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GSIS finds way to beat high housing loan default

[ ] August 17, 2011

One of the first things that Robert Vergara noticed when he came in as president-general manager of the Government Service Insurance System was the extremely high default on housing loans.

He has a large inventory of foreclosed homes in many parts of the country. Buyers are few. While many titles have been consolidated in the name of the system, the borrowers continue to occupy the homes.

Bad business practice. What is lost to housing is benefits denied to the members.

He immediately suspended housing loans. Still he recognizes that many of the system’s 1.8 million members need homes. They must be accommodated in a way where the loans will be regularly amortized so that the system can earn a profit.

After some serious thinking, it occurred to him that it might be safer to give home loans through Pag-Ibig, whose main function is lending money to individual private-sector members and to property developers.

Vergara is now prepared to sign an agreement with Pag-Ibig where the GSIS will provide an initial fund of P5 billion to be lent exclusively to members of the system.

Pag-Ibig lends home loans at about 12 percent a year. Vergara said he noticed that the defaults on Pag-Ibig loans are tolerably low compared with the GSIS, where defaults sometimes come to as high as 50 per cent.

The initial effect is Pag-Ibig gets P5 billion more for home loans to developers and individual borrowers. The other effect is a reasonable assurance that the GSIS will get back its money with some interest income of between 5 and 6 percent practically without administrative costs.

Naturally, a nominal fee has to be paid Pag-Ibig as some kind of professional fee for acting as fund manager. Vergara himself was a fund manager for more than 25 years in Hong Kong, having had a background in fund management from Harvard University.

He figured that using Pag-Ibig to manage the home loans is better than GSIS doing the lending at 12 percent but ending up with a huge inventory of foreclosed homes the system has taken over but can hardly sell.

He wonders aloud how this thing could happen. Loans to GSIS members are paid through salary deductions. But somehow, home loans are harder to collect. It may be either because the borrower is hardly left with any money if the home loan is deducted from the borrower’s salary or some inefficiencies attend the deduction process.

The other reason could very well be that Filipinos are soft of heart. Officers of the government agencies that employ the borrowers could not bear to see a member going home with a practically empty pay envelope if the amortization for the home loan is deducted.

Vergara seems to be convinced that Pag-Ibig collects home loans more efficiently than the GSIS. After all, Pag-Ibig lends huge amounts of money to large property developers who collect from the home owners and remit the amortization to Pag-Ibig.

Less messy, Vergara said.

According to Vergara, the GSIS has outstanding loans of P160 billion from its members who are charged 12 percent, a rate that is way above the market.

Except for housing, the GSIS makes profits from these loans, especially salary loans. Part of the portfolio is lent to calamity and emergency accommodations to members.

Among the government financial institutions, the GSIS is probably the most cash-rich. It collects an average of P55 billion a month from its members and from the state institutions the said members work for.

Vergara pointed out that the GSIS makes sure that it is actuarially sound for a period as long as 40 years.

It earns interest income of P14 billion a year against operating expenses of P4.8 billion.

In an interview with Malaya Business Insight, Vergara pointed out that the system has taken "a flight to safety." That means, he said, that his first consideration in making investments is safety of the principal. Yet he finds ways to make a reasonably high yield that approximates the average income of 9.2 per cent a year to maintain the actuarial soundness for 40 years.

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