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Success Stories Assistance Areas SEED Reports Contact Information Last updated: 34     USAID's Assistance to Poland's Housing Finance Sector, 1991 – 1999 Summary This paper summarizes the way in which USAID has assisted the evolution of Poland's housing finance sector in the first, critical, decade of transition. Assistance started in 1991, at a time when all lending was made by the state savings bank at highly subsidized rates, and when there was no private or legal infrastructure to support mortgage lending. When our program of assistance ends in 1999, the sector will have developed to the extent that it no longer stood in need of any sustained foreign assistance. Within the near future: private mortgage lending will be sufficiently robust to withstand major macro-economic shocks; mortgage lending will be provided relatively efficiently, through a competitive system (with different types of lender, offering a variety of mortgage products, throughout the country); the public housing finance policy will be reasonably supportive of private sector lending, and with subsidies becoming well and transparently targeted to those groups that cannot access private housing finance; and the legal, regulatory and institutional structure will be in place to support continued growth and development of the sector, and whereby Polish institutions can undertake critical analyses and obtain access to technical advice for specialized assignments. The Evolution of the Sector Poland entered the 1990s with a stock of housing well below the European standards to which the country aspired, and with a declining rate of housing production. In the early 1990s, there were 296 housing units for every 1,000 people, compared with 334 per 1,000 in Slovakia, 397 in the Czech Republic, 383 in Hungary, and 481 in Western Europe. The housing stock was in an abysmal state of repair: a widely accepted estimate was that 11.4 percent of the stock needed immediate replacement and that 8 percent needed major repairs. Housing production had fallen from 150,000 units in 1989 to a reported 62,000 in 1996. (1997 and 1998 witnessed a small recovery – although we suspect that actual completions are significantly higher than the numbers officially reported.) These conditions were the consequence of a deep recession, a lack of affordable mortgages, lack of confidence in the financial sector, and a poor legal, institutional and regulatory framework. Although people in the rural areas were somehow building their own housing, the new Poland inherited no institutional infrastructure for urban housing delivery. There was no profession of developer. The only available form of home financing was subsidized but severely restricted credit from the State Savings Bank, PKO BP. There was little ability on the part of local governments to facilitate any form of private housing construction. The public sector had no resources to maintain or renew its housing stock for low-income households, but were maintaining rents of "social housing" at an unsustainably low level. All of these problems were a legacy of central planning. At the same time, popular perception was that housing was a right, a social good to be provided by government. Several initiatives ran in parallel to achieve a sectoral transformation, which, in its later years, has accelerated dramatically. The table at the end of this paper summarizes the main milestones in the development of the housing finance sector, and of USAID's own role in helping this metamorphosis. Among the more significant changes was that PKO BP announced the cessation of its subsidized housing loans - which, because it was unsustainable and inconsistent with a market economy - both created an uncompetitive environment for private lenders, and led to unrealistic public expectations concerning interest rates. However, because of a considerable overhang of commitments by PKO BP, it was not until 1996 that the last subsidized loan was actually disbursed. Simultaneously, the Polish Government turned for help to USAID and other donors. The USAID response is described below. A Mortgage Fund was capitalized with funds from USAID, the World Bank, the EBRD and the Government of Poland, in order to on-lend long-term capital, at market rates, to commercial banks for mortgage loans and construction finance. Because Poland was faced with continuing high and unpredictable interest rates, the basic instrument employed was the Dual Indexed Mortgage (DIM), which was linked to changes in earnings and interest rates. Other than the few banks that chose to participate in the Mortgage Fund, a very few other banks opted to offer mortgage loans and construction finance to their customers. The first of these was the Polish American Mortgage Bank (PAMBank), financed in part by the Polish American Enterprise Fund, itself supported by USAID. PAMBank (most of whose loans are denominated in US dollars) first opened its doors for business in 1993. The next commercial bank