Letter to the Editor-Public can invest in social housing too


22-April-2009

Now that government debt burden has become untenable, government can no longer provide funds nor extend guarantees as it used to. Moreover, state-owned banks will be privatised in due course, thus depriving the HFC of a friend in need that could be a friend indeed. 

The HFC’s management and the government, therefore, must find new ways to raise funds if the former is to continue with its noble objective of providing affordable homes to future wage earners. Here are some ideas for both the HFC and government to generate new funds for the HFC.
 
Mortgage bonds

The HFC says it pays Nouvobanq 15.5% for its funds. According to the Central Bank, the average lending rate of commercial banks during the month of February 2009 was 16.39%, while paying on average 9.97% to savers, raking in a hefty margin of 6.42%.

The HFC should issue its own bonds to entice members of the public to lend it money and split the difference on the savings it makes with its investors. Bonds or certificates of deposits are more secure finance for the HFC since investors must keep the money invested over the life of the bond.

The Central Bank can include HFC mortgage bonds in the secondary market for treasury bills and other government bonds to create liquidity.
 
Securitisation

The HFC has a loan portfolio (assets) well in excess of R300,000,000 generating fixed incomes in the form of interest payments by home owners who have borrowed the funds. Securitisation is the process of selling debt obligations to third party investors by assigning the interest payable by the borrowers on their loans (income stream) which these debts generate.

The money raised through securitisation becomes fresh capital for the HFC to lend. Investors would be life insurers and the Pension Fund or investment trusts.

In this connection, the government must order a rethink of the investment policies of the Pension Fund.
Pension Fund money should be invested in HFC housing funds to increase the stock of affordable homes, rather than in the production of alcohol or commercial property. In any event, commercial property incomes are under serious threat from the recession caused by the macro-economic restructuring and may not appreciate much in the foreseeable future. Returns may be limited if the rental market becomes saturated. 

By borrowing directly from members of the public, the HFC would also help to break the stranglehold commercial banks have on savers’ money, thus raking in inordinate profits. The HFC can invest unused funds in 91-day treasury bills earning 25%-plus interest to generate funds to pay for its running costs.

By going direct to the public to raise funds and securitising its loans portfolio, the HFC would help spearhead the development of a capital market in Seychelles, thereby increasing the efficiency of capital and reducing its borrowing costs.

Transforming HFC into a building society

Many HFC customers complain that they are required to make loan repayments even if they have not yet received disbursements. This is because the HFC finds itself short of capital.

By qualifying housing loans on the basis of a regular saving with the HFC, in other words buying HFC bonds or certificates of deposits, the HFC would be able to generate funds on an ongoing basis. HFC bonds would be good collateral for HFC loans, which should qualify borrowers for reduced interest rates since they are in effect lending to themselves.

Social housing may be a noble objective and probably desirable in the context of the economic conditions of Seychelles in the foreseeable future. The reality, however, is that the HFC must, from now on, source its funds from the domestic capital market.

The availability of social housing in Singapore has been made possible by the National Provident Fund’s (NPF) compulsory savings scheme. It may be opportune for us to consider reinstating the NPF fund abolished in 1980 now that the Social Security Fund has been merged into the Consolidated Fund and counted as government revenue.
 
 Paul B Chow

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