HABITAT INTL. Vol. 19, No. 4, pp. S29-S46.

1995
Pergamon Copyright@ 1995Elsevier Science Ltd
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The Community Mortgage Program:

An Almost-Successful Alternative for some Urban Poor

MICHAEL LEE
Urban Policy Consultant, London, UK*

ABSTRACT

The Community Mortgage Program is unique to the Philippines, and has gained a
certain international reputation for successful innovation. It was initiated in 1988
to help the urban poor - mainly squatter communities - to purchase the land
they had been living on, and thus to legitimise their status. This paper introduces
the principles of the programme, and reports on some of the problems that have
been facing it, as well as on current attempts to make it financially sustainable.
As the Community Mortgage Program is being considered for implementation in
a number of other countries, the paper also reviews the circumstances in which
a remodelled programme could be implemented elsewhere.

INTRODUCTION

The Community Mortgage Program (CMP),which was conceived in the intellectual

excitement of the years immediately following the overthrow of President
Marcos, and formalised in 1988, is designed to assist orgunised communities of
the landless urban poor to purchase residential land and thereby enjoy security
of tenure. It is a scheme expressly intended to be self-sustaining, national,
affordable, and to muximise community involvement.1 Long-term mortgage
loans are made by the government, on concessional terms, to communities
which have negotiated a deal with the landowner. For their part, the communities
are assisted in negotiation, borrowing and repayment by local organisations with
experience both of grassroots work with the urban poor and of dealing with the
government.
The CMP differs from conventional upgrading programmes in that the
projects are initiated and implemented by the communities themselves, not by
government. The role of government is simply to finance, guide and regulate. The
CMP contrasts, too, with orthodox practice in that the heart of the programme is
furnishing legal title to the land, not the provision of services or improvement of
dwellings. It works on the principle of incrementalism: beneficiary families start
repayments at a relatively low level in return for a minimum degree of shelter
improvement (tenure rights), and, as and when they can afford it, incrementally
add benefits (communal services and/or individual home improvements and
extensions).
It is also notable, although not unique, as a large-scale programme which
gives the poor formal access to credit. (Probably the best known and, by

*Address for correspondence: 37 Flask Walk, London NW3 IHH, UK

529
530 Michael Lee

many measures, the most successful of the others, is the Grameen Bank in
Bangladesh. Other institutions lending for housing to the poor include the
Thrift and Credit Cooperative Societies in Sri Lanka, the non-governmental
Self-Employed Women’s Association Bank (SEWA Bank), in Ahmedabad,
India, and the public sector Bank Rakyat Indonesia. All of these, however,
have tightly circumscribed rules of access which would exclude many of the
CMP’s clients, and/or have loan periods that raise affordability thresholds above
those of the CMP.2)
The Community Mortgage Program is a success, insofar as, by early 1994,
some 37,000 families (say, 210,000 people) have benefited from the programme.
Most of its participants unequivocally regard it as effective.
On the other hand, its detractors see it as trivial, problematic, or both: the
programme has helped fewer than 2% of the 2l/2 million or so families living in
substandard urban housing in the Philippines. Many of these families are eligible
to benefit from the membership of the programme, and many would choose to do
so if they could. For a number of reasons, the programme suffers from a variety
of imperfections, which frustrate it from meeting more than a tiny proportion of
the need.
The programme is intended to be sustainable. This implies that:
?? itshould be reliant on a dependable and renewable flow of financial resources;
?? itshould permanently enhance the capacity of participants to improve their
quality of life, providing benefits that are apparent and can be realised in a
cost-effective, affordable and timely manner;
??implementation should not require extraordinary skills on the part of managers
or participants;
?? participation of intermediary organisations should be voluntary and willing,
not requiring legal coercion.
As it currently stands, it is doubtful as to whether the CMP can be regarded
as sustainable, although a number of reforms could readily make it so.
This paper starts by reviewing why urban managers need a new strategy
for helping squatters, and then sets the context of the CMP by outlining the
evolution of the Philippine government’s approach to shelter policy. There
follows a description of the way the CMP works, illustrated by three case studies.
Final sections provide an evaluation of the degree to which the CMP is actually
and potentially sustainable, and draw conclusions about the circumstances in
which a community mortgage programme could be implemented successfully in
other countries.

UPGRADING AS A SOLUTION?

Most readers of this journal know about the growth of urban populations in
the developing world.3 We know that many of these people have no personal
choice but to subsist in abysmal standards of accommodation. We understand
the economic costs of the housing policy (or its absence) that has brought
about these circumstances, and know it to be true that the sanitary conditions
of these settlements cause the majority of their residents to die before they reach
maturity. And where, socially concerned, we used to deride people who told us
that the poor can only drink and steal, we are now becoming afraid of the social
malaise that accompanies these urban conditions.
Too often, recommendations to solve the problems of urban poverty and
squatting were only piecemeal, too expensive, or politically impracticable. From
the early 197Os, the main donor agencies with an interest in shelter (principally
the World Bank, USAID and the British Overseas Development Administration;
 The Community Mortgage Program 531