to start lending for housing was PBK, which did not offer its first loan until 1995. The Mortgage Fund succeeded in spearheading a remarkable transformation in the banking industry. It demonstrated to commercial banks that mortgage and construction lending is profitable. It established industry standards for loan origination and underwriting. Although the complexity of the DIM was to prove a barrier to its widespread acceptance, the Mortgage Fund, together with PAMBank, developed the initial public demand for unsubsidized mortgages. Three years ago, other than the four banks participating in the Mortgage Fund, PAMBank and PKO BP, there was only one other bank making unsubsidized mortgage loans (PBK). Today, perhaps 30 banks offer commercial loans for housing. In the last year, the value of the mortgage loan assets held by these banks doubled; over 100,000 loans have been sold in the last four years. A variety of loans are being marketed, including two variants of the DIM, and conventional variable rate mortgages denominated in zlotys and foreign currencies. Loans are available for the purchase of new and existing housing, for renovations and extensions, and for construction. It is estimated that about 20 percent of home buyers now take out a mortgage, with the proportion rising. Other components of a market-driven housing delivery system have simultaneously been put in place. A Polish Association of Home Builders has become a self-sufficient organization representing small and medium-sized builders and developers. The professions of appraiser, real estate broker and property manager have become established and recognized in law, with their own professional associations. Bank training schools have started to offer a variety of training courses in housing finance subjects. The Polish Banks Association has set up a permanent Housing Finance Committee, with a full-time salaried secretariat. Banks are cooperating with real estate brokers in loan origination. There have been advances, too, in the development of social support schemes for housing for economically weaker households. A variety of schemes are proposed, which promise to be more efficient and transparent than the previous raft of poorly-targeted subsidies. The longest-established is the non-profit housing association (TBS), primarily for the construction of rental housing, which receives substantial subsidized loans from the National Housing Fund and grants-in-kind from local authorities; this is targeted towards middle income households. Other schemes were – at the time of writing – still before Parliament. Rents of local authority apartments are in the process of being de-controlled, with a safety cushion provided by housing allowances for poorer households. The Housing and Urban Development Authority has published a Strategy for the Sector, with a stated purpose to "promote competitiveness and limit [the State’s] interference to a minimum... State assistance for the housing sector should be directed to precisely defined groups of people… Welfare cushioning programs should be clearly separated". Until now, commercial banks have financed their long-term lending for housing either from the Mortgage Fund or, more often, from their own short- and medium-term resources. In order to reduce the transformation risk and to lower lending costs, a law was passed in 1997 which permits the creation of specialized mortgage banks, a form of bank which was active in Poland before the war. Raising capital through the issue of mortgage bonds, mortgage banks will be able to access capital markets directly. Sale of the bonds will depend on stable, lower interest rates. With inflation now under control and at the single digit level, the first licenses for mortgage banks have recently been issued, with several other banks having expressed a firm intention to enter the market. With these advances, the sector has attained its first, major, stage of development: the basic policies, instruments and skills are in place to be able to boast of the existence of a market-based housing finance system. Nevertheless, the sector is still small and relatively fragile: the system is inefficient and therefore expensive to its customers; it may be unprofitable to several participants; it is vulnerable to a variety of risks, largely unquantified and largely unknown to the participants; because barely regulated, it is open to exploitation; and, although it has the good will of the government, its growth is not yet well supported by legislation. Much remains to be accomplished before the transformation of the sector is complete. USAID's Role USAID has actively supported the development of Poland's banking sector, and of the institutional, legal and regulatory infrastructure necessary for the evolution of a modern housing finance system, since the early 1990s. At that time, Poland turned to USAID and other donors for help in transforming the housing delivery system from one constrained by central planning to one which was market-based, efficient and