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URBAN INSTITUTE CONSORTIUM REPORTS FOR THE USAID/POLAND HOUSING FINANCE PROGRAM

Reports listed below are available for download in the Portable Document Format (PDF). Reports will be added as they become available. Please check back.

Note: PDF files can be read with the freeware software Adobe Acrobat which can be downloaded at the Adobe site.


Poland: Housing Finance at The Millennium
An Assessment of Achievements and Outstanding Issues

Dr. Sally Roe Merrill
The Urban Institute
Dr. Edward Kozlowski
Mr. Piotr Karas
Cracow Real Estate Institute
Dr. Jacek Laszek
Bank Slaski

February 2000
Project No. 6933-002

Poland is now developing one of the most effective systems of housing finance among the transition countries. The sector has reached an enviable position in replacing decades of state monopoly and control with a market-driven and competitive environment.

This report looks at the evolution of housing finance in Poland and at the factors that have supported its development. An overview of the portfolio, the major lenders, and the characteristics of typical mortgage products is provided, based on a first-of-its-kind survey of banks developing business in housing finance. The efficiency of the system is analyzed through a variety of efficiency measures, including the spread (the gap between the mortgage lending rate and the cost of funds), "real" rates (the gap between the mortgage rate and inflation), and "intermediation efficiency" (the gap between the mortgage rate and the Treasury bill rate). The report also assesses the major issues which remain to be more fully addressed as the system matures, including developing information systems to assist with analysis and management of risk, maintaining a level playing field between the universal banks and the emerging mortgage banks, and re-assessing risk sharing, especially the proportion borne by the lenders, as the legal infrastructure and new credit enhancement mechanisms evolve.


The Transition in Housing Finance in Central Europe and Russia: 1989-1999

Douglas B. Diamond
The Urban Institute

February 2000
Project No. 6933-002

This report describes and analyzes the past and near-term prospects for housing finance in Russia and four Central European countries (the Czech Republic, Hungary, Poland, and Slovakia). The focus is on the policies, institutions, and forces shaping the market today, but the starting points and transition process are also covered.

Three major conclusions are drawn. First, all four Central European countries have adopted similar institutional structures for their new housing finance systems. Second, homebuyers in Central Europe are so far unusually reluctant to borrow, even at subsidized low real rates, unless rates are below the return on bank deposits. However, mortgage market in Poland seems to be growing at an accelerating pace. Third, the Bausparkassen-type institutions, which have been very popular, may supplant mortgage or commercial banks as the primary housing lenders in all countries other than Poland, even though they will not provide the sorts of public benefits expected.

With respect to Russia, the housing finance sector has made greater progress towards market-based operation than the economy as a whole. Partially due to continuing USAID-funded technical assistance, the sector is poised to develop rapidly whenever macroeconomic conditions grow more supportive of long-term lending.


Global Models For Funding Housing: What Is The Best Model For Poland?

Michael Lea
Cardiff Consulting Services

February 2000
Project No. 6933-002

Polish housing finance has progressed considerably in recent years. As recently as 1996, the entire country had only four lenders and 653 million zloty of market rate mortgages. By mid 1999, over thirty lenders were active in the housing finance market, with over 3.9 billion zloty of market rate mortgages outstanding.

To date, all mortgage lending in Poland has been done by commercial banks. A lively debate regarding the introduction of alternative models for the provision of housing finance has emerged. Legislation authorizing creation of specialized mortgage banks and contract savings institutions (Bausparkassen) was passed in 1997. Two mortgage bank licenses have been granted recently, but there has been no lending activity to date. In addition, there has been discussion about securitization and an on-going role for the Mortgage Fund, a second tier refinance facility created in 1994.

What should be the appropriate model for accessing funds for housing is a question not unique to Poland. Historically, many countries have created specialized institutions and special circuits for the funding of housing. Although such special circuits have been replaced in many countries, they are still important in several countries and continue to be introduced in both developing and transforming market contexts.

This paper reviews the four major models for funding housing that are being discussed in Poland today: the universal banking model, the mortgage bank model, the contract savings model and the secondary mortgage market model. The review briefly describes each model, notes its strengths and weaknesses, and characterizes its relative importance in developed country housing finance. The paper concludes with a view as to the likely evolution of housing finance in Poland in the early 21st century.