and, latterly, the regional Development Banks) started to promote settlement

upgrading as one of the twin pillars of the urban housing reform programme.
(The other pillar was, of course, site and service development.)
The rationale for upgrading was straightforward and persuasive: if a group
of people had already settled somewhere in the city, but continued to live in
unacceptably bad housing and environmental conditions, there were essentially
two choices to improve their housing conditions: either to resettle them in new
housing elsewhere - the then-conventional solution - or to improve (‘upgrade’)
the existing settlement in situ. The latter solution is clearly less disruptive, and
is preferred by residents, who would otherwise need to move house and home,
usually to a site far distant from work and friends. It is also relatively cheap, since
the authorities need to spend little money on new housing: residents, so the theory
went, would improve their own, existing, houses. Upgrading is demonstrated
generally to have a better economic rate of return than conventional housing
schemes. And upgrading should be more straightforward to implement than
resettlement, especially since there is rarely need for large-scale land acquisition
or, often, for major extensions of trunk infrastructure services.
Indeed, with this sort of rationale, World Bank-supported upgrading schemes
did benefit some 7 million people between 1972 and 1981. Payne points out,
however, that this figure is “dwarfed by the 292.7 million increase in Third
World urban populations between 1970 and 1980”.5 Some of the donors have
now largely withdrawn from providing financial support for upgrading, and
others have scaled down their level of contribution. In the absence of donor
support, local authorities throughout much of the world - Indonesia being
a major exception - show relatively little interest in undertaking upgrading
schemes on their own initiative.
Why have upgrading schemes not taken root? There is a variety of reasons,
ranging from the lack of a political base for low-income residents - hence no
motivation for political leaders to champion upgrading - to perceptions on the
part of the urban elite that the human rights even of the poor entitle them to
accommodation of a standard that could not be attained by upgrading schemes,
confined, as they are, by geography and finance. Probably most burdensome
of the implementation problems, though, were questions of land: acquisition,
plot demarcation, provision of title, and so on. These issues, involving political
decisions as well as technical competence, often proved beyond the capability
of many local authorities to manage.
Slums have consequently proliferated in urban centres of the developing
world, leaving urban managers without a clear solution as to how the conditions
of their residents may be improved .6 The CMP promises to offer a partial
solution.

SHELTER IN THE PHILIPPINES

The Philippines has one of the world’s highest rates of urbanisation, with an
urban growth rate exceeding 5% a year. Over 50% of the country’s population
is now living in urban areas.
The last 15 years have been a turbulent time for shelter policy and practice
in the Philippines.
The record of the Marcos regime was mixed as regards shelter development.
On the one hand, relatively large proportions of the government’s budget were
spent on massive housing and re-housing schemes, and a Ministry of Human
Settlements was created at a time when few other countries recognised the
importance of the sector. On the other hand, many people felt that the money
was wasted on high cost, prestige projects which could not possibly be replicated
532 Michael Lee

at a scale sufficient to make an impact on the country’s housing needs. The World
Bank7 found that, of total housing expenditures between 1976 and 1984, nearly
two-thirds was for units affordable only to the richest 20% of the popu1ation.s
Even though the government engaged in extensive resettlement of squatters,
slums proliferated.
Largely as a result of the country’s economic decline, the mid-1980s witnessed
widespread mortgage defaults, which, together with the weak national economy,
discouraged private investment in housing. (The poor design of mortgage
instruments also played a part in promoting defaults.) At the same time, the
public housing finance system effectively transferred resources to high-income
borrowers, from low-income lenders to the national housing fund, at heavily
subsidised rates.9
Following the ‘People’s Power Revolution’ of 1986 which swept President
Marcos from office, the all-powerful Ministry of Human Settlements was replaced
by a coordinating council with significantly reduced powers. Simultaneously,
political forces demanding more popular participation, together with financial
realities, brought about major shifts in policy, a realignment of functions between
central and local government, and between government and non-government
(private sector and community organisations).
On the overthrow of the Marcos government, many thousands of people
invaded public and private land in Manila to establish new squatter communities,
expecting more benevolent treatment from the new administration. But, plus
ce change . . . The Aquino government necessarily pursued a programme of
financial austerity, and renounced the construction of most forms of new
infrastructure. Among other consequences of the government’s macroeconomic
policies was considerable volatility of interest rates, which, coupled with weak
credit markets, meant that few people could borrow for housing. An ever-
increasing proportion took to squatting as the only form of shelter.
Philippine statistics on land tenure are not watertight, but the broad picture
is clear: about 40% of the urban population do not own, or have unclear title
to, the land they occupy. As a result, most of the urban poor are inhibited from
making any substantial improvements to their homes or to their infrastructure
services. Because of their tenure, they are unable to access any formal finance to
borrow for improvements. The authorities, too, are disinclined to provide water
and sanitation services to land with disputed ownership. This is the main group
targeted by the CMP.
Nuquitc presents a characterisation of the urban poor in the Philippines, the
intended beneficiaries of the CMP. He says that the typical family is nuclear, not
extended, and has six members. Husband and wife are usually migrants from a
depressed region of the Philippines. Half of the members of this typical family
are less than 20 years old, with the children particularly prone to malnutrition
and poor health. Their houses are typically constructed from scrap materials.
Writing of Manila, Nuqui reports that
only a few households have access to safe water supply and have their own
sanitary toilets; there is also lack of an adequate sanitary and drainage
system. This causes severe flooding in many areas and creates, economic
disruption, accelerates the deterioration of infrastructure and creates serious
sanitation and health problems. Systems for solid waste management are
either nonexistent or seriously deficient . . . (p. 522)
The public answer of the Aquino and (present) Ramos administrations has
been to target public funds more tightly to families in need, and actively to
encourage participation by the private sector. This policy is beginning to pay
dividends: Kingsley and Mikelsons quote government statistics that, in 1989,
“75 % of total housing assistance benefited the lowest 50 % of the population
 The Community Mortgage Program 533

and, of these, 12,800 units or 64 % benefited the lowest 30 % of the population”.

The government’s Housing and Urban Development Coordinating Council,
HUDCC,r* reported that the private sector was responsible for 58% of total
formal sector housing production in 1990.‘3
Nevertheless, the quantity and quality of the housing stock still fall far short
of need and aspirations. For instance, there is a need for over 250,000 new urban
units a year just to accommodate population growth, in contrast to a recorded
annual production in the formal sector of little over 100,000 units. Philippine
Urban Perspectives, the leading urban newsletter, estimates that 3.8 million
units are needed over the next B-year period,14 on top of a housing deficit
which, according to the National Economic Development Agency, had already
reached 3.4 million units by 1988, and by now must be somewhat greater.
President Ramos promised that his administration would provide 1.2 million
houses over a 6-year period from 1993. Of these, 156,000 were to be supplied
under the Community Mortgage Program.