effective. Beginning in 1991, USAID and the then Regional Housing and Urban Development Office (RHUDO/Warsaw) embarked on a three-fold housing reform support program: the development of a non-subsidized, sustainable housing finance system; direct assistance to developers, to generate housing projects; and a series of initiatives to help local governments support a supply of private housing. To stimulate a commercial mortgage system, USAID collaborated with other donors to capitalize a Mortgage Fund. USAID's Housing Guaranty loan complemented funds from the World Bank, the EBRD and the Polish Government, for an initial total of $400 million. Technical assistance was provided - initially to the Bud-Bank, which managed the Fund, and later (1994-1996) to the Housing Finance Project Office, a Polish Government agency with responsibility for assisting with the management and implementation of the donor-supported Mortgage Fund Project. From 1994 to 1997, USAID's program of technical assistance to the housing finance sector focused on the following issues: developing a capacity by bankers and developers to use construction loans; working with banks and bank training institutes to initiate a basic curriculum for training bankers in the elements of housing finance; establishing the need for an association of bankers to represent the community of interests of the housing finance industry; assisting commercial banks to use Mortgage Fund facilities more effectively. Simultaneously, the Eastern European Real Estate Federation has been working since 1992 to establish the real estate professions in Poland: the Polish Real Estate Federation was established in 1994; it now has 19 regional associations, with 1,500 member brokers; the Polish Federation of Valuers’ Associations was established in 1995; it now has 29 regional associations, with well over 3,000 member appraisers. By late 1996, USAID-supported technical assistance had: provided training and analytic services which resulted in the construction or planning of about 2,000 housing units; worked with Bud-Bank and commercial banks participating in the Mortgage Fund to develop procedures and standard forms for construction and mortgage loans; initiated a training development and capacity building program, which prepared a detailed curriculum of 13 training courses, the course materials for three of these courses, training of trainers, and had helped deliver the first courses in two bank training schools; assisted in the implementation of a housing allowance system that allowed the introduction of market-oriented rents for public housing; provided a forum for the discussion of housing finance issues; prepared training manuals and computer programs for the planning and financial design of TBS programs. The critical elements were then in place within the banks for a steady take-off of mortgage lending in Poland. The institutional infrastructure, however, was not yet designed to support an industry: there was no central bank regulation; there was relatively little understanding of the goals or techniques of mortgage lending within central government, and therefore certain policy mechanisms were acting contrary to the interests of the sector and of the country, and initiatives were being undertaken in isolation from the rest of the sector; there was no central group representing the interests of the bankers, or pursuing common goals; the industry was, at times, doing itself a disservice through its inefficiencies and poor customer service; and the ancillary finance instruments by now common in western countries were largely unknown in Poland. There was no public debate on housing finance issues, and the media remained poorly informed. An analysis of options for the future of Poland's commercial and public housing finance sector was therefore undertaken for USAID, in order to raise these issues to the level of a public debate, and to help formulate USAID's own assistance program for the next few years. The findings of this analysis were included in a seminal report entitled "Building on Progress". This report was presented at an April 1997 conference which brought together members of the Polish government, the banking community, regulators and the media to discuss the state of the housing sector. The conference and the report helped spark a wave of media interest in housing finance, and have led to a much sharper focus of professional interest in the housing finance sector on the part of all the main actors. Since that time, USAID consultants have concentrated on development of an institutional capacity to ensure the robustness of the sector. The recent program has been: working with the Banking Supervision Department of the National Bank of Poland (NBP) to advise on the development of an appropriate regulatory framework; continuing the development of a capacity in the bank training schools to deliver and develop a complete curriculum of housing finance courses; undertaking analyses of public sector housing finance policies, especially