Yesterday’s post on my experience teaching a brand-new course, Mortgages for the Poor; An Overview of Products and Supporting Infrastructure at the world-famous Boulder Microfinance Training Program (MFT), brought us to the point of wanting to follow the customer. 

Whoever gets the customer first, wins!

The MFI customer needs and wants a housing-finance product, because traditional microfinance can’t lend enough money to buy large fixed assets (new homes, a one-room addition, installation of in-home toilet), and if you’re going to lend for long intervals (3-5 years may not seem like much to us, but it’s 6-10 times as long as the typical microfinance loan).  Banks won’t enter the space, I said, because it’s too small and they’re afraid of it, so if housing finance is to come to informal housing, it’s going to be you MFIs as the change-agent MEEs.  As I’ve put it before:

Though drawn into the space by a sense of mission, they are enterprises and subject to the normal business imperatives:

It’s got a mission, but it’s also a bank: SEWA in Ahmedabad, Gujarat, India

* They need initial capital to set up the business. 

* They generate revenue to sustain their operating costs (or reduce their costs to match their revenue).

* They make ongoing capital investments whose payback is long-term — either hard costs like land sites or pilot schemes, or soft costs like political advocacy and the catchall phrase ‘capacity-building’. 

* They hire and retire staff; manage and account for their capital; secure resources via negotiation; protect themselves against malfeasance and waste by their executives; handle organizational turnover; and manage organic growth and evolution as their business ages. 

In short, NGOs need business models.

All these problems are compounded because the entities tend to be short of classical business expertise and experience, despite their entrepreneurial approach to their missions.  Nor does the technical assistance that reaches them emphasize entrepreneurship. 

You have to bring the expertise to the customers, and you have to adapt what you know to what they need.  Portability and flexibility are important.

With that as a preamble, I put the class through a role-playing exercise called Let’s make a loan –

When you lend on housing, you’d better know what’s behind Door Number 3!

– a role-playing game using this extremely cheesy graphic showing the roles in a home-purchase value chain:

I’d printed up name tents for each of the major roles I wanted played:

Home seller

Home buyer

Loan originator

Appraiser

Underwriter

“Funding desk”

Securitizer

Security holder

One by one, we introduced our dramatis personae, and I took volunteers from the group.  It wasn’t hard; give people who know something a chance to ham it up, and you’ll be amazed at the results.  Sure enough, the Brazilian district attorney volunteered to be the home doctor; Muaffaq the Palestinian community organizer was ready to be the buyer, and Hemantha the Indian microbanker (from Hand-in-Hand) was happy to be the loan originator. 

Originating loans in Tamil Nadu and India

As we introduced each one, we asked:

What does he or she want from the transaction?

How does he or she get paid?

What are his or her incentives?

When it came to the question of appraising the house, we got into a lengthy discussion about whether we needed an appraiser.  “Why not just have the estate agent do it?”  [Estate agent is Brit-speak for broker – Ed..]  So we drafted Marianne of DIG to be the estate agent, and then deconstructed her qualifications and motivations (when it comes to a realtor, who really works for whom?).

I’ll give you a hint: I get paid only if it sells

Meanwhile, we’d already established that Hemantha the originator wouldn’t be on salary, so during the break I asked him sotto voce to interrupt me every few minutes with “I want my commission!” 

Adding people to the role-play reversed the normal teacher-class dynamics; instead we brought out the people who knew quite a bit about the subject and could contribute it.  Maria-Teresa from Habitat had plenty of experience in Peru’s Credito MiVivienda and Techo Propio programs, which she put to good use in her role as underwriter.  Anwer and Muhammad, loan originators from Pakistan’s Tameer Bank, told how they mitigate risk both before and after the loan, by counseling borrowers on their home improvement plans, and by assigning a relationship manager who calls each borrower a few days before the monthly payment’s due date.

Making loans that people can pay back

As often happens, the roles took possession of the players.  When it came time to foreclose on our homeowner Muaffaq, I tugged at the table representing his house but he maintained a firm grip on it.  Looking impishly at me, he asked, “What if I don’t want to leave?”

“I’ll get the bailiffs and they’ll remove you and your goods.”

“They’re friends of my brother’s.  Why don’t you pay me three hundred to go?”

I turned to the class.  “Is that immoral?”  Lively discussion ensued.  As it was raging, I asked, “is it illegal?”  No.  “Well, is it bad business?”  Another lively discussion: several participants pointed out that the minute we pay off one delinquent homeowner, everybody else will expect the same payments to vacate – so there’s a value to consistency.

Day 3 brought us the case studies, and to illustrate how programs evolve, I took three successive experiments in one country (Peru):

MiVivienda

Techo Propio

Mibanco

(A useful comparison, commissioned by Cities Alliance, is available here in pdf.)

I finished with my personal favorite, which isn’t even a housing loan product per se: Patrimonio Hoy run by Mexico’s largest cement company, Cemex.

For each case, the class worked through the essential questions to ask about any MEE’s` financial product:

Who’s their target customer?

What’s their core product?

What’s their business model?

Questions to ask about any MEE: Part 1

What’s their value proposition?

What’s their core competency?

What’s their comparative advantage?

Questions to ask about any MEE: Part 2

Which led me, as my class was flagging – it was Saturday morning, after all, and they’d had a solid week of these topics and more – to present this definition of a housing finance company:

A functional description of a housing finance company

“If you want to be in the housing finance business,” I said, “you can test market a product.  You can limit your risk by piloting it.”

And if it doesn’t work, you try something else

“You can offer it only to repeat customers, or your best customers, or customers who live in particular neighborhoods.  You can cut the rates after six months’ of good payment history.”

Somewhere in this sermon skeptical Samantha, who’d asked why do it, piped up with, “it’s just tweaking what we do now.”

That, it seemed to me, was a fine place to finish the class.

“My work here is done.”

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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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