Final Conference of USAID's Housing Finance Project:
A Decade of Building Housing Finance in Poland
Challenges at the Outset of the New Century

December 8-9, 1999
Warsaw

Dr. Sally Roe Merrill
The Urban Institute

This conference, organized by the Urban Institute and its Polish partner, the Cracow Real Estate Institute was the final conference of the Poland Housing Finance Project of the United States Agency for International Development (USAID), and was co-sponsored by the Polish Banks Association (PBA) and USAID. The two-day conference was held in Warsaw on December 8 and 9, 1999 and included over 200 speakers, discussants, and guests.

The conference provided a celebration of the achievements of the market-based housing finance sector in Poland. It represents the culmination of USAID-sponsored housing finance work in Poland, which has taken place over nearly a decade. More specifically, the conference embodies three years of intensive work in housing finance by the Urban Institute Consortium (UIC), which itself built on previous USAID-sponsored work. The Urban Institute Consortium, directed by Sally Merrill, worked in close concert with the manager of USAID's housing finance program, Michael Lee, to assist both public and private housing finance. The Project developed close counterpart relationships with the PBA, the Ministry of Finance (MOF), the General Inspectorate (GINB) of the National bank of Poland (NBP), the Housing and Urban Development Agency (HUDA), and the Foundation for Mortgage Credit (FMC). The Cracow Real Estate Institute has served as the Urban Institute's partner in Poland since UIC began its work in October 1996. The consortium has also worked with numerous Polish experts in housing finance and housing policy, and with Polish bank training institutes, the Polish Association of Homebuilders, and the Polish Federation of Valuers' Associations.


Regional Conference on Housing Finance:
Building Housing Finance in Central and Eastern Europe: Sharing and Comparing

December 10, 1999
Warsaw

Dr. Sally Roe Merrill
The Urban Institute

The Regional Conference on Housing Finance was a one-day regional workshop for policy makers and practitioners involved in housing finance and housing finance policy throughout Central and Eastern Europe (CEE), Russia, and the Newly Independent States (NIS). A group of countries with relatively advanced systems of housing finance, the Czech Republic, Hungary, Poland, Russia, and Slovakia shared their experiences with participants from Bulgaria, Romania, Albania, Armenia, and Kazakhstan.

The conference, which was co-sponsored by the United States Agency for International Development (USAID) and the Polish Banks Association (PBA), was the second portion of the closing events of USAID's Poland Housing Finance Program, undertaken on behalf of USAID by the Urban Institute Consortium (UIC). On December 8 and 9, a final conference discussing the issues surrounding both private sector housing finance and public sector housing policies-"A Decade of Building Housing Finance in Poland: Challenges at the Outset of the New Century," was held to celebrate the achievements of nearly a decade of development of the Polish housing finance sector. This conference was also sponsored by USAID and the PBA, and included the participation of the Housing Finance Project's other counterparts in Poland i.e., the Housing and Urban Development Agency, the Ministry of Finance, and the Foundation for Mortgage Credit. Most of the speakers for the Regional Conference and a number of the participants also attended this final conference on Poland, which allowed them the opportunity to assess the various actions important to achieving success in housing finance and to gain some perspective on the evolution of factors in the development process.


Property Valuation and Appraisal
U.S. Information Systems and Recommendations for Poland

Mark Bates
David Dale-Johnson

W.J. Brzeski
Cracow Real Estate Institute

September 1999

Real estate appraisals can provide current market value estimates to support multiple purposes, including purchase or sale, financing and related underwriting, property listing, assessment for tax purposes, and value at transfer (inheritance or gift). Readily available real estate data facilitates more accurate appraisals, allowing real estate risk to be more precisely assessed by buyers, lenders (primary and secondary), and regulatory authorities.

Three appraisal methodologies are standard for U.S. appraisers and for most appraisers worldwide, including those in Poland:

  • Sales comparison: The value indicated by recent sales of comparable property in the market.
  • Income: The value of a property's earning power based on the capitalization of its income.
  • Cost: The current cost of reproducing or replacing the property, plus improvements, minus the loss in value from depreciation, plus site value.