insofar as they impact on the mobilization of private finance for sectoral development; introducing the concept to the banking community of basic ancillary instruments (mortgage default insurance; data bases for appraised values; etc); and assisting central government bodies with the fine-tuning of a number of legislative initiatives. Achievements that can directly or indirectly be attributed to this, final, phase of assistance include the following: Raised awareness within government, the banking sector and the media of the importance of housing finance, and the interrelationship of its various components, through conferences, reports and technical assistance; Enhanced understanding of regulatory issues; Completed the development of a mortgage bank simulation model; Argued for tax treatment for Mortgage Banks that does not discriminate against universal banks; Proposed revisions to contract savings legislation that would mitigate the most damaging effects threatened by the legislation; Prepared analytic studies that have contributed to changes in national legislation; Undertaken research which is expected to lead to repeal of the Statutory Lien; Generated interest in the development of ancillary financial instruments – notably mortgage default insurance; Established sustainable, comprehensive, housing finance training programs in three bank training institutes, and an agreement with the PBA to continue cooperation on the training program beyond the end of USAID’s assistance; Facilitated a linkage between PBA and the (American) Mortgage Bankers Association; With PBA, managed a national and a regional conference to chart future priorities for development of housing finance in Poland, and in Central and Eastern Europe; Contributed to continuing public debate through the provision of reports, briefing papers and conferences. A bibliography of selected reports is appended to this paper. The Future USAID believes that the future of the sector - in, say, ten years from now - will look as follows. Demand for residential mortgages is likely to remain relatively low in the next few years, until such time as real interest rates have fallen further, banks and their customers become more comfortable with the principle of long-term mortgage lending, certain legal obstacles are softened (e.g. the Statutory Lien, difficulties of foreclosure, and uncertain and expensive title registration procedures), and the market disincentive of highly subsidized rents for social housing is reduced (with compensating housing allowances). As these constraints are gradually removed, as developers become increasingly sophisticated and willing to compete on price, and as local governments start to play a more active role as facilitators of private housing construction, so demand will pick up and start to move towards levels experienced in countries with more mature financial systems. Within five to ten years, the residential mortgage market will be served by two types of lender: a few specialized mortgage banks, with outlets in the principal urban agglomerations; and several universal banks - probably fewer than at present, since competition will have reduced the number able to compete effectively - will lend at a cost marginally above that of the mortgage banks, but will compete on service, accessibility and cross-selling. The Mortgage Fund will have ceased to exist, but may well have been succeeded by a secondary mortgage facility, a predominantly private financial institution that purchases and sells mortgage assets from smaller banks. Despite a likely contraction in the number of banks active in the sector, the population will be better served than at present: towns with a population of 10,000 and more generally have at least two outlets, each with a staff trained in mortgage and construction lending, and in customer service, and offering a wider choice of mortgages and insurance instruments. Whereas a standard apartment in many cities can now be afforded by a middle income household (PLN 2,000 per month) with cash savings equal to eighteen months’ income, such an apartment will then be affordable to households much lower in the income distribution, with a much lower downpayment than commonly needed today. The sector will be regulated effectively by an office within NBP, its inspectorate and policymakers routinely using (and updating) the manual on mortgage finance regulation. The growth and development of the sector will be led by a mortgage bankers association (with institutional links to the American Mortgage Bankers Association). Among other products and services that will by then be familiar to the market, will be mortgage protection instruments (such as mortgage default insurance). The sector will be more effectively monitored and the quality of research improved, with both bankers, central and local government decision-makers, and the public at large better informed about trends and options. The state will still find it necessary to provide subsidies to many households below the median