THE COMMUNITY MORTGAGE PROGRAM

The CMP finances poor communities to buy their own residential land, normally
land that they have been squatting on. Land purchased through the CMP
may either be occupied already by the beneficiaries, or previously-unoccupied.
Acquisition of title is the primary aim of the participants in the programme;
improvement of shelter conditions is a secondary objective. However,
once squatters have secure tenure to the land they occupy in the form
of a legal title, house improvement quickly follows and within a very
short time permanent structures are erected with financing provided from
savings, overseas remittances, family assistance and/or formal and informal
borrowing. 15
The programme is administered by a small, dedicated group, the Community
Mortgage Group, within the government’s National Home Mortgage Finance
Corporation (NHMFC) in Manila. The NHMFC is the policy-making body, the
funder and the administrator of the CMP. It also administers the other, larger,
parts of the government’s Unified Home Lending Program, which provide
conventional financing for house purchase and construction to households in
higher-income groups.
The CMP loan programme is designed to be implemented in three stages:
(1) an initial loan for purchase of the community land, thus giving immediate
security of tenure;
(2) a second loan to the community for upgrading the water supply, drainage,
sanitation and other infrastructure services; and
(3) thirdly, loans to the individual beneficiaries for house improvement or
reconstruction.

The Community Association

A scheme can only be initiated after a community has formed a representative
association. This association must be recognised by the Presidential Commission
on the Urban Poor. (The requirement of formal governmental recognition is
necessary to avoid the real likelihood of spurious organisations trying to take
advantage of the benefits of the programme.)
Following registration, preliminary negotiations over acquisition of the site
take place between the association and the landowner. In most cases, the
owner will have been trying to get the squatters off her/his land (an unusually
534 Michael Lee

high proportion of these sites are owned by women) for many years, foiled
by the intransigence of the occupiers and by the widespread presumption of
politicians and the law in favour of underprivileged poor, and against rich,
predatory landowners. Negotiations which may lead to any form of recompense
are, therefore, generally welcomed by landlords, especially when every other
recourse - often including resort to strong-arm techniques - has failed.
The NHMFC purchases the land from the landowner and mortgages it to
the community association, in turn collecting monthly repayments, on heavily
subsidised terms.
The association has continuing responsibilities throughout the life of the
project: at the outset, identifying the potential for utilising the CMP; explaining
the principles and mechanics of the CMP to community members and persuading
them of the scheme’s benefits; and finding and working with a sponsor. Not least
of its subsequent duties are collection and recording of the monthly payments
due from each of its members. As will be seen in the case studies quoted
below, a good association can make a CMP project function smoothly, but a
poorly-managed association can spoil a project which otherwise has potential
for success.

The originator
Each community association is required to enter into an agreement with a
more experienced partner organisation, known as the ‘originator’. This is an
organisation which works with the community at each stage of programme
implementation and, most importantly, is responsible for the legal origination
of the mortgage. Most originators are NGOs, or central or local government
units. Others may be charitable associations (such as Rotary or Lions Clubs),
private developers, or specified national government agencies.
The originator acts as a sort of godfather organisation, generally for several
communities:
?? In the initial, planning period, the originator provides information about
the CMP to the community, and liaises between the community and the
government. It ensures that members of the community understand their
obligations ,as well as their rights under the programme.
?? The originator is responsible for nurturing and monitoring the project.
Originators may, for example, be expected to provide help with engineering
or architectural designs (e.g. the relocation or installation of utility services, the
construction of a community hall or offices, or even plans for the improvement
of individual houses).
??The originator helps the community association to complete the mortgage
documents and process the loan application.
??The originator is also expected to provide support to the community for
an indefinite period thereafter, including continuing liaison with external
agencies, and advising how to develop community projects.
Originators receive a nominal fee (P500 [US$18] per household)16 for their
services. This fee usually does not even meet the direct financial costs associated
with origination, let alone contribute to overhead expenses. It is an arrangement
which acts as a disincentive for all except well-heeled NGOs to participate in the
programme.

The second and third stages of development

After the first stage of a project, transfer of ownership, the site is then to be
improved and developed, for instance, by the paving of footpaths and access
 The Community Mortgage Program 535

roads, by installation of piped water, or by the improvement of drainage and

sanitation. Further loans are available from the NHMFC for this purpose, also
at subsidised interest rates, but there have been few takers as yet.
The third stage of development is for subdivision of the land, and of the title
- which, to date, is still in the name of the community - to be individualised
in the names of each of the members of the association. Additional, individual,
loans can be obtained from the NHMFC for house improvements. No-one has
yet applied for this benefit.
There are several possible reasons why there has been so little interest in
Stages 2 and 3. Maybe it is to be expected at the present stage of the programme,
where few communities yet have the financial confidence to take on a second
or a third long-term financial commitment. It may reflect the marketing of the
programme, where a political decision has apparently been made to use most of
the available financial and staff resources to expand the number of communities
participating in the programme and, by implication, to give a lower priority to
upgrading infrastructure (or improving collections). The communities’ apparent
lack of interest in borrowing for infrastructure may also have something to do
with (1) their ability to undertake certain basic improvements without external
financial help, and (2) the willingness of politicians to provide infrastructure
facilities free of charge in the run-up period to local elections.
Regardless of the fact that no-one has applied for an individual loan under
Stage 3, it is impressive, even if anticipated, that most of the beneficiary
communities have started to improve village services, and that many households
have taken advantage of their newly-acquired security of tenure to upgrade their
own homes. Typically, access roads and paths have been widened or paved,
the water supply improved, and some improvements made to site drainage.
New houses are now being built out of permanent materials (previously, only
temporary materials - timber, tin or cartons - were utilised). Others are being
improved, such as by the addition of more secure roofs.

Financial terms
Loans are made by the NHMFC to participating communities at an interest rate
of 6% a year, repayable in equal monthly payments over a period of 25 years. By
way of comparison, mortgages can be obtained from commercial banks at 18%)
for no more than 15 years. The annual rate of inflation has varied in recent years
from a high of 18.7% in 1991, to 7.6% in 1993. By any measure, then, the real
interest rate charged under the CMP is highly negative.
The maximum loan per plot that a community can borrow under the CMP is
P60,OOO($2,200) in Manila, and P45,OOO($1,600) outside the capital. In practice,
the average size of loan actually taken by beneficiary households works out to be
about P21,OOO($760), less than half the permitted maximum, although there are
wide variations between communities. The mean loan of P21,OOOwould require
a monthly payment of about P135 ($4.90). Stated household incomes range from
some P2,OOOto P3,600 a month, so that, typically, participation in the CMP takes
around 5% of a householder’s income. 17 (Inflation, of course, erodes the real
cost of repayments. If prices and incomes were to increase at, say, 10% a year,
repayment of the average initial loan would be reduced from 5% of income to
2% after less than 10 years.)

