Training Session on General Housing Finance Syed Nabeel

Training Session on General Housing Finance Syed Nabeel Ahmed Rizvi Business Manager-Secured Products United Bank Limited

Mortgage Industry Overview In a 2009 report, World Bank estimated a Housing Shortfall of around 8 million units in Pakistan ABAD claims annual incremental demand of 600, 000 units of which 50% is met by the private/public investment leaving an annual shortfall of 300, 000 units Taking 600, 000 incremental demand 500, 000 units from the backlog, total annual housing needs come to 1. 1 million

Mortgage Industry Overview At an average price of Rs. 1 million per unit, total funding requirement is Rs 1. 1 trillion per year Assuming that only 10% of housing needs can be converted into effective demand, total funding needs are Rs. 110 billion At 70% LTV (Loan–to-Value Ratio), this translates into Rs. 77 billion per annum housing credit requirement Mortgage lending in Pakistan less than 1% of GDP, far from the 14 % registered in Chile, 5 % in Colombia, 2. 5 % in India and 65% in USA

Housing Finance Market No. of Institutions involved in Housing Finance • • • Commercial Banks Islamic Banks DFIs MFBs Islamic Banking Branches : 22 : 05 : 02 : 07

Mortgage Market of Pakistan (Gross Outstanding)

Major Stakeholder Banks Government Authorities Realtors Customer Mortgage Finance Appraisal Firm Law Firms Local Authorities

REGULATIONS FOR HOUSING FINANCE

REGULATION R-15 • Banks/DFIs shall determine the housing finance limit, both in urban and rural areas, in accordance with their internal credit policy, credit worthiness and loan repayment capacity of the borrowers. At the same time, while determining the credit worthiness and repayment capacity of the prospective borrower, banks/DFIs shall ensure that the total monthly amortization payments of consumer loans, inclusive of housing loan, should not exceed 50% of the net disposable income of the prospective borrower. • The bank should not allow housing finance for the purchase of land but can extend finance for the purchase of land construction on it. • The bank may allow housing finance for construction of houses against land owned by their customers

Maximum Per Party Limit UBL Loan Amount Product Range Minimum (PKR Million) Maximum(PKR Million) Purchase 0. 5 30 Home Equity 0. 5 10 Build 0. 5 30

Age Salaried SEP/SEB • Min- 23 • Max - 60 or retirement age (max up to 65 yrs) • Min- 25 • Max - 65 Co-Borrower (income clubbing) • Same as for primary borrower Co-Borrower (income not clubbed) • Min- 18 • Max – 70

Income & Employment Requirement Salaried SEP/SEB PKR 50, 000 per month net salary PKR 50, 000 per month 2 years of work experience net income 3 years in business

Types of Housing Finance • Buying a Home – Loan for Purchase of a constructed residential property like house, duplex, apartment and townhouse, where the said property can be mortgaged with the bank. With a maximum financing limit of 85% you can easily buy a house or apartment that best fits your requirements • Building a Home – Building a Home is loan for construction of home over a residential plot. The financing will be done in tranches. Customer provides the detailed BOQ (Bill of Quantity) and approved building plan for the construction. The customer, together with his/her architect and the bank’s approved appraiser, will prepare the BOQ.

Types of Housing Finance • Home Equity - Renovation – Home equity loan is against residential property (as mentioned in “Home Purchase’), which the borrower already owns, for the purpose of making improvements in the property. • Land Plus Construction – Land + Construction loan is for Purchase of land subsequent construction. The financing is done in 5 trenches (1 st trench for purchase of land subsequent 4 trenches for construction as per BOQ). The customer has to start construction within 6 months of purchase of land. • Balance Transfer Facility – Balance transfer is for financing of Mortgage taken out from other Banks

UBL Address Variants BUY-A-HOME. • Loans for purchase of residential ready property for the purpose of selfoccupation by the borrower HOME EQUITY BUILD-AHOME • Loans against owner/non owner -occupied residential property for home renovation • Loans against residential Land for the purpose of constructing a house

REGULATION R-16 (Loan-To-Value) The housing finance facility shall be provided at a maximum debt-equity ratio of 85: 15. BUY-AHOME EQUITY BUILD-AHOME • up to 10 MM – 70% • 10 MM ≤ 20 MM– 65% • 10 MM ≤ 20 MM– 60% • up to 10 MM – 30% • up to 10 MM – 70% • 10 MM ≤ 20 MM– 65% • 10 MM ≤ 20 MM– 60%

REGULATION R-17 As per SBP PR: Banks/DFIs may extend mortgage loans for housing upto any tenure defined in the bank’s/DFI’s duly approved credit policy and keeping in view the maturities profile of their assets & liabilities UBL Loan Tenure (Years) Product Range Minimum Maximum Purchase 3 20 Home Equity 3 20 Build 3 20

REGULATION R-18 • The house financed by the bank/DFI shall be mortgaged in bank’s/DFI’s favour by way of equitable or registered mortgage. • Registered Mortgage: – In registered mortgage (RM), the mortgagor binds himself to repay the mortgage money on a certain date and transfers the mortgaged property absolutely to the mortgagee but with the condition that it will re-transfer it to the mortgagor upon the payment of mortgage money as agreed. The mortgagee acquires the right to sell but only where mortgagor defaults in repayment of the loan. • Equitable Mortgage: – Being the most common and generally accepted, equitable mortgage (EM) is completed by deposit of title deed of the Property. EM also gives the right to sell to the creditor upon default by the borrower but only after obtaining permission of the court. The deposit of title deed is documented by means of a Memorandum of Deposit of Title Deeds [MODTD].