income, as well as small subsidies for the repair of dilapidated multifamily housing, since there will continue to be a gap between incomes and affordable prices. Many of the inefficiencies that can be found in the present system will be removed or reduced, thus both creating a smoother continuum between the subsidized and unsubsidized sectors than at present, and with built-in incentives for the role of private capital in financing public and private housing. USAID's program of assistance has been driven by this vision of the future; our final year in Poland has been devoted to working with our partners to continue building a housing finance delivery system that is robust, efficient and effective, that builds on the successes and avoids the failings that have been experienced in more developed financial systems, and that in every way is able to meet the challenges of the twenty first century.  Our Legacy at the End of the Program A housing finance system that is effectively regulated and supervised by NBP A sustainable housing finance training system that is managed by Polish institutions A banking sector that is well represented, and well served, by the PBA in housing finance issues A housing finance system that is well-balanced, and capable of development and expansion A public sector that is well informed on the options for support and intervention.  Chronology: The Development of the Sector, 1991-1999   Banking Milestones Institutional Milestones USAID Milestones 1991   * Housing Finance Project Office established * Mortgage Credit Foundation created * FNMA conference on housing finance 1992 * PKO BP declares intention to end subsidized lending to cooperatives   * HG program to support Mortgage Fund authorized * HBI/APHBI program initiated * EERPF assistance initiated 1993 * PAMBank offers first $-denominated mortgage loan * Housing Allowance program * Rent setting authority given to gminas * $10 million HG loan to Mortgage Fund 1994 * Mortgage Fund (MF) finances first loan * PKO BP declares intention to end subsidized lending to individuals * PAHB formed * PFREB formed * First training courses for developers * RHUDO Director receives Polish state honor for services to housing 1995 * PBK offers first mortgage loans * PKO BP offer first non-subsidized mortgage loans * National Housing Fund established to support subsidized lending to non-profit housing associations (TBS) * PFVA formed * NAHB/RC begins support to PAHB * PADCO appoints resident Mortgage Banking Advisor 1996 * PKO BP disburses last subsidized loans * First 100 mortgages from Mortgage Fund * 4 Mortgage Fund-supported banks and 3 others offer mortgage loans * Mortgage Credit Foundation re-established * HFPO dissolved (CREI/Warsaw and REAS established) * EBRD withdraws from sector * Kasy Mieszkaniowe contract savings schemes start * TBS manual and software published * Full-time training development advisor appointed * National conference on training for housing finance * 600 bankers attended USAID-supported courses on construction lending; 450 developers received tech. assistance 1997 * about 20 banks offer long-term housing loans * 4 banks participate in the Mortgage Fund * 5 basic mortgage loan instruments available: PLN [DIM / Deferred Payment / amortizing (fixed or variable)] and foreign currency * USAID survey reports 4% of the population has taken a mortgage loan * PBA creates Housing Finance Team with full time professional secretariat * Mortgage Banking Act passed * Kasy Budowlane legislation passed (but not effective) * First bank training institute offers housing finance courses independently of USAID * Official statistics show first up-turn in housing completions * Several newspapers start publication of weekly housing supplements * National conference on the future of housing finance * Report "Building on Progress" widely distributed * Workshop on housing finance regulation with NBP; series of reports on regulatory issues * First IREM courses offered 1998 * 28 banks now offer long-term mortgage and construction loans * Net growth rate of mortgages exceeds 40% p.a. (gross rate is higher) * Bud-Bank announces entry into retail lending * G12 group of small regional banks express interest in mortgage banking * Ministry of Finance re-examines Kasy Budowlane and Statutory Lien legislation * HUDA's first housing policy strategy * 3 bank training institutes offer housing finance courses * PAHB reaches financial independence * USAID advises MoF and HUDA on reform of Kasy Budowlane legislation * Recommendations to MoF on reform of Statutory Lien * Study Tour to U.S. by PBA members * LGPP initiates housing and land management assistance programs * HG loan completely drawn down 1999 * Mortgage credit continues to increase at annual rate of 90 percent * Loans taken by 74 TBS; construction of over 2,000 units (by end-98) * License granted for first Mortgage Banks * Numerous proposals for demand-oriented legislative revisions in pipeline * Agreement between PBA and bank training institutes * Polish