Housing Mortgage – One Step Forward

Home mortgage financing is negligible in Pakistan. This is due to multifaceted issues that are deterring affordable housing in a country with a chronic shortage for it. There are both supply side and demand side issues keeping the mortgage potential at bay. One of the biggest road block on the supply side of housing is the inability of banks to foreclose properties in case of default.

This is an old issue which has been dealt with in the past, but with limited success. Recently, Lahore High Court ruled that banks and financial institutions are not required to obtain a decree to sell mortgage properties to recover defaulted loans. This will essentially save 2-3 years of litigation time. However, the process is still not going to be efficient.  

Under Section 15 of the (Recovery of Finances) Ordinance, (FIRO) promulgated in 2001, a comprehensive legal framework existed on foreclosure. It empowered the financial institutions to sell mortgaged property. However, the Supreme Court of Pakistan passed an order in 2013, declaring Section 15 of the Ordinance as ultra vires of the Constitution of Pakistan. The section was reintroduced through an amendment in 2016 but it was still not fully implemented.

The difference with the new ruling is that once the case is settled, banks can sell the mortgaged property. However, banks still have to go to court to prove the outstanding claims against the defaulted client. The dispute settlement usually takes 3-4 years and there is no change in that. The additional time to get decree (2-3 years) is now reduced. Hence, one can say that the litigation time is reduced by half.

It’s a step in the right direction, but still a long way to go to have robust mortgage financing. In case of car financing, the process of repression is simpler and banks do not have to spend extra time in courts. That is one reason car financing is much higher in Pakistan. Around one fourth of cars being sold in Pakistan are financed, and it constitutes a major portion of formal consumer financing in Pakistan.

The next step is to improve the capacity of banking trail courts to reduce the time of litigation. At times it takes 1-2 years to just prove that the defaulter has borrowed from the bank. The courts are overloaded with cases, with an average of a few minutes given to each case. Moreover, the judges lack the ability to comprehend the complexities of banking cases. Once these issues are dealt with, the home financing number may inch up to car financing.

Foreclosure should become easier now if the default is proven. Banks can liquidate the property without consent but this is not possible in every locality. For instance, in housing societies, the relevant authorities have more power, which is why banks are reluctant to mortgage houses there. In other places where land titles are not clear, banks are hesitant to entertain potential clients. This leaves very few societies such as, DHA, where banks are fully comfortable and have full authority over the houses they finance. Now with this new legal development, banks may be inclined towards a higher number of mortgages in selected housing societies.

If one assumes that the number of houses needing financing is equal to the number of cars being financed, incremental housing finance per year could have been 50,000 in 2018. However, housing finance is just a fraction of it, with total outstanding loans are in the range of 60,000-80,000.

If Pakistan has to reach India’s mortgage depth level (10% of GDP) in 5 years, the number of new housing finance should be more than 100,000 cases per year. And in order to reach 5 percent of GDP, housing finance should match the number of car financing. The recent ruling will inch towards it, but there is still a long mile to go.