Uncertainty factors over any business could spoil its future prospect. Similarly, housing finance companies in India are undergoing a long phase of uncertainty over its business existence. It has been witnessed in western countries like the United States of America, Canada, and European countries along with Australia have well-developed and flourished mortgage guarantee market. Unlike India mortgage guarantee market is almost negligible or at nascent stage.
Mortgage guarantee products provide security against the borrower’s loan. It is a credit default guarantee taken by mortgage lenders against borrower’s payment defaults. The mortgage guarantee becomes payable when a specified loan becomes non-performing asset (NPA). The goal of taking mortgage guarantee is to mitigate the risk taken by the moneylenders.
Mortgage guarantee product pricing considers both expected and unexpected losses. The expected losses are calculated based on historical data and loss assumptions. Unexpected losses typically occur due to natural calamities or strong economic distress.
Recently, it has been witnessed in the industry that various housing finance companies are exploring mortgage guarantee products to secure their loans that are vulnerable to volatility in cash flows. In nutshell, mortgage guarantee products provide cushion amidst slowing economy or any kind of natural crisis. In India, several housing finance companies avoid buying mortgage guarantee products as they believe the loan losses has been much lower than premium in a market with low default rates.
Lately, there is a sharp spike in interest from public sector banks and non-banking finance companies has been witnessed to mitigate risk posed due to the unprecedented situation. They are evaluating different mortgage guarantee products as per their financing schemes and requirement.
Several industry experts revealed that due to tough competition among housing finance companies and banks, they avoid buying mortgage guarantee products. Smaller non-banking finance companies (NBFCs) and housing finance companies (HFCs) do not find any value in mortgage guarantee products as they also lend to smaller income group segment. Mortgage guarantee products are an extra cost attached to the lending rates to borrowers.