    The reliability of the final estimate of value, however, is intimately tied to the reliability of the data. In the U.S., the real estate valuation process typically begins with a broad overview of market forces using general data, continues with an analysis of regional and local market conditions, and ends with an analysis of specific data applicable to a particular property or properties. In most geographic locations, for most types of property, extensive data are available, both public and private, and the available data are generally able to support the chosen valuation methodologies. This is not the case in Poland nor in the transition countries in general, since under the state-dominated real estate sector, a valuation process, as used in market-based transactions, did not exist. Thus, Poland now needs to establish the relevant data series and build the corresponding databases.

    This paper reviews the residential and commercial appraisal process in the United States, describes the databases that support them, and discusses the particular roles of the public and private sectors in making data available. It identifies the general macroeconomic data (national and regional) and the property-specific data needed if appraisals are to accurately assess both value and potential risks. It surveys the strengths and weaknesses of the current U.S. and Polish systems, and points out that, though Polish appraisers understand and use all three appraisal methodologies, an engineering tradition that focuses on physical attributes, combined with lack of market transactions and income data, may lead them to emphasize the cost approach. In addition, the Central Bank, it its role as regulator of mortgage banks now being established in Poland, must determine the rules underlying the concept of "mortgageable value" for the underlying collateral of mortgage bonds. Thus, a unique opportunity exists in Poland to develop a system of collection and distribution of real estate data based on current international best practice, and the paper makes general recommendations as to the components of such a system and how it might best be developed in Polish circumstances.


    The Feasibility of Estimating the Demand for Residential Mortgage Credit in Poland

    Sally Merrill and Rebecca Lawrence
    Urban Institute
    Stephen Mayo, Maciej Grabowski, Martha Sickles-Grabowska, Marek Koziarek
    Urban Institute Consortium
    Edward Kozłowski
    Piotr Karas
    Cracow Real Estate Institute

    April, 1999
    RFS 638

    This paper provides a brief commentary on the demand for housing and the related demand for mortgage credit. No attempt to actually estimate the demand for credit or the demand for housing has been made (in the first instance, the requisite data are not available at present). Rather, the purpose of this paper is to provide a discussion of the types of housing models that are generally developed, the practical applications of these models, and the types of data necessary to their estimation.

    The study has been prepared based on a request from the Ministry of Finance (MOF) and the Foundation for Mortgage Credit, among others. It will, hopefully, be useful to their efforts to understand the factors underlying the demand for housing and the demand for mortgage credit, and the relationship among these and the other asset and consumer goods choices facing Polish households. Estimates of long-term demand relationships, and their variance according to household characteristics, should also be useful to the Housing and Urban Development Authority (HUDA) for developing housing subsidy policies that best achieve their desired policy ends. Finally, our comments should also be useful to the Polish Banks Association (PBA) and individual banks in order to assess what types of databases and methodologies are relevant to forecasting the potential demand for mortgage credit.

    Recommendations are then made for next steps in Poland. The most important of these is to develop a long-term, ongoing survey: a "Survey for Housing and Consumer Finance." The survey would be conducted on a representative sample of households (the sample could provide not only nationwide estimates but also individual estimates for Poland's largest cities and/or other geographic areas, for example). Microeconomic data from this survey will be crucial to estimating the basic models for the demand for housing and mortgage credit (and consumer credit as well, for example). Other recommendations include developing modifications to the traditional models of the demand for housing and mortgage credit relating to the barriers between potential and effective demand in Poland (and other transition countries); developing a database of mortgage credit information based on existing bank portfolios, linking household-level data on loan characteristics and household characteristics; and, in order to establish benchmarks for demand in Poland, comparing key housing indicators from advanced emerging nations, such as Turkey and Chile, and key housing finance statistics from Western European nations just recently experiencing a surge in the demand for mortgage finance.


