The Hindu Business Line : Mortgage Credit Guarantee Co, a promise yet to be honoured

AT a press conference on December 24, 2003, the then Chairman and Managing Director of National Housing Bank, Mr V. Sridhar, spoke of the "imminent launch" of a new company — Mortgage Credit Guarantee Company.

The company was to be set up with a capital of $7.2 million, in collaboration with Canada Mortgage and Housing Corporation, United Guarantee — a wholly-owned subsidiary of AIG of US, International Finance Corporation and Asian Development Bank.

Two years down the line, the company is yet to be set up. The reasons for the delay are not clear. "We are still pursuing it," Mr R.V. Verma, Executive Director, National Housing Bank (NHB), told Business Line , adding that the proposal was not dropped.

The Mortgage Credit Guarantee Company (MCGC) was conceived to facilitate rural penetration of housing finance. The company would guarantee the loans given by a housing finance company, thereby protecting it against defaults.

Industry experts point out that the problem is partly in the difficulty that MCGC would have in recovering dues after it has paid a claim. Such a guarantee company "is very much needed," said Mr Nitin Palany, Managing Director, Sundaram Home Finance. He pointed out that in countries such as the US, such an insurance was mandatory in cases where the loan given was more than 80 per cent of the value of the property. The borrower had to bear the cost of the insurance.

Meanwhile, the industry is not waiting. Dewan Housing Finance Corporation, for instance, is talking to some private insurance companies for insuring loans.

The problem is, it involves some concept selling, because at present, there is no such product in the market.

The Managing Director of Dewan Housing, Mr Kapil Wadhawan, told journalists here that a guarantee company would also help develop the market for mortgage-backed securities (MBS), or home loan securitisation.

In securitisation, home loans (like any other loans) are split into various pools and `pass through certificates' issued against the pools.

These PTCs, like any other debt instruments, are credit-rated.

Usually, credit rating agencies ask the finance companies to themselves subscribe to a part of the PTCs, as additional security, for better rating.

Obviously, money is locked in such "credit enhancement". Mr Wadhawan noted that a guarantee company could lower the cost of getting a better rating.

Both Mr Palany and Mr Wadhawan said that a guarantee company would greatly help in better rural penetration of housing finance.

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