Appropriate finance can greatly increase the speed and lower the cost of incremental housing the process used by much of the low/moderate-income majority of most developing countries to acquire shelter. Informal finance continues to dominate the funding of incremental housing. However, new sources have developed including housing microfinance, community-based finance savings and loan groups, and consumer credit for building materials. This paper examines informal and formal finance for incremental housing and makes recommendations for the vast expansion necessary to meet the affordable housing demand from the huge urban wave in developing countries projected over the next three decades.

Access to institutional housing finance has largely failed to improve habitat for low-income groups since neo-liberalism has spread around the globe. Table 1shows mortgage finance as share of GDP for selected countries around the world. The very low penetration of mortgage finance in most developing countries stands out. Traditional mortgage finance is virtually irrelevant to the majority of households in developing countries for many reasons (Ferguson, 1999; Smets, 1997). Even in developed countries, institutional housing finance is in crisis. In the USA, sub-prime lending increased when lenders started serving clients with low or fluctuating incomes and/or poor or thin credit records. About 10 years ago sub-prime lending was almost absent, but had reached a level of 20% of all mortgages in the USA by 2008. These sub-prime home lenders primarily focused on profiting from the upfront fees rather than sound underwriting. Ina radical shift from historical precedent, many US home lenders offered mortgages with negative amortization, no down payment(sometimes, lending more than the appraised value of the house),sharp increases in introductory interest rates based on volatile indices, and no or little documentation from the borrower, believing that housing prices would always rise to cover their risk. A steep rise in securitization of US home mortgages spread the risks of these sub-prime loans around the globe by allowing other financial institutions to purchase this paper. Rapidly growing problems with this sub-prime mortgage portfolio provoked a global credit crunch and economic crisis in 2008 that continues today.