chapter of IREM formed * Recommendations on reform of public housing finance policy * Seminar (with MCF) on mortgage insurance * Mortgage bank simulation model completed * National and regional "agenda-setting" conferences * USAID housing finance program completed   Acronyms used in this table: APHBI American Polish Home Builders Inst. CREI Cracow Real Estate Institute DIM Dual Indexed Mortgage EBRD European Bank for Regional Development EERPF Eastern European Real Property Foundation FNMA Federal National Mortgage Association G12 Group of Twelve HBI Home Builders Institute HG Housing Guaranty HUDA Housing and Urban Devt. Authority IREM Institute of Real Estate Management of Chicago IBRD World Bank LGPP Local Govt. Partnership Program MCF Mortgage Credit Foundation MoF Ministry of Finance NBP National Bank of Poland PADCO Planning and Development Collaborative International, Inc. PAHB Polish Association of Home Builders PBA Polish Banks Association PFREB Polish Federation of Real estate Brokers PFVA Polish federation of Valuers’ Associations REAS Real Estate Advisory Services RHUDO Regional Housing and Urban Development Office TBS Towarzystwo Budownictwa Spolecznego (Public Housing Association)  Bibliography of selected housing finance reports prepared for USAID/Warsaw PADCO publications: Polish Housing Sector Status Report, 1994 Manual: Rent Setting in Poland, 1995 Developer How-To Manual, 1995 Introduction to Construction Lending, 1996 Contrasting Fortunes: the 1990s Experience of Housing Associations in Western Europe, 1995 KFM Loan Repayment Model and Manual, 1997 Feasibility Model for Residential Projects, 1997 Mortgage Lending Training Development Project - Curriculum Design, 1997 Model Mortgage Lending Support Documents, 1997 Workshop materials: Loan Origination and Interviewing Skills, 1997 Workshop materials: Mortgage Loan Processing, 1997 Workshop materials: Underwriting Mortgage Loans, 1997   Urban Institute Consortium publications: Building on Progress: The Future of Housing Finance in Poland. An overview study prepared for USAID and the Polish housing finance community. Sally Merrill and others Risks of Commercial Real Estate Lending - study undertaken at the request of the Ministry of Finance (Mortgage Credit Foundation) and NBP. Michael Lea, with Achim Dübel and Jacek Laszek Dual Index Mortgages: Conditions of Sustainable Development in Poland - study undertaken for NBP. Loïc Chiquier Regulation and Supervision of Mortgage Finance - overview study undertaken for National Bank of Poland. William Handorf Analysis of New Entrants into the Polish Mortgage Market - study undertaken for USAID to assist planning technical assistance activities. Jacek Laszek. The Role of Insurance in Mortgage Finance - study undertaken for PBA. Roger Blood. Local Government Rent Policy and Best Practice – The Need for Rent Reform and an Improved Housing Allowance Program - undertaken for USAID, for use in the Local Government Partnership Program. Sally Merrill and others. Analysis of the Feasibility of Studies of the Demand for Residential Credit - report written at the request of the Ministry of Finance/ Mortgage Credit Foundation and PBA. Sally Merrill. Forthcoming Development of a Regulatory Policy Framework for Real Estate Lending in Poland - technical assistance provided at the request of NBP. William Handorf and Loïc Chiquier. Not published. Several reports on Contract Savings for Housing Systems in Poland. Michael Lea, Jacek Laszek, Doug Diamond and Loïc Chiquier Property Valuation: Sources of Information - study undertaken at the request of PBA. Mark Bates and others. Forthcoming Analysis and Recommendations for Revision of Statutory Lien Policy –recommendations to the Ministry of Finance. Carol Rabenhorst and others Public Sector Housing Finance Strategies - a study undertaken for USAID, addressing the Strategy of the Housing and Urban Development Authority. Sally Merrill and others. Options for the Future of the Mortgage Fund - study undertaken for USAID. Michael Lea and others. Not published. Mortgage Bank Simulation Model: software, manual, tutorial and case studies –Steve Bernstein and Mariusz Rogowski. Mortgage Lending Training Manuals for mortgage and construction lending (both single and multifamily) – training material prepared co-sponsored by the bank training institutes and written jointly by a group of experienced practitioners from Polish banks, supported by USAID experts. Housing and the Macroeconomic: Tax Reform and Alternative Subsidy Policies for Housing – Study prepared for Deputy Prime Minister Leszek Balcerowicz. Sally Merrill and others. International Banking and Real Estate Crises: Lessons for Poland. Paper prepared for the PBA’s Winter Banking Forum, March 1999. Michael Lea.    Useful Links: Center for Housing Initiatives/Centrum Inicjatyw Mieszkaniowych http://www.cim.org.pl Urban Istitute - http://www.polandhousingfinance.org (english) or http://www.kin.cc.pl/polhousfin (polish) Back to Top

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