    Housing and the Macroeconomy: Tax Reform and Alternative Subsidy Policies for Housing

    Sally Merrill
    The Urban Institute
    Patric Hendershott
    Stephen Mayo
    Michael Lea
    Douglas Diamond
    The Urban Institute Consortium

    April, 1999
    RFS 638

    This paper discusses two topics of immediate interest to the current policy debates in Poland: (1) the role of the housing and housing finance sectors in the macroeconomy and (2) alternative approaches to housing subsidy policy for owner-occupied housing, particularly in the context of the proposed reform of the tax system towards lower tax rates. The paper, which was prepared following a request to USAID from Deputy Prime Minister and Minister of Finance Leszek Balcerowicz, stems from ongoing discussions with the Government of Poland, especially the Ministry of Finance. It also draws from previous work undertaken by the Urban Institute Consortium, on behalf of USAID, for the Housing and Urban Development Authority, the Polish Banks Association, the National Bank of Poland and the Foundation for Mortgage Credit. More specifically, it is based on material further developed in Patric Hendershott, "Taxing and Subsidizing Housing"; Sally Merrill, et. al.," Public Sector Housing Finance Strategies for Poland" and "Local Government Rent Policy and Best Practice in Poland: The Need for Rent Reform and an Improved Housing Allowance Program"; Stephen Mayo, "Housing and the Economy" Douglas Diamond, "The Transition in Housing Finance in Central Europe"; Sally Merrill et. al., "The Feasibility of Estimating the Demand for Residential Mortgage Credit in Poland" and M. Lea et. al. "Analysis of Contract Savings for Housing in Poland".

    Poland's plans to undertake major reform of its tax system present an excellent opportunity to reconsider the goals and subsidy policies for the housing sector. In the first instance, a move toward a proportional tax system suggests elimination of the current, large tax benefit to new construction, as well as certain other tax-related benefits. What might be the preferred alternatives to this subsidy for owner-occupied housing, if any?

    Although the authors were asked to comment on alternatives to the current system of tax benefits, the discussion of subsidy policy is best couched in a more complete assessment of the problems facing the housing sector in Poland and the major priorities for its reform. Thus, the paper considers both existing and alternative types of subsidies. No subsidy policy, however, is likely to have the desired effect in a housing sector that is burdened by distortions in pricing; rigidities in supply response, mobility, and tenure choice; and lack of an adequate legal and administrative framework. In this context, the key problems in the sector are also noted.

    Key issues addressed here include the following:

    • the important relationships between housing and the macroeconomy;
    • the macroeconomic consequences of an inefficient and poorly functioning housing sector;
    • constraints to development of an effective housing sector, especially those imposed by policy legacies in transition economies;
    • the key principles that guide effective and efficient housing subsidy policy, including realistic estimates of housing need; and
    • housing subsidy alternatives for assistance to owner-occupied housing: direct grants and either an interest rate buy-down or a limited mortgage interest rate deduction.


    Public Sector Housing Finance Policy Strategies for Poland

    Sally R. Merrill
    Urban Institute
    Michael Lea
    Cardiff Consulting Services
    Douglas Diamond
    Martha Sickles-Grabowska
    Katherine Aukward
    Urban Institute Consortium
    Edward Kozłowski
    Jacek Łaszek
    Cracow Real Estate Institute
    Rebecca Lawrence
    Urban Institute

    December 1998
    RFS 648

    A team of housing finance experts of the Urban Institute Consortium has reviewed the public sector housing finance policies proposed in the Housing and Urban Development Authority's (HUDA) Strategy Report, particularly those policies in which the central government has the predominant role or a strong supporting role with the gminas or other levels of government. This report looks at proposed housing finance policies and discusses options, goals, and strategies. It attempts to provide recommendations which the government of Poland might use in continuing to formulate and carry out its strategies based on a review of the HUDA Strategy Report and discussions with HUDA officials, other government institutions, and other housing experts in Poland during late June 1998.


    Local Government Rent Policy and Best Practice in Poland: The Need for Rent Reform and an Improved Housing Allowance Program

    Sally R. Merrill
    Rebecca Lawrence
    Urban Institute
    Harry Garnett
    Urban Institute Consortium
    Wanda Urbanska
    Housing Research Institute
    Edward Kozłowski
    Jacek Łaszek
    Cracow Real Estate Institute

    November, 1998
    RFS 636

    A team of housing policy experts from the Urban Institute, the Cracow Real Estate Institute, and the Housing Research Institute has reviewed a wide range of issues with regard to gmina rent policy for communal and other rent-controlled housing. The most important topic of the report concerns the very limited progress which has been made by gminas with regard to raising rents. Rent reform is considered by the UIC team to be one of the most crucial aspects of policy reform yet outstanding in the housing sector. Failure to undertake rent reform has two serious consequences. First, for the vast majority of gminas, rent revenues are so low that they do not even cover current maintenance costs, much less capital repairs. Second and more importantly, from a nation-wide perspective, without rent reform a private rental market for rental housing will not emerge, nor will households who can pay full costs for housing be encouraged to do so.