Source of funds
The CMP has derived its capital funding from short-term loans from three
government-supported savings and loan funds: the Home Development Mutual
Fund (known as Pag-IBIG), SSS and GSIS, which together comprise the Unified
536 Michael Lee

Home Lending Program. This arrangement was intended to be temporary: these

loans were to be re-financed from the World Bank’s Shelter Sector Loan to the
Philippines.
In the event, the CMP received no funding from the Bank. Philippine Urban
Perspectives reports that the World Bank suspended disbursement of loans to
the housing sector in 1993, on the grounds that the collection efficiency of the
NHMFC, including the CMP, was inadequate, at 62% of amounts due. The
Bank is quoted as saying that:
no financial institution can survive on such a low level of operational efficiency
without extensive subsidy . . . The cause of the NHMFC’s problems goes
beyond weak management to the underlying political imperative to direct
increasing volumes of loan funds to housing. Emphasis has been on
disbursement performance rather than loan recovery.18
In the absence of other funding sources, the government saw little choice but
to maintain the programme from the national budget. At the time of writing,
member associations of the Unified Home Lending Program are requiring that
the ‘temporary’ loans be repaid, and the government was proposing to inject
an additional P12.8 billion ($460 million) into the CMP over a 5-year period.

Defaults
Penalties are charged by the NHMFC on payments overdue from community
associations. Communities that are persistently in default are subjected to the
same sort of treatment that would be expected by any delinquent mortgagee:
starting with friendly reminders, then offers of assistance, threatening letters
and, finally, foreclosure. At the time of writing, the NHMFC had made several
threats to foreclose, but had not actually succeeded in carrying through its
warnings. Some of the associations genuinely believed that the NHMFC was in
earnest about this, and, with the help of their originator, were actively trying to
re-organise their finances. Others, though, believed it to be a bluff, and that the
government could not have the political will to dispossess a squatter community
in real distress.
It is the responsibility of the community association to maintain financial
discipline. With poor communities, and especially in those communities that
comprise a large proportion of irregularly-paid workers, households often find
it difficult to meet regular payments; community treasurers need a fair amount
of skill to explain, cajole and work with defaulters to persuade and help them to
pay or reschedule their repayments. In cases of genuine need, richer communities
have often used their savings to compensate for temporary lapses on the part of
individual members. There is, however, a limit on the community’s resources,
and most of the CMP community associations - by definition, poor - cannot
afford to compensate for defaults by more than a few members, or for long
periods of time.
The first sanction takes the form of community pressure on delinquent
members; most community organisations also charge a penalty on payments
overdue. If these pressures fail, unresponsive defaulters are to be evicted from
their homes by their community association. Clearly, this is not easy, even in
cases where families have the ability to pay but have opted not to do so (“We
have been living here free for so-many years; why should we pay now?“). It
is even less easy, and less easily justified, to dispossess a family because its
members have become unemployed and destitute.
Despite these problems, a number of community associations have succeeded
in evicting defaulters. Some have done this by persuasion, some using legal
means. Other associations do not know how to go about this, or prefer not
 The Community Mortgage Program 537

to. Where plots have been vacated, they are sold, and the evicted member is
compensated by the substitute household for payments previously credited to
the CMP. The usual exceptions are members in default who are too old to be
able to fend for themselves elsewhere and who do not have relatives who are
able to support them. In such cases, the community usually finds a solution,
such as offering them a job in a community livelihood project.

The scale of the programme

By early 1994, the NHMFC was committed to take out CMP mortgages with
a total value of P1.6 billion ($57 million), for 564 accredited projects with
53,000 plots (= beneficiary families). Actual disbursements at that time were,
however, much less: P800 million ($29 million), for 304 projects and about
37,000 beneficiary families, achieved over a period of 5 years. The CMP’s
most productive year was 1990, when the project financed the acquisition of
over 10,000 plots.
About half of all communities assisted have been in the Manila area: 70% of
all CMP projects are in Metro Manila and the two adjacent regions. The reason
for this concentration is less because need is greatest in the capital (which may
or may not be the case), but because of the ease of access and communication
between communities in Manila and the NHMFC: between central bureaucrats
and their clients, and between representatives of poor communities and power-
holders in the centre. The Philippines is a large country: it has a population of
over 60 million, comprises 7,100 islands, and stretches 1,700 km from north to
south. It is a subject of frequent complaint by provincial communities that, in
order to have their applications considered fairly and rapidly, it is necessary for
their representatives to make frequent visits to Manila. When they could not
afford to do this - to travel by air from Davao to Manila, for instance, costs
around $200 - they felt that they were effectively being shut out of the CMP.

THREE VILLAGES

Three case studies are described below. The first is of an urban village which
has some fairly severe project-related problems that could have been avoided
with better oversight on the part of the originator. The second case study is
of a community that has become delinquent in repayments through no fault of
its own, and which has little hope of avoiding foreclosure. The third case study
happily reports on an example of a near-perfect CMP community. The status
of these villages is reported as of mid-1993.19

The Nazareth Homeowners’ Association

The village known as Nazareth is on the outskirts of Metro Manila, with some
350 households living in simple wooden houses. Most of the water supply is
from communal deep wells. Few houses have individual toilets. Before the
CMP, there was no paved road, drainage was a major problem, and garbage
was rarely collected systematically. The residents of Nazareth -who came from
different parts of the country, and thus have few communal bonds other than
their residence in Nazareth - first squatted on the site in the early 1970s. For
20 years the landowner, BF Homes Realty Corporation, has been trying to evict
them, using legal and - reportedly - extra-legal, strong-arm, techniques to get
them out.
When the BF group of companies went into liquidation and ownership was
assumed by the Central Bank, most of the residents of Nazareth jumped at the
538 Michael Lee

