Editorial: Finance and shelter improvements

Lending to low-income households for shelter improvements, to allow them to buy or build their own homes, has had a bad press recently as the full consequences of sub-prime lending have been felt in the US fi nancial markets and, as a result of the scale of their impact there, in the global capital markets. However, experiences across Southern towns and cities demonstrate that loan capital can provide a critical contribution to improved shelter and livelihood strategies. The papers in this volume of Environment & Urbanization, as in the previous volume, provide multiple examples that demonstrate two lessons from experience. The fi rst is that fi nancial markets can contribute to improving the well-being of low-income households. The second is that this contribution is not inevitable but is achieved through a careful refl ective design process that takes account of the particular circumstances of the target group and the vulnerabilities that they face. Perhaps a further emerging lesson is that lending to the poor does not have to threaten the stability of fi nancial markets, but can help to strengthen economies through encouraging savings and developing good lending practices. What is the sub-prime crisis? In the United States, lenders have sought to reach those lowincome households that were seen as risky by the conventional mortgage providers. They have done so by creating an expanding sub-prime market – lending at higher interest rates to those families considered to be high risk because of low incomes and/or poor credit records. In some cases, lenders have been accused of deliberately encouraging default through high-cost loans to very low-income households, but it is not clear that such abuse was widespread. In most cases, the lenders simply sought to secure their profi ts through the repayment of loans rather than secure the housing asset through default, as lenders benefi ted from the interest rate premium that they charged these low-income clients. However, as the sub-prime market has moved into crisis it is evident that there are real issues of affordability, with many loans being taken by families who now fi nd themselves struggling to manage repayments, in part because these mortgages had a repayment structure that offered low rates for the fi rst few years. In the US, the sub-prime lending market was virtually unknown 10 years ago, but now accounts for just over 20 per cent of US mortgages.(1) The affordability problems are demonstrated by the fact that sub-prime loans are responsible for 55 per cent of foreclosures (repossessions). In December 2007, The Economist estimated that sub-prime mortgage borrowers in the US might default on US$ 300 billion of loans (about one-third of current US sub-prime debt).(2) In the UK, sub-prime lending now accounts for about 8 per cent of UK mortgages, but sub-prime lenders are responsible for more than 70 per cent of all repossessions.(3) Meanwhile, fi nancial intermediation, which appeared to be adding to the achievement of well-being and prosperity by providing additional capital to markets, may have encouraged lenders to take excessive risks. Mechanisms such as securitization and mortgage-backed derivatives were intended to add value to the market, leading to greater fi nancial wealth through more precise packaging of assets and the delineation and spreading of risk.(4) By December 2007 they had failed,