    Since a few gminas have been able to overcome the apparently strong resistance to rent reform, the report has sought to understand the "best practice" procedures which have enabled them to make progress. The report also addresses housing allowance utilization, utility costs, rent burden, revenues in communal housing, management issues in communal housing, and restructuring of rents to reflect differences in unit quality, a policy reform also called for under the 1994 Rent and Housing Allowances Act.

    The Urban Institute Consortium team has based its analysis on several sources of information: an analysis of existing data, particularly the housing data regularly collected by the Housing Research Institute; interviews with a sample of fifteen gminas to ascertain their rent policies in the context of overall housing policy; more detailed interviews with a sample of five gminas selected to represent best practice in rent and/or housing policy. In addition, we have included portions of a simulation analysis carried out for USAID as part of a recent report "Public Sector Housing Finance Policy Strategies for Poland"; this analysis assists our understanding of the rent burden faced by households of different income levels and in different voivodships and also supports our recommendation with regard to the improving the housing allowance program to better support real rent reform.


    Regulation of Mortgage Banks and Mortgage Bonds in Poland: Assessment of the Regulatory Framework for Mortgage Banking in European Union Countries with Lessons Learned for Poland

    Loïc Chiquier
    Urban Institute Consortium

    November 1998
    RFS 643

    This paper offers an analysis of regulatory issues introduced by Poland's Act on Mortgage Banks, focusing on European Union countries' experience in the regulation of mortgage banks and mortgage bonds and the implications of the different rationales underlying regulation for decisions which must be made in Poland. It also includes an analysis of a major report prepared by the Foundation for Mortgage Credit, "Development of Terms and Conditions Concerning Implementation of the Act on Mortgage Bonds and Mortgage Banks of 29 August, 1997." Recommendations are made for the Polish environment based on an analysis of EU rules and regulations, particularly of risk-weighting rules and valuation and appraisal practices in residential, commercial, and construction lending; legal lending limits for mortgage banks; capital adequacy requirements on mortgage bonds and other products related to housing finance; and minimum equity requirements. This document was prepared at the request of USAID/Warsaw for the attention of the National Bank of Poland.


    Prospective Role of Mortgage Insurance in Support of Housing Finance in Poland

    Roger Blood
    Urban Institute Consortium

    September 1998
    RFS 629

    The objective of this paper is to assess the development of insurance products relevant to real estate lending in Poland, and in particular to provide an analysis of the relevance and feasibility of mortgage default insurance to the current and evolving mortgage industry in Poland. The report also includes a brief discussion of several other mortgage-related insurance products which appear ripe for more immediate adoption or broader usage in Poland. Mortgage default insurance may be able to play a useful future role in Poland as the nation's housing finance sector develops and matures, especially by enhancing affordability for more prospective homebuyers and supporting the development of a private secondary mortgage market by helping to build investor confidence.


    The Current Operation of the Bauspar Systems in the Czech Republic, Hungary, and Slovakia

    Douglas Diamond
    Urban Institute Consortium

    September, 1998
    RFS 645

    This document describes the history and current operations of the Bauspar systems in three Central European (CE) countries: the Czech Republic, Hungary, and Slovakia. It is based on interviews and data collected in June 1998 as part of a study of the transition in housing finance in these countries. Each of these countries has adopted a version of the German and Austrian system of separate contract-savings banks for housing, or "Bausparkassen." It is most likely premature to evaluate the achievement of the four goals of Bauspar systems, namely (1) to subsidize housing, (2) to increase savings, (3) to indicate credit-worthiness, and (4) to create a pool of stable funding. However, policymakers in the Czech Republic and Slovakia suggest that the system has been a disappointment in terms of real effect on the housing market relative to the outlay of budget resources, at least in the period until the low rate loans become commonly available, and in each country the large advantages to participating have actually introduced an element of instability where none existed previously. However, it is most likely premature to evaluate the achievement of the four goals of Bauspar systems, namely (1) to subsidize housing, (2) to increase savings, (3) to indicate credit-worthiness, and (4) to create a pool of stable funding. What is certain is that the maturation of the Bauspar systems will greatly expand the amount of borrowing for "housing purposes."


