The underwriting practices of lenders are vital to controlling credit risk in India’s affordable housing loans segment, which is set to grow strongly over the next few years as the government tries to increase home ownership among underprivileged groups, says Moody’s Investors Service.
“Moreover, ‘affordable housing loans’ present unique credit risks for lenders and — when securitized – for residential mortgage-backed securities (RMBS), because of the nature of the borrowers,” said Georgina Lee, a Moody’s Assistant Vice President — Research Writer.
The affordable housing loan market is forecast to grow to Rs 4 trillion – Rs 8 trillion by 2022 from Rs 593 billion in March 2015, bolstered by government measures to increase home ownership among underprivileged groups. Affordable housing loans accounted for 14% of the total home loan books of housing finance companies as on 31 March 2015, the report added.
Many borrowers do not have previous banking transaction records and, for the self-employed, they do not disclose their incomes or file tax returns. As such, the formal documentation or records needed to verify income and the ability to service loans is absent, similar in some ways to “low-doc” mortgage loans in other jurisdictions.
“In this context, the underwriting practices of lenders — in this case, housing finance companies (HFCs) – are vital to controlling credit risk,” adds Lee. “Some key credit considerations for HFCs when they originate affordable housing loans include income assessments and the quality of the construction firms involved when the loan is for the purpose of funding an individual’s purchase of a home; some HFCs prefer to extend loans to the specific building projects of construction firms that they have pre-approved.”