KARACHI: Pakistan Mortgage Refinance Company (PMRC) plans to tap domestic capital debt market for providing medium and long-term funding to banks and financial institutions, issuing fixed mark-up corporate bond for the first time in the housing sector, the company said on Tuesday.
PMRC being the liquidity facility will spur the development of the local bond market since its main source of funding will be from the bond market. “PMRC will issue plain vanilla unsecured fixed-mark up debt instruments with lower spreads on the strength of PMRC’s desired AAA credit rating,” the PMRC said in an emailed reply to questions.
“The issuance of PMRC’s bonds enables the primary mortgage lenders to obtain lower cost of funding in order to grant mortgage loans for housing particularly for middle and low income groups. At the same time investors have the advantage of investing in safe bonds with a relatively high return.”
However, sources with knowledge of the matter said the planned mortgage-backed debut bond is expected to come after the PMRC receives a final nod from the government to start operations.
The company is likely to be launched in November, they said. PMRC, as a notified development financial institution (DFI) regulated by the SBP, will provide funding to primary mortgage lenders (ie banks and financial institutions) by raising funds from the capital debt market at cheaper rates than the primary mortgage lenders would be able to do if acting alone.
In other words, PMRC will act as an intermediary between primary mortgage lenders and capital market. The SBP initiated the setting up of a mortgage refinance company, known as PMRC. Its role was to promote, develop and improve housing finance in Pakistan to aid financial institutions in extending housing loans in greater amounts, by addressing their liquidity issues through refinancing facilities. Pakistan’s mortgage to GDP ratio is 0.5 percent as compared to South Asia’s average of 3.4 percent. The low level of mortgage is due to the challenges faced by the primary mortgage lenders. Mortgage finance in Pakistan remains cautious due to a number of constraints. Banks are reluctant to undertake mortgage lending due to issues relating to lack of clear land titles, the slow foreclosure process, lack of long-term funding sources and the low supply of affordable housing.
“The impact of PMRC is critical to keep the pace of the growth of mortgages and making mortgage finance accessible to middle and low income groups. By acting as a central refinancing platform, PMRC can act as a force to make the requisite changes in the market,” the PMRC said. “In Pakistan, mortgage finance for the middle and low income groups is not available due to the high cost of servicing. Fixed rate mortgages which can be refinanced by PMRC are especially important for the middle and low income groups who are vulnerable to the volatile interest rate movements in Pakistan,” it added.
All mortgage loans in Pakistan are based on floating rates.
Bankers said the PMRC will certainly enable banks to provide housing finance facility on a relatively long termed / fixed rate mode.
“Previously, both the consumers and banks have suffered due to the fluctuating bench mark rates and resulted in non-performing housing finance portfolios. With the mitigation of risk attached to floating rates, banks can adopt an aggressive approach and expand their housing finance network to tier II cities, emerging urban centres and middle income class strata,” said a head of retail banking at Faysal Bank.
“Banks and PMRC could also work on devising a mutually agreed credit / customer on boarding policies providing a level playing field to new entrants vis a vis smaller housing finance players,” he added.
The PMRC said with interest rates expected to rise, the borrowers’ ability to meet their monthly repayment obligations will be tested and this will result in defaults. Middle and low income groups are more exposed to any adverse interest rate volatility as their disposable income may not increase proportionate to interest rate increases. “Any significant increase in interest rates will dampen the confidence in the market and may lead to a significant decline in the creation of mortgages,” PMRC stated.
The mortgage lending practices are not standardised. The PMRC is already working with International Finance Corporation and World Bank to introduce the minimum quality standards (MQS) for the PMLs. MQS will act as industry standards for granting mortgage loans to borrowers that will qualify for refinancing with PMRC. This will promote efficiency and mitigate risks in mortgage lending and lead to more affordable house ownership. During the last few years, the government has demonstrated its commitment to housing finance with initiatives which include the establishment of PMRC, recent amendments made in the Financial Institutions (Recovery of Finance Ordinance and Records) 2001 to expedite foreclosure, improvements in land titling system in Punjab and Sindh by digitalising land records and exemptions from tax on interest paid up to Rs2.0 million for mortgage instalments by individuals.
Mortgage market in Pakistan is again gearing up. In the last three years, the cumulative aggregate growth rate of mortgage market is 11.65 percent.