REGULATION R-19 • Banks/DFIs shall either engage professional expertise or arrange sufficient training for their concerned officials to evaluate the property, assess the genuineness and integrity of the title documents, etc. • PBA approved companies on penal or sufficient training for internal staff looking after the above tasks

REGULATION R-20 • The bank’s/DFI’s management should put in place a mechanism to monitor conditions in the real estate market (or other product market) at least on quarterly basis to ensure that its policies are aligned to current market conditions.

REGULATION R-21 • Banks are encouraged to develop floating rate products for extending housing finance, thereby managing interest rate risk to avoid its adverse effects. Salaried • One year KIBOR Ask side + 3. 5% SEP/SEB • One year KIBOR Ask side + 4. 5%

REGULATION R-21 (Classification) Category Determinant Provisions Substandard Overdue by 90 days or more 25% provision of the difference form the outstanding principal balance less the Forced Sales Value of mortgage properties to the extent of 75% of such FSV Doubtful Overdue by 180 days or more 75% provision of the difference form the outstanding principal balance less the Forced Sales Value of mortgage properties to the extent of 50% of such FSV Loss Overdue by one year or more 100% provision of the difference form the outstanding principal balance less the Forced Sales Value of mortgage properties to the extent of 75% for first year; 60% for second year; 45% for third year; 30% for fourth year and 20% for fifth year

Target Cities Karachi Lahore Islamabad/ Rawalpindi Faisalabad

Issues in Housing Finance – Undocumented Economy – Our Legal Framework affecting Foreclosure of loan, takes long time to initiate legal prosecution against delinquent borrowers. – Transfer, Tenancy, Rent Control: it refers to the weak property transfer process in all over in Pakistan including in Urban or Rural areas both. – Rationalization of Transaction Costs: It varies with area and concerned allotment authorities.

Issues in Housing Finance – Integrated land registration information system – Financing on Housing project: there is no mechanism of project financing because of the potential threat of land grabbing mafias and political interventions. – Supply of land for affordable housing: availability of land for affordable housing is difficult – Structuring and streamlining Large Scale Developer’s Finance

Issues in Housing Finance – Facilitate low-cost/low-income housing models and products – Facilitate Real Estate Investment Trusts (REITs) – Provision of long term funding for housing loans – Housing Observatory (housing market information system) – Capacity building of the mortgage banking industry in Pakistan

Process Flow Customer Branch Sales Verifications Login RHQ Appraisal Recommendation Legal Underwriting Decision Consumer Operations for Booking

Charges Type of Charge Amount (Rs. ) Processing Charges 5, 000 Legal Charges 4, 000 Appraisal Charges 4, 000 Late Fee per Installment 1, 000 Property Insurance Free @ 0. 049% Life Insurance Optional Prepayment Penalty on Outstanding Principal 8% in year 1 5% in year 2 3% from year 3 and onwards

Documentation • General – Copy of CNIC – Two recent photographs (also for Co-borrower whether income clubbing or not)

Documentation • Specific Salaried (known companies) Current salary slip Employment certificate Salaried (unknown companies) Bank statement (for the last 24 months) Tax document (for the last 24 months) SEB/SEP Bank statement for the last 12 months. Last 3 years (2 years for existing customers ) of tax assessment or registered partnership deed or Memorandum of article of association and last three years Form A/29 or Proprietorship Letter from Bank.

Verifications • General Data Check, NADRA, Verisys, ECIB, SECP (where required), FBR, FRMU, Online Telephone verification is mandatory for all mentioned segments

Verifications / Reports • Specific (Salaried) – – – – Internal (telephone) verifications conducted for home Internal (telephone) verifications conducted for office Physical verifications conducted for office & home Legal Opinion Taken from lawyers Property Appraisal conducted from agency Collateral VA conducted Market Check variance with appraisal report Housing price Grid variance with appraisal report

Verifications / Reports • Specific (Businessmen) – – – – Internal (telephone) verifications conducted for home Internal (telephone) verifications conducted for Business Physical verifications conducted for office / Business & home Legal Opinion Taken from lawyers Property Appraisal conducted from agency Collateral VA conducted Market Check variance with appraisal report Housing price Grid variance with appraisal report

Income Estimation / Calculation • For salaried segment income is calculated through salary slip and bank statement (for unknown companies) • For SEB / SEP Class – Income is calculated through bank statement of the customer as per the existing income calculation methodology. Clubbing of income through 2 bank statements is allowed.

Thank You