opportunity of legalising their situation, and formed a community association as

one of the preconditions for participation in the CMP. A minority of the village
residents opted not to join, mainly because they could not see the point of paying
to remain on land that they had hitherto occupied for so long, free of charge.
Participation in the CMP led to significant improvements to the village. There
was obvious pride on the part of villagers in having graduated from squatter
status. A few plots had been realigned and several houses rebuilt to higher
standards, the main road serving the village had been paved (as a result of
pressure being put on a political candidate standing for re-election), and access
to wells had been improved. Even so, the physical environment still left much
to be desired.
Despite the dignity that had been conferred on residents by the project,
there were considerable problems with defaults: no more than 10% of member
families were up to date in their payments; 64% were in arrears, and 26%
had made no payments at all. The NHMFC has, indeed, issued a notice of
foreclosure, and the community leaders believed that the Corporation was
in earnest about carrying out this threat. There were said to be two main
problems. The financial problem was precipitated by people losing their jobs
due to a nationwide economic recession. The other problem was the presence
of ‘recalcitrants’ - people who, persuaded by the original non-joiners, refused
to pay because “if the site is a government property, it must be given free”.
Nazareth’s leaders were at their wits’ end to know how to escape from this
trap. They understood that it would be sensible to evict at least a token number of
defaulters, pour encourager les autres, but had no idea how to set about doing so.
Nor did the community have enough resources to be able to reduce its financial
obligations to the NHMFC.
A part of the blame for having got into this situation can be laid onto the
originator. This was a public sector organisation, which perhaps should have
anticipated a range of problems on account of the weak social cohesion of
the village (no association in existence prior to the application to CMP; and
refusal of a significant number of households to participate in the programme).
It should either have vetoed the group’s application to join the CMP, or have
taken steps to strengthen the community organisation. The originator should
also be giving advice to the village association on how to evict some defaulters
and, in the course of doing so, shouldering some of the opprobrium for playing
the bad guy.

Jerome Drivers’ Village, Davao City

Jerome Drivers Village, on the outskirts of the largest city on the island of
Mindanao, is occupied by families of drivers of tricycle-rickshaws, traditionally
a popular means of public transport. The site has been squatted on for some
35 years, and the occupants have resisted five attempts at demolition. There
are about 140 member families of the community association, comprising all
the residents of the village and some non-resident members. The association
was formed in response to the threats of demolition, and was thus in existence
prior to the CMP.
The main impression of the site is one of an extensive swamp. The land is
very badly drained, and much of it is under water for much of the year. Because
of the expense of landfill, several members have not been able to develop their
land, and so still reside elsewhere. A quarter of the houses have piped water;
about half have electricity connections; but many have no form of toilet. Paths
are in places barely passable, but, since joining the CMP, the central spine path
has been improved for much of its length. A few houses have also been rebuilt
 The Community Mortgage Program 539

in recent months, of permanent materials; most are still of makeshift timber

construction.
In the early days, collections of loan repayments ran at close to 100%. The
trouble started, however, soon after a bus service was introduced to the area,
severely reducing the clientele for tricycles. Passengers found that the bus
service was not only more pleasant and faster, but also cheaper. People now
travel by tricycle only to those places not reached by the bus routes. With fewer
passengers, the incomes of the tricycle-drivers fell, to the extent where many of
them could not afford repayments for the CMP. Initially, the Village Association
used its surplus funds to offset individual members’ arrears. Subsequently, the
officers of the association did everything according to the book to keep up
payments: they tried to persuade people not to dishonour the community; they
issued formal demand letters; they attempted to reschedule loans according to
the defaulters’ personal circumstances. Failing the success of these measures,
they followed up by substitutions, expulsion from the society and from their
homes of defaulting members, who were then replaced by newcomers who were
able to pay.
But this was not enough (or the evictions were not carried out sufficiently
forcefully). As the community’s income declined, so the collection rate for CMP
payments fell, to a reported 25% at the time of our visit. The NHMFC had
already issued foreclosure threats. Morale was low, and sinking. The community
faced dissolution. There was no obvious solution in sight.

Back of Rubber World Residents’ Association (BARRA), Cebu City

The people of BARRA had been paying rent to the landowner for 20 years
before the opportunity was given by the CMP for them to buy their village land
outright. The owner, an elderly lady, was pleased to be rid of the problem of
squatters, and negotiations over the price were going well. The only snag was
that the owner died before negotiations were complete. After a few hiccups,
however, her heirs were eventually persuaded to honour her intent.
Residents are proud of the considerable improvements that have been made
since they assumed ownership: footpaths and culverts have been improved,
electricity supplies and the water system have been extended. Most of the
houses, too, are now of permanent materials, in marked contrast to the poor
quality of buildings in pre-CMP days.
The repayment rate to the NHMFC exceeds 100% (because of some pre-
payments). Not that there have been no defaulters: one person has refused to
pay on principle (others say that one bad apple is inevitable). Several members
have been unable to keep up their payments because of a deteriorating personal
financial situation. The community, however, has made up for the shortfall out
of advance payments and deposits.
BARRA has benefited from a relationship with an experienced originator.
This is a long-established local NGO, which has maintained links with the village
community, and has provided intermittent advice and assistance with matters
ranging from book-keeping to physical improvements. BARRA has elected a set
of officers who are clearly responsible, and responsive to their members’ needs.
The association, recognising its potential shortcomings in financial management,
had asked the Cebu Commission on the Urban Poor to maintain individual
ledgers and to help with submission of routine financial reports to the NHMFC.
BARRA is an exemplary CMP settlement, in the sense that four neighbouring
communities, having seen the benefits, have applied to join the CMP. This may
not be an example of an ordinary CMP village but, then, neither is it unique.
540 Michael Lee

PROBLEMS AND SHORTCOMINGS

A review of the CMP by the Government’s Housing and Urban Development

Coordinating Council, in 1991, noted that the programme was hailed for
successfully providing the poor with access to credit on a large scale, and, as
the report put it, for “channelling people power and promoting self-reliance”.m
At the same time, the review recognised a number of problems, which threw
doubt on the sustainability of the programme:
?? demand for participation in the programme exceeded the capacity of both
negotiated funding sources and staff resources;
?? administrative delays had brought about several consequences, notably mistrust
of the CMP administration by a number of urban poor communities; and
that landowners were discouraged from participation, having seen inflation
significantly erode their gains between the date of negotiation of a price
and the date of purchase of the land - delays of 18 months or more are
not uncommon;
?? some of the community organisations were themselves internally divided and
unable to fulfil their part of the social contract.