    Analysis and Recommendations for Revision of Statutory Lien Policy in Poland

    Carol Rabenhorst
    Urban Institute
    Jacek Łaszek
    Cracow Real Estate Institute
    Tomasz Stawecki
    Klaus Peter Follack
    Urban Institute Consortium

    September, 1998
    RFS 646

    This report considers the Government of Poland's current policy on statutory liens, in response to a request made by the Ministry of Finance to USAID. In Poland, a statutory law confers certain rights and privileges on the government to facilitate the collection of taxes and other fiscal obligations is the so-called statutory lien or mortgage. This law gives the government an automatic security interest in real property owned by a debtor who has failed to meet financial obligations owed to the state or gmina. Bankers in Poland cite the statutory lien as a major impediment to entering or vigorously pursuing the housing finance market. Their experience indicates that mortgage loans cannot be adequately secure as long as there is a possibility of a government statutory lien that will have superseding priority even if it arises later than the bank's lien. Experience to date with execution procedures (all in non-residential mortgages) demonstrates the detrimental effect of the statutory lien. In 70-80% of execution cases, the state exercises its right to recover tax obligations; in cases where the state is a claimant, the bank loses 50-80% of the balance of its loan. The absence of direct experience with execution on residential property results in substantial uncertainty with regard to the statutory lien and how banks can best protect themselves. Consequently, the risk is shifted to the borrower. The results are more expensive and time-consuming loan application and underwriting procedures, more expensive loans with less attractive terms, and less competition in the banking sector.


    Development of a Regulatory Policy Framework for Real Estate Lending: Review of United States Regulation and Lessons Learned for Poland

    William C. Handorf
    Urban Institute Consortium

    May 1998
    RFS 642

    This report evaluates prudential regulation established by federal banking supervisors for real estate lending by banks in the United States. While the analysis focuses broadly on topics in prudential regulation felt to be relevant to Poland, there is a strong focus on topics of special priority for NBP and NBP's General Inspectorate (GINB): risk weighting rules for residential and commercial real estate loans, regulation of appraisal, and parameters for legal lending limits.

    The lessons learned from this review of prudential regulation of real estate finance in the U.S. and from a review of problems facing banks in the United States from the mid-eighties to mid-nineties—many of them real estate related—support a number of recommendations for NBP to consider. The recommendations are, in most instances, equally valid for regulation of mortgage lending by both universal banks and mortgage banks.

    This report recommends that the National Bank of Poland consider modifying or expanding certain prudential rules that relate to real estate lending and enhance monitoring efforts to ensure that banks do not engage in excessively risky real estate lending nor replicate the pattern of liquidations of U.S. banks that were related to problem real estate loans. The National Bank of Poland can learn from the expensive lessons related to real estate lending in the U.S.; however, there are clearly differences in law, appraisal standards, credit information and economic development that must be considered, and—to the full extent possible—the report's recommendations have been developed in light of these differences. It is recommended that NBP should carefully monitor real estate lending, retain the 100 percent risk-weight for commercial real estate loans and residential real estate loans, and reduce the loan-to-one-borrower limit from 25 percent to 15 percent of capital for commercial real estate loans to ensure banks obtain a more diversified portfolio and maintain adequate capital, and expand staff training in real estate lending risk. Finally, several regulations are made regarding the expansion of the regulation of appraisal.


    Analysis of Contract Savings for Housing Systems in Poland

    Michael Lea
    Cardiff Consulting Services
    Jacek Łaszek
    Cracow Real Estate Institute
    Loïc Chiquier
    Urban Institute Consortium

    March 1998
    RFS 645

    This report compares and contrasts the two Polish systems (kasy mieszkaniowe and institutions modeled after the German Bausparkassen), with each other and with the variants recently introduced in the Czech Republic, Hungary and Slovakia, and analyzes their potential effects on the state budget and housing finance system. Based on this analysis the recommendations for amending the Bausparkassen legislation are offered.

