & balances before not after

• Recognise need for players to have skin in the game

• Ensure healthy loan-to-value ratios; risk weights take into account macro economic fundamentals such as asset-price inflation & exposure limits are dynamic

• Inclusive housing cannot be at the cost of responsible lending

Learnings for players

• Banks are about trust; it takes years to build reputations ; only an instant to destroy them

• Old world skills of knowing borrower must be re-learnt, documents can never be a substitute  

• Sounds almost Biblical but there is always a come uppance for the unethical.

Recent Developments: India • Renewed emphasis on macro-prudential

aspects & lately consumer protection

• Basle III?

• Mortgage backed securities with adequate safeguards

• Strict guidelines for Mortgage Guarantee Cos.; 1st IMGC

• Fresh impetus to CIBIL

Final Note

Better safe than sorry, especially in poor, emerging markets : so when in doubt err on the side of caution cos

• The future ain’t what it used to be

Yogi Berra

Thank You