FINANCIAL SECTOR FORUM 2002 Chantilly, Virginia, June 19, 2002 Housing Finance Session

FINANCIAL SECTOR FORUM 2002

Chantilly, Virginia,

June 19, 2002

Housing Finance Session

Affordable Housing Finance

in Emerging Economies ?

1

Affordable Housing Finance in Emerging Countries

PRESENTATIONS

Key factors for affordable housing finance (Loic Chiquier, FSD)

IFC in Housing Finance; Case Study of Colombia (Pamela Lamoreaux, Head Housing Finance, IFC

Trends in Social Housing Finance Policy (Dc. Marja Hoek-Smit, Wharton University)

Chilean Case Study (Olivier Hassler, FSD)

2

Countries Over 50% Urban Today

Over 50 %

Reaching 50%

Least Urbanized

3

Key Housing Sector

Needs increased by urbanization rate, shifting demographics, expansion of a middle class

Housing as key economic sector

– Household: >75% wealth + N.1 expenditure (25%-40%)– Key social shelter and community factor – Housing investment: 25%-35% overall investments– Cities are built the way they are financed – Impact for economic growth, labor markets (9%)– Secured long-term profitable assets for banks and investors

(first or second largest fixed-income securities)

4

IMPORTANCE of MORTGAGE SECURITIES

% of total bond market

» USA 24% **» Germany 44% *» Denmark 59% *» Chile 33% ***» Malaysia 11% **

* 1999 ** 2000 *** mid 2001

Housing Affordability

Two Different Affordability Dimensions– Housing Price (wide range of Price-Income Ratios: 2-7 years,

beyond threshold need to lift supply constraints)– Housing Finance Services (credit affordability factors: down-

payment, interest rate, maturity, debt-to-income)

Access to HF differs greatly: small, instable, fragmented systems in emerging economies:

– Excessive proportion “dead” RE assets (% GDP)– Unaffordable housing (delayed access, retained savings, costly

incremental construction)– Smaller inefficient real estate industry (impact growth)– Perceived need for more subsidies (vicious circle) – Higher risk exposure of lenders, banking and fiscal crisis

6

Developed Countries: Size Mortgage Markets(source: Countrywide, IUHF, EMF)

Emerging Countries: Size Mortgage Markets(source: Countrywide, IUHF)

3

Access to Housing Finance: MEXICO

Affordable Housing Assets to Finance

Property Rights and Urban Laws– Duly established, transferable, registered property

rights (special transaction costs, co-ownership issues)

– Market-sensitive, realist land development, construction licensing and urban planning tools

– Sound national / local taxation of housing and HF

– Market sensitive rental regulations

Efficient real estate industry

