One of the most immediate effects of the COVID-19 outbreak will be a loss of income for many
households and an inability to meet mortgage or rent payments. The repercussions for the financial
system will be an increase in bad debts, provisioning and reduced capital ratios. This, in turn, will
put pressure on secondary mortgage markets and create market liquidity challenges, as seen
during the Global Financial Crisis.
Responses have been a mix of forbearance for households,
regulatory forbearance for lenders and liquidity provision to the financial system. Policy
responses by the World Bank are focused on supporting governments in maintaining liquidity to
housing finance lenders, ensuring inclusive approaches to housing crisis response and laying the
ground for a rapid resumption of activity when crisis abates. The housing sector can play a strong
role in recovery as a channel for stimulus and employment creation, where large-scale investments
are needed to meet SDG11 on safe, adequate and affordable housing for all.
1. What is the impact of the COVID-19 Outbreak on Housing Finance Sector?
Based on the experience of the 2008 sub-prime crisis and the Global Financial Crisis contagion,
the following impacts are likely to hit global housing and residential mortgage markets:
Household Impact
• Wave of household borrower defaults resulting from unemployment or reduced income;
• Defaults by renters, impacting landlords who may have property loans to repay;
Financial Sector Impact
• Increased Loss Given Default levels for lenders putting pressure on capital requirements;
• Further pressure on capital levels due to revaluation and loan classification requirements
under IFRS9;
• Secondary mortgage markets become less liquid and more expensive as a result of the
overall increase in risk aversion;
• Liquidity pressure with reduced and higher cost access to capital market for long term
funding;
Housing Sector Impact
• Illiquid housing market with little to no activity – making it difficult to value property –
depressing real estate markets impact developers and contractors;
• Housing developers facing liquidity crisis as cash-flows dry up due to reduced demand
and financing for end borrowers, as well as reduced access to construction finance;
• Wider sectoral impact in sectors linked to construction/housing such as raw materials,
timber, primary infrastructure for housing, household goods.
Identifying country vulnerabilities for housing finance
During the 2008 global financial crisis, the housing finance sector had deep and lasting
repercussions, on the entire financial system, hitting those countries with deeper housing finance
systems and with a reliance on capital markets.
The deeper the mortgage market (in terms of mortgage debt outstanding to GDP ratio above 15%)
the higher the vulnerability of the financial system to a wave of payment defaults, and knock-on
effects on mortgage securities and wider capital markets. The case will be more visible in emerging
economies where capital markets depend on foreign investors, and/or where non-bank financial
institutions play a large role as mortgage lenders. Non-bank institutions may face more difficulty
in accessing liquidity from bond markets or refinancing from banks, and they cannot directly
access central bank packages.
Another aspect to consider is the relative size of the mortgage sector as a share of the overall
financial sector. Some countries may have a modest-sized mortgage sector, which can nevertheless
represent a systemic threat to the overall financial system. As seen in some East Asian economies,
there can be also be high levels of mortgage debt, even if it is a modest part of overall private
credit.
For countries with smaller mortgage markets—many emerging economies have mortgage debt
ratios below 5 percent of GDP—funding primarily comes from deposit transformation, rather than
capital market instruments. The contagion effects are reduced, and the systemic impact is also
much lower. Still, the social and human cost of mortgage defaults or missing rental payments needs
attention, even if the immediate priority for governments may be elsewhere, such as help for smalland medium-sized businesses or the corporate sector as a major employer.
Another vulnerability stems from developers who are hit by reduced demand, delayed investments,
and aralyzed real estate market infrastructure. They may also be affected by a credit crunch,
including to construction credits to developers and mortgage finance to end users. Contractors
may not be able to get necessary workforce or building materials. Some projects will be delivered
with delays and new projects suspended. This may especially hit countries where real estate
development was already fragmented, under-capitalized, unregulated, or on the verge of an
adverse cycle before the COVID-19 crisis.
2. How are Policy Makers Responding?
The initial response in most countries came from lenders themselves, with central banks following.
At time of writing this paper, governments were still formulating some proposals or adapting them.
Most measures fall under a broader envelope of stimulus packages and liquidity provision to
markets.
Given income losses of households, many lenders now offer forbearance or debt restructuring
measures, less so in countries where income losses are largely compensated by cash transfers or
expanded health and unemployment insurance, such as in France and Malaysia.
Court systems may not be active, limiting pursuance of foreclosure enforcement. Property markets
may also be frozen as key required intermediaries, such as notaries, registers, brokers, and valuers,
are unavailable.
Most forbearance initiatives provide some temporary suspension of credit repayments (principal
and/or interest2), but important differences are observed between simple debt restructuring that
provides additional flexibility of repayments, such as suspended payments being accrued into debt,
to solutions implying some loss taken by lenders and/or Governments to both subsidize borrowers
and preserve the mortgage portfolio quality. Some schemes recapitalize rescheduled payments
through the main mortgage loan, thus potentially increasing credit risk. Banks may cut their credit
rates or, like in Denmark, provide a subsidized short-term overdraft line, separate from the
mortgage loan which backs a covered bond or Mortgage Backed Security (MBS). Beyond
temporary respite, other approaches may offer a more structural solution through external
repayments made or assisted through mortgage guarantee funds. Within the same country, the
capacity of various lenders to professionally service their housing loans will be another
differentiating factor.
A critical aspect is the regulatory treatment that central banks will apply to this forbearance, given
the number of borrowers affected and duration of the shock, which will affect the length of any
moratorium. The combination of extent and duration will be relevant to regulatory response, such
as provisioning and capital measures.
Source: World Bank
