Affordable Housing Institute : US

Somewhere in The Moon is a Harsh Mistress, Heinlein describes his intellectual hero Professor Bernardo de la Paz working as an itinerant teacher on the Moon, teaching anything to anybody, by reading up furiously and staying a few weeks ahead of his syllabus.  It was with something not entirely dissimilar that I put together, and taught, a syllabus on Mortgages for the Poor; An Overview of Products and Supporting Infrastructure at the world-famous Boulder Microfinance Training Program (MFT), which after fourteen years has become the global standard for training in microfinance.  
 

 

As their Web site puts it with justifiable pride:

 

Because most of the faculty [Unlike some folks – Ed.] are drawn from the ranks of global academia, and hence available only in the summer, the course is held in late July and early August in Torino (Turin), Italy.  Known to most of us mainly as the headquarters of Fiat, it’s actually a delightfully livable city, particularly in August, when for reasons best known to themselves [Well, it is hot, but nothing as bad as Boston – Ed.], the Torinese flee their city, leaving it to people like us.  

 

Torino’s Mole Antonellia: like the cupola of a submerged cathedral

 

Not that I saw very much of it – for three days straight, I was running the first-ever module on housing mortgages (and guest-lecturing one module on slum upgrading, using my Brazil trip as the case study), as part of a team put together by the ever-enterprising Franck Daphnis of Development Innovations Group.

 

Teaching adults differs from teaching children.  Adults are there by choice, and even though present, they choose whether or not to pay attention.  So to teach them, you must entertain them, and not condescend, and not give them irrelevancies.  I think of them as hard-to-satisfy campers at summer camp for global leaders, and my principal job is to make them happy campers.

 

 

Inventing a new executive-education course is tricky.  You don’t know much about the participants, what their roles and careers are, whether their backgrounds are homogenous or varied.  You’re in a one-room schoolhouse and you have to keep all the class – or at least, the lion’s share – focused and learning.  Which means you have to talk to them about things you know and they don’t.  The totality of your experience, even your experience relative to a particular narrow subject, can always take longer to relate than your course allows (this one was 3 modules of 2½ hours apiece).  You have to find the sliver of intersection between what you know and what they need to know and don’t. 

 

The teacher knows A; the students don’t know B, and you have to find the intersection!

 

Flying blind, I structured the course into three modules:

 

Part 1: Economics and structure

Part 2: Roles in a mortgage loan system

Part 3: Current practice around the world

 

I figured that before we got to current practice, the campers needed to see the core economics of housing lending, and in particular the challenges of lending against collateral rather than on a person’s credibility.  I expected the participants to be heavily represented by Mission Entrepreneurial Entities — actual lenders who were doing business in microfinance loans, and who had elected the one-week housing-finance course (as part of the three-week comprehensive MFI course) to learn about housing finance and whether they should expand their activity into housing finance. 

 

One way to think about microfinance

 

I figured they would be apprehensive.  As I said to them about five minutes into the course:

 

To a housing lender, a microfinance loan is a tiny amount, with an exorbitant interest rate, for an insignificant interval, and with no collateral – hence really risky.

 

Having paused just long enough for them to wonder, I went on:

 

Of course, to a microlender, a housing loan is a huge sum, with a minuscule interest rate, over a really long interval, and with no knowledge of the borrower – hence really risky.

 

With that out of the way, Day 1 dug into the practicalities of making a loan with secure collateral – fixed collateral that you cannot repossess.  Most of the participants were used to making loans on personal credit – I lend to you because I’ve checked you out – and on chattel – movable personal property like television sets, cell phones, and cards.  But housing is a whole ‘nuther ballgame, because you can’t move it. 

 

The class was arranged seminar-style: a series of rectangular tables arranged in a square-edged open U, so the teacher/ facilitator could stand at the open end, or venture into the arena around the class. 

 

Imagine roughly twice as many seats, filled with people

 

Behind one side of the U ran the large window wall; behind the other was the highly-valued bank of free-access broadband Internet computers.  So, to illustrate the differences of housing lending, I divided the class into Internetville (the better neighborhood, after all) and Windowburg, which was low-lying and vulnerable to natural catastrophe (hurricane, cyclone, or monsoon at your preference).  We could rationally imagine lending to Internetville when we wouldn’t lend to Windowburg, couldn’t we? 

 

Credit decisions notwithstanding, I made the case for housing finance as the driver of expanding MFIs’ business, using simple arithmetic: what a loan’s annual payments are, based on different loan tenors (durations):

 

 

The point is straightforward: even at high interest rates, loans can be much more affordable if you push out their repayment schedule.  For instance, a loan at 20% interest, if repaid over 3 years, has a constant of 44.6%, but if repaid over 10 years, the constant is only 23.2% — half as much. 

 

[Yes, these constants and rates are high, but they’re nothing compared to microfinance, which routinely charges 75% annual interest on loans averaging 6 months; indeed, in the microfinance world, rates are quoted in percentages per month.]

 

Using that arithmetic, I converted interest rates and loan tenors to how much house a customer can afford as a multiple of his or her household income:

 

 

If rates are 17% and the loan is outstanding for 10 years, a customer paying 30% of household income for housing can afford a house equal to 1.4x annual income.  That same customer could afford only half as much house (0.7x income) if the loan had to be repaid in 3 years.

 

That got us through Day 1, and when Day 2 began, I asked the students if any comments or questions had occurred to them in their evening interval.   “Yes,” said Felicity from South Africa’s Kuyasa Fund. 

 

Kuyasa’s Web home page header: “a new dawn for housing finance.”

 

“Why do it?  It seems awfully rrrrisky.”  The delightful trill to her R’s lent the question a certain emphasis.

 

“How many loan products have you got?” I asked her.  When she replied one, I turned to Emma from Holland, lately of ABM Amro.  “How many products have you got?”  “A couple of hundred,” she answered.  “And that’s the point,” I said.  “You keep adding products to follow your customers.”  Puzzlement. 

 

A loan product, is simply a comprehensive term sheet that sets forth to whom you will lend, at what rate and over what period, for what purpose.  You can create a loan product as pure vaporware – a description of something that doesn’t yet exist – and see whether your customers are interested in creating it. 

 

I wonder what they’ll come up with

 

That became the question for Day 2 and Day 3: why do it?  My answer, paraphrasing Deep Throat from Watergate, was simple: Follow your customer. 

 

Follow the customer, and you’ll follow the money

 

[Continued tomorrow in Part 2.]

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