    The report finds that Bausparkasse program will be very attractive to users of housing loans in Poland. The savings rates are high over a short term horizon (three years) but steadily decline as inflation erodes the value of old savings (earning three percent after the first year). However, the availability of the low rate loan means that the net present value of the combined loan and savings are positive throughout the periods, although they fall after five years at higher rates of inflation.

    Changes in the subsidy formula are suggested. First, a reduction in the initial level to 20 percent would provide attractive but not extraordinary returns to households in the current environment. It is also recommended that the formula should be indexed rather than to depend on ad hoc future adjustments which have to go through the legislature with uncertain results and timing. For budgetary purposes, it is recommended to fix a maximum cap in nominal Zloty rather than to index the cap to house prices. Finally, a limit on the number of years households can receive a subsidy would eliminate long tails on subsidy obligations.

    The report recommends that a longer minimum savings period and a reserve fund to meet future loan demand should be required. It also recommends that it should be made clear that the Bausparkassen cannot guarantee immediate funding of the loan upon completion of the savings contract and that Bausparkassen deposits should be subject to the same deposit insurance premiums as deposits in other financial institutions.

    The Czech and Hungarian Bausparkassen laws are more detailed and somewhat more conservative than the Polish Act. The premiums are less generous relative to monthly incomes, the required savings periods are longer, and the premium may be kept after a minimum period in order to encourage participation of non-borrowing savers. The Czech and Hungarian Acts specifically allow waiting periods and interim loans. The Hungarian legislation contains a number of regulatory provisions designed to minimize liquidity risk and is an appropriate model to consider for Poland (as the macroeconomic environments are similar).


    Dual Index Mortgages (DIMs): Conditions of Sustainable Development in Poland

    Loïc Chiquier
    Urban Institute Consortium

    February 1998
    RFS 625

    This paper responds to NBP's need for a better understanding of DIMs and their inherent risks, as well as providing suggestions regarding the potential prudential regulatory and supervisory parameters appropriate to these products. In inflationary economic conditions, DIMs can be an effective housing finance instrument. The unique ability of DIMs to self-adjust provides opportunities for both borrowers and lenders, combining credit affordability and, ultimately, profitability for the lender. DIMs amortize according to two independent indexes—an index reflecting the changing income of borrowers and a financial index—as the flow of payments and amortization rates are separated from credit rates. Despite their efficacy, DIMs are complex products to underwrite, and if improperly underwritten, they can lead to severe contingent liabilities.

    Several characteristics of DIM credits make the DIM system a practical option for Poland: DIMs are relatively inflation-proof, more affordable than conventional credits, and resistant to external shocks. Appropriate DIM parameters and indexation can also help minimize risk. The design of DIMs requires choosing appropriate indexes that closely reflect the evolution of borrowers' incomes and the costs of lenders' funds; the indexes must be adjusted as often as necessary, be regularly published, and be relatively free from distortions. This paper suggests index options for DIM scenarios for Poland and provides examples of DIMs in other countries. Establishing an efficient DIM system requires frequent monitoring of payment-to-balance ratios and consideration of credit policies that have been recently developed. Dual Index Mortgages details several other recommendations for the sound underwriting and supervision of a DIM system and uses the experiences of Mexico, France, and other countries to help create a viable scenario for Poland's housing finance system.


    The Risks of Commercial Real Estate Lending

    Michael J. Lea
    Cardiff Consulting Services
    with
    Achim Dübel
    Urban Institute Consortium
    Jacek Łaszek
    Cracow Real Estate Institute
    contributions from
    Loïc Chiquier
    William Handorf
    Abt Associates

    December 1997
    RFS 624

    The purpose of this study is to provide the NBP and the Ministry of Finance with a comprehensive overview of the risks of commercial real estate lending and how these risks are managed, regulated and supervised in selected European countries and the United States. The risks of commercial real estate lending depend critically on the type of lending, in particular whether loans are for property development or standing investment projects. It is the former more than the latter that is responsible for the enormous losses suffered by lenders in a number of Western countries during the 1980s and 1990s. Furthermore, the risk of commercial real estate lending depends on the legal standing of the lender (i.e., whether the lender has the right to foreclose on a defaulted loan and repossess the property within a reasonable time period and for reasonable cost) and the lessor (i.e., whether long-term lease contracts can be offered and enforced).

