Barbados has a relatively well developed financial sector and an equally well developed housing finance sector. Nearly all institutions are open to lending as far down the income spectrum as fits their conventional criteria (in effect, the entire middle class). As importantly, there are several institutions which are actively seeking to expand market share by offering better service and new products. However, competition along the line of rates has not taken root after a long period of rates being administered by the Central Bank. Also, none of this competition is explicitly oriented towards going further down the income range. Indeed, most of the efforts by the credit unions are oriented to moving further into mainstream mortgage lending to the middle class. While product improvements by lenders, including 95 percent LTV loans for 25 years and various arrangements designed to reduce transactions costs, do marginally expand the housing credit opportunities of lower-middle class families, there is no private (or public) entity seeking to radically expand those options for lower income levels. Nor are there special incentives for lending institutions to move down market apart from increasing market share. It appears that there are few significant innovations left to be made with respect to housing credit for lower income households without introducing subsidies in combination with more efficient land development and housing standards, and reforms in the chattel housing sector. The chattel housing sector is heavily burdened by the legacy of past government intervention and can probably only be resolved with further major government programs and well targeted subsidies. The present low-income housing subsidy situation is clouded by the presence of deep and ill-targeted subsidies through the National Housing Corporation.

Any new subsidy schemes will have to redefine the NHC programs, integrate useful elements from these programs into them and focus on improving the allocative and productive efficiency. The largest of the lenders, the trust companies and the insurance companies, are well connected to the rest of the financial system and thus there is unlikely to be liquidity issues for the sector as a whole. There are presently no evident other needs for a secondary market mode of funding, since there are already wholesale funds available to most lenders at an all-in rate that is not much more than rate on government debt which an unsubsidized secondary market cannot match. If private lenders or investors would feel the need to make existing whole-sale lending operations more efficient and liquid, government could be requested to establish the necessary legal and regulatory infrastructure to facilitate, for example, the establishment of a privately-owned mortgage trust to acquire mortgages and issue mortgage bonds. There appear to be no social policy reasons to commit implicit or explicit government subsidies for secondary market development. This report on the housing finance sector and housing subsidy systems in Barbados is part of a larger report supporting the preparation for a housing sector and neighborhood upgrading program subject to formulation by the Government of Barbados (GOB) and the Inter-American Development bank (IDB). The program is expected to be focused on improving housing opportunities for low and moderate income urban households, but the potential policy agenda includes the entire housing sector. The goal of the program is to improve the cost efficiency and social effectiveness of housing delivery systems, whether subsidized or unsubsidized.