Loan recovery
Central to the question of whether any housing finance programme can be
sustained is the condition of its financial health; central to the question of
financial health is the state of loan recoveries. The more borrowers that see
that there is no penalty for delinquency, the fewer that will actually bother to
pay on time, or ever. Unless loans are largely and efficiently being recovered
(with, say, no more than 5% of the portfolio past due for over 12 months), any
lending organisation will be deprived of a useful, perhaps essential, source of
capital for financing new loans. It will also not be sufficiently creditworthy to
be able to take on new commercial credit.
Unfortunately, the official collection statistics for the CMP are dismal.
Overdue payments were said (and officially believed) to represent 45% of all
billings, representing a collection efficiency of 55%. Only 20% of communities
were recorded as being up to date with their payments. (The official figures,
however, overstated the seriousness of the situation. One reason was the
‘stickiness’ of transmittal of funds from the provinces to Manila: payments had
been made by community associations to their bank branches, but, at the time
of analysis, had not been received by the NHMFC.21) At the time of writing,
the precise default rate of the CMP was not clear, although the overall situation
was obviously not good.

Capital financing
Although the government was apparently committed to provide capital financing
from its own resources, sceptical observers noted that previous governments had
not always been able to fulfil similar promises, and rarely in a timely way;
and pointed out that sums of this magnitude are unlikely to be provided on a
sustained basis. An alternative solution being canvassed was for the CMP to be
separated from the NHMFC, financially and managerially; and for some sort of
non-governmental guarantee to be given to enable the newly-independent CMP
to borrow from the domestic capital market. Loans to beneficiaries would be
made at close-to-market rates, but could be matched with grant funds from
the government budget to buy down the total cost to beneficiaries to a readily
affordable level.
 The Community Mortgage Program 541

Programme complexity
Basaen reports that there are many poor squatter communities in the Philippines
for which the CMP does not provide a realistic option for addressing tenure
concerns:22 perhaps because some landowners have no intention of dealing with
the community, or because some communities lack the requisite negotiating
skills. Basaen points out, as well, that the CMP is considered out of reach of
many poor communities which believe they could not cope with its administrative
processes. The intricacy of the programme has been a constant complaint since
its inception. Over time, certain simplifications have been made. However, the
CMP is not a straightforward housing finance programme, and its characteristics
are seen to require relatively complex rules.

Stajjing
The CMP’s client group, even with the goodwill and assistance of their
originators, cannot realistically be expected to understand every nuance of
the programme’s procedural complexities. Some mistakes are inevitable, for
instance in the paperwork. This, then, calls for a relatively high degree of
technical assistance, training and supervision. There are doubts as to whether
the tiny number of professional staff assigned to manage the programme - in
1993, there were about 30 positions filled - is adequate.

Regional delegation
The NHMFC has only six regional offices, with fewer than 10% of its total staff
assigned to the regions. These offices, of course, deal with all of the corporation’s
programmes, of which the CMP is only a relatively small part. The regional staff
have a certain amount of delegated authority, but have only narrow authority
to take decisions and limited expertise to deal with queries and complaints. As
a result, most of the originators prefer to deal directly with Manila, further
undermining the authority and motivation of staff in the regional offices, and
causing additional delays.

Originators
The (abbreviated) list of originators’ responsibilities set out earlier in this
paper was formidable. Many putative originators were either unwilling or, in
the event, unable to perform all of their functions properly. The consequent
failure of several originators can be blamed for some of the weaknesses of
individual community projects. These shortcomings could have been resolved
by a combination of better screening of would-be originators, and more
realistic financial compensation (with Manila at least meeting the marginal
costs of origination). Recently, formal training has been provided to the staff
of originator institutions to assist them to provide all the services that are required
by a community association.

The community association

However, important the originators, it is unfair to place the blame for poor
implementation on them alone. A good originator cannot rescue a community
from the inadequacies of a bad community association. Several associations
were established simply for the purposes of accessing the financial benefits
of the CMP; and many of these associations, which did not have the actively
committed support of the members of the community were subsequently unable
to carry out their duties and responsibilities adequately. In a few cases, too,
542 Michael Lee

associations were set up fraudulently to be able to take advantage of the heavily

subsidised loans. Either the benefits did not flow to the intended beneficiaries,
the urban poor, but to members of more privileged groups; or the loans were,
premeditatedly, not repaid; or both. There were not many such cases, and most
of them occurred in the earlier months of implementation of the CMP, and are
now guarded against.
It may be difficult, at the time of a community’s initial application, to
distinguish between well-functioning associations and those that are inadequately
supported by their members, since these characteristics emerge later. Experience,
however, has shown that the one criterion critical to the later success of a
CMP scheme is that the community association should have been in existence
and functioning for some significant length of time before applying to join
the CMP.

Health benefits
There are standard arguments that the main benefits of settlement upgrading
are measurable in terms of health improvements, by better housing or improved
infrastructure. This is clearly not the case with the CMP, which has few health
benefits to point to: where infrastructure has been upgraded, it has been either
relatively small-scale or cosmetic, or has mainly taken the form of access
improvements. Given the cost and difficulty of improving the environmental
infrastructure, few communities have ranked the benefits of better water supply
or improved sanitation sufficiently to place these as a high priority for use of
their own, severely limited, personal financial resources.

The titling dilemma

The design of the CMP is predicated on communities providing peer pressure
on their individual members to repay, on the communities’ ability to assist their
members to tide over straitened circumstances, and on the ability of a group to
negotiate the sale of land. The CMP, by its very nature, can only be a community
programme. There are, however, strong pressures for community loans to be
individualised as quickly as possible. Those members who are able to pay off
their loans want to do so in order to acquire secure title to their own plot of
land; and to be rid of the responsibility for meeting the financial shortfalls of
the rest of the community.
The programme thus encapsulates a dilemma: although it is necessary for
the CMP to incorporate group lending, the financially-stronger fraction of
beneficiaries will exert an influence to dismantle the community loan, thus
- depending on one’s perspective - either freeing them of the encumbrance
of the rest of the community; or removing community support from the poorer
members of the community. A compromise might be to offer loans for a much
shorter period than 25 years, during which time it would be mandatory for the
community to maintain responsibility for repayment.

REPLICATION OF THE CMP

Land tenure characteristics

The CMP is not a panacea to solve the problems of all the urban poor in the Third
World. Whether or not the CMP can be replicated elsewhere will largely depend
on the system of land ownership in place, the attitude of that government and
the degree of community in the squatter settlements.
 The Community Mortgage Program 543

As it stands, it is designed mainly to help squatters on private land. There

is no theoretical reason why the same programmatic principles should not be
used for squatters to purchase land from a public entity. However, the politics
of purchase might militate against this type of transaction.
The CMP does not offer much help to low income renters, a group which, in
many countries, is growing in size year by year, except insofar as the programme
as a whole may expand the supply of rental housing, and thus regulate prices and
expand choice. The local consequence of implementing a community mortgage
programme in an area with a high proportion of non-resident owners would likely
be to raise rents in the programme area and thus partially to displace the renter
population.
Nor does it offer much solace to those owners of houses in illegal subdivisions
who ako own their plots, since their problem is less one of land tenure, or even
of access to finance, than of recognition by the authorities of the legality of the
settlement.
The CMP, in effect, gives public blessing to the existence and form of informal
settlements once their tenure has been determined. Implementation of the
programme requires implicit acceptance by the authorities of the legitimate
existence of settlements which do not meet normal minimum standards for
buildings and subdivisions. This condition is not valid in many countries, where
politicians, trying to maintain high standards for all their voters, will not tolerate
a low legal standard of housing.

Infrastructure
The main benefit from the CMP as it is practised in the Philippines is an
improvement in the tenure status of squatters. In other countries, beneficiaries
or governments might put a higher priority on infrastructure improvements, and
thus prefer to design the programme so as to incorporate site improvement
ab initio.

Community and NGO participation

In those countries with a weak history of community-based programmes, there
would be a high risk that a community mortgage programme would fail because
associations would be unable to cohere sufficiently for the programme to take
root. Similarly, it is essential for there to be a strong NGO presence, willing
to work with local communities over an extended period of time. Such NGOs
have long existed in the Philippines. The Philippines is not unique, but neither
are there many other countries with such a strong infrastructure of competent
private voluntary organisations.

IN CONCLUSION

Most of the existing problems of the CMP in the Philippines have a solution, in
theory if not in the practical reality of daily political life. However, a quandary
remains; the heart of the issue of sustainability. If the programme is priced so as
to be financially sustainable, can it meet the goals of reducing poverty? If it can
be afforded by the poor, can long-term capital funding be made available?
In most countries, governments do not have enough funds to be able to run
a CMP-like programme on a heavily subsidised basis, at a volume significant
enough to make an impact on the tenure and shelter problems of the urban
poor, on a long-term basis. Nor are those governments sufficiently persuasive to
be able to access much concessional funding from international donors (or from
544 Michael Lee

the local charitable business community). It follows that capital funding for such
a programme must be sought from private domestic markets. Several conditions
must be fulfilled for this to happen but, above all, the programme managers
must be able to borrow and repay on competitively commercial terms.
This implies, firstly, that the interest rate must be set so as to reflect the total
cost of borrowing, including administrative costs and an allowance for bad debts.
Secondly, in order to be able to borrow commercially, the programme must
be seen to be financially sound and creditworthy. In turn, this implies that
its management must be able to collect debts and enforce its contract with
the community associations; and to be independent of political whims of the
government of the day. If the programme is to be creditworthy, underwriting
criteria must reject communities incapable of repayment, and must, in the last
resort, be able to foreclose on delinquent communities.
If a CMP were to borrow and lend on commercial terms, the questions of
equity and affordability are sure to be raised. Housing policy analysts may
point to examples of poor people choosing to borrow from moneylenders at
huge interest rates, or borrowing from the formal sector at large positive rates.
They can demonstrate that poor people are able to repay the loans. However,
it is also true that (1) the quoted loans, almost without exception, are taken for
periods of a few months, not years. Psychologically and financially, it is easier
to sustain relatively high levels of repayment for, say, 24 months, than for 25
years. And (2) certainly there are individuals who can afford high repayments;
but, equally certainly, in most communities of the really poor there will also be
many families who cannot afford to take on loans of any magnitude.
Does this mean that a financially sustainable programme cannot work for
communities that include individuals who are very poor? No: there are ways in
which the programme could become simultaneously affordable and financially
sustainable. One solution would be to mix grants with commercial loans in
order to buy down the cost of the loans. Although the Philippine government
appears to have ruled this out, at least for the present, the CMP appears to
have built up sufficient public support from landowners and squatters that it
would be politically hazardous for to abandon it. While the search carries on
for an acceptable long-term solution, short-term funding will continue to keep
the programme alive.

NOTES
1. Descriptions of CMP procedures and history - in greater detail than are included in this paper
- can be found in several publications, including the following. HUDCC (Housing and Urban
Development Coordinating Council, Republic of the Philippines) The National Shelter Program
(HUDCC, Manila, 1991). Wilfred0 G. Nuqui, “Philippines Country Paper”, in The Urban Poor
and Basic Infrastructure Services in Asia and rhe Pacific (Asian Development Bank and Economic
Development Institute, ADB, Manila, 1991). pp. 515-552. PADCO, Assessment of the Communiry
Mortgage Program, for USAID/Philippines, Philippine Business for Social Progress, Ramon Aboitiz
Foundation, and Kauswagan Sa Timugang Mindanao Foundation, Manila (May 1993).
2. From its establishment in 1976, the Grameen (‘Rural’) Bank lent small sums of money for
income-generating projects. Housing loans were started in a small way only in 1984, but the
volume has since expanded rapidly. Priority is given to women and to those poorest members of
the community who do not have their own homes. As in their other lending programmes, loanees
are landless men and women who form themselves into groups of five, in order to receive the loans
for which no collateral is required. Several groups combine to appoint representatives who validate
loan proposals and supervise activities. (See USAID, Asia Perspective 2, 2, Special Issue on Housing
Finance (US Agency for International Development, Regional Housing and Urban Development Office
for Asia, Bangkok, 1990).) Both the CMP and Grameen offer loans at below-commercial rates of
interest (althoigh Gramekn’s other loan programmes are run at close to market rates; the Grameen
Bank is financially self-sufficient). The main differences between the CMP and the Grameen Bank’s
shelter programme are as follows:
 The Community Mortgage Program 545

Grameen Bank CMP

?? mainly short-term loans 0 usually 25 year loans

?? for house improvements ?? for land purchase; then infrastructure; then house
improvement
?? through small groups ?? through established communities
?? previous borrowers preferred ?? no financial track record required

Of the other institutions mentioned, the Thrift and Credit Cooperative Societies in Sri Lanka
effectively collapsed when, in 1988, the government forgave poor families repayment of their
loans. (See Michael Lee, The Role of Private Enterprise in Housing Finance: Lessons from South
Asia (USAID Regional Housing and Urban Development Office for Asia, Bangkok, 1992).) The
SEWA Bank lends to individual members (poor women), at commercial rates (currently 16%), for
periods of up to 20 years. Default rates are very low. Bank Rakyat Indonesia lends for house extension
and improvements at 32% for periods of up to 36 months. Repayment rates on this programme are
excellent, but loans are currently made in general only to people with a fixed income, thus excluding
the self-employed and the casually-employed, who are among the lowest paid in Indonesia.
3. For newcomers: in 1988 the United Nations Centre for Human Settlements estimated that the world’s
urban population will grow from 2.2 billion in 1990, by lOO%, to 4.5 billion 30 years later, an average
increase of 75 million people a year. Kasarda and Rondinelli point out that “the net addition of
urban population in developing countries between 1980 and 2000 [will be] equal to that of the total
urban population in developed countries in the year 2000” (p. 393). Cairncross ef al. note that “it
is impossible to estimate with any precision what proportion of the 1.3 billion urban dwellers live
in inadequate housing with inadequate provision for water, sanitation and other basic needs. Case
studies of specific cities show that it is common for between 30 and 60 % of the population to live
either in illegal settlements or in tenements and cheap boarding houses We estimate that at
least 600 million people living in urban areas of the Third World live in what might be termed life
and health threatening homes and neighbourhoods” (pp. 2. 4).
United Nations Centre for Human Settlements (UNCHS) Habitat News (1988) p. 10. Kasarda and
Rondinelli, “Mega-Cities, the Environment, and Private Enterprise: Towards Ecologically Sustainable
Urbanization”, Environmental Impact Assessment Review, 10 (1990), pp. 393-404. Sandy Cairncross,
Jorge E. Hardoy and David Satterthwaite, The Poor Die Young: Housing and Health in Third World
Cities (Earthscan Publications, London, 1990).
4. See Jorge E. Hardoy and David Satterthwaite Squatter Citizen: Life in the Vrban Third World
(Earthscan, London, 1989). These authors give credit, in particular, to “priests and religious groups
affiliated to the World Council of Churches”, and other researchers and professionals who worked
with low-income people in housing and community development projects in the 1950s and early 1960s
as having developed the concept of upgrading, which was later adopted by the donor agencies.
5. Geoffrey Payne, Informal Housing and Land Subdivisions in Third World Cities: a Review of the
Literature (Centre for Development and Environmental Planning at Oxford Polytechnic, for the
Overseas Development Administration, Oxford, 1989).
6. Even if settlement upgrading is not widely practised as a solution to the problems of urban slums,
Hardoy and Satterthwaite have noticed several changes for the better. Among these is a much greater
level of tolerance for informal settlements on the part of politicians and policy-formers (although this
may be associated with the increased degree of commercialisation of informal construction, and the
associated political power of informal developers); a recognition of the right of many people living in
informal settlements to basic infrastructure and services; the reformulation of building and planning
regulations to more realistic standards; and the recognition of and support for the role of NGOs
and community groups as advocates for the urban poor. Hardoy and Satterthwaite (1989), op. cit.;
see note 4.
7. World Bank, Staff Appraisal Report: Housing Sector Loan (The World Bank, Washington, DC,
1988).
8. Quoted by G. Thomas Kingsley and Maris Mikelsons Decentralizing Philippine Development: Second
Year Assessment (The Urban Institute, Washington, DC, 1992, for USAIDIPhilippines).
9. Michael Lee, “The Appraisal of Shelter Programmes: Resource Management in Metro Manila”,
Habitat International, 9, 314, (1985), pp. 317-332.
10. Nuqui (1991), op. cit., see note 1.
11. Kingsley and Mikelsons (1992), op. cit., p. 67, see note 8.
12. HUDCC (1991), op. cit., see note 1.
13. But Murphy reports that, during the posr-Marcos years, some 100,000 squatters were evicted every
year, and that most of them received neither compensation nor alternative land on which to settle.
Denis Murphy, The Urban Poor - Land and Housing (Asian Coalition for Housing Rights,
Bangkok, 1993).
14. Philippine Vrban Perspectives, 1, 4 (Development and Management Institute, Makati, Metro Manila,
July-August 1993).
15. PADCO (1993), op. cit., p. 10, see note 1.
16. The Philippine currency, the peso, stood at about US$l = P27.50 in early 1994.
17. Actual household incomes may, of course, be higher than stated incomes. The official poverty threshold
was P4,220 (then $169) per urban household per month in 1991. All of the CMP communities surveyed
by PADCO had average incomes well below the government’s official poverty line. See PADCO
(1993), op. cit., see note 1.
546 Michael Lee

18. Philippine Urban Perspectives (Development and Management Institute, Makati, Metro Manila,
July-August 1993), pp. 2-3.
19. These communities were visited as a part of the study reported in PADCO (1993), op. cit., see
note 1.
20. HUDCC (Wl), op. cit., see note 1.
21. This author has come across no suggestion of financial malpractice, in the sense of official corruption,
in this programme.
22. Ines M. Basean, “Non-Governmental Initiatives in the Philippines”, in The Urban Poor and Basic
Infrastructure Services in Asia and the Pacific (Asian Development Bank (ADB) and Economic
Development Institute (EDI), Manila, 1991).