    Lender underwriting is the key risk control variable. The focus of underwriting has traditionally been on the loan-to-value ratio and the debt service coverage ratio. Property valuation plays a key role in this process and the different approaches to valuation are highlighted in this study. Particular emphasis is given to the German concept of mortgageable value which is a regulatory guideline for valuation of properties collateralizing loans used as security for mortgage bonds. The recent U.S. experience is quite instructive as well. As the funding of commercial real estate has shifted away from traditional intermediaries such as commercial banks and savings and loans and towards securitization, the rating agencies have become more prominent in the risk review process. They have developed detailed, quantitative rankings of the risks of commercial real estate backed securities that provide useful guidelines for regulators.


    Building on Progress: The Future of Housing Finance in Poland

    TEAM LEADER

      Dr. Sally Merrill, Abt Associates Inc., USA

    HOUSING FINANCE

      Dr. Michael Lea: Finance Team Leader, Cardiff Consulting, USA
      Dr. Jan Brzeski, Cracow Real Estate Institute, Cracow
      Dr. Loic Chiquier, Credit Foncier International, France
      Mr. Lawrence Simons, Powell, Goldstein, Frazer, & Murphy, USA

    LEGAL ISSUES

      Ms. Carol Rabenhorst: Legal Team Leader, The Urban Institute, USA
      Dr. Tomasz Stawecki, University of Warsaw
      Dr. Małgorzata Wrzołek-Romanczuk, Warsaw

    PUBLIC SECTOR POLICIES

      Dr. Bengt Turner: Public Sector Team Leader, University of Uppsala, Sweden
      Mr. Eligiusz Koniarek, American Polish Home Builders Institute, Gdansk
      Dr. Duncan Maclennan, University of Glasgow, United Kingdom
      Mr. Maris Mikelsons, The Urban Institute, USA

    HOUSING SECTOR REVIEW

      Ms. Barbara Werchowiecka, Cracow Real Estate Institute
      Mr. Zbigniew Tłok, Gdansk

    INTERNATIONAL COMPARATIVE ANALYSIS

      Dr. Steven Mayo, Washington D.C.

    May 1997
    RFS 612

    The primary goals of this study are to assess the emerging market-based housing finance system in Poland, the legal framework for mortgage lending, and the public finance system for housing and housing-related infrastructure, including the National Housing Fund, the proposed Renovation Fund, the housing allowance system, the Fund for Environmental Protection, and other initiatives guiding public housing policy development. It suggests three key goals of housing policy reform: the private sector increasingly owns the housing stock and provides new capital for its growth; rent and subsidy policies in the public sector are consistent with development of the private sector; and government plays a strategic and enabling role, curtailing its own role as a direct provider and manager.

    The report also proposes a structure for Poland's public housing and infrastructure finance system in the near future. The structure builds on the public finance initiatives now in place, or nearly in place, for not-for-profit housing, rehabilitation, and housing-related infrastructure. Thus, the proposed structure does not alter the existing institutional arrangement but rather seeks to clarify the policy goals and to enhance the connections to sources of private funding. Although the roles of the national government and particularly the gminas remain crucial, various forms of public/private partnership increasingly take center stage.


    CONTACT INFORMATION

    To request copies of these reports, please contact:

    In Poland:
    Cracow Real Estate Institute
    Attn: Edward Kozlowski
    phone: (+48) (22) 622 62 97
    fax: (+48) (22) 621 60 22
    e-mail: kin_waw@kki.krakow.pl
        In the US:
    Urban Institute Press
    phone: 1.202.261.5687
    fax: 1.202.466.3982
    e-mail: pubs@ui.urban.org



    Home to the Urban InstituteFor additional information, send e-mail to
    Poland Housing Finance Program at poland@ui.urban.org.

    Poland Housing Finance Program
    c/o The Urban Institute
    2100 M Street, NW
    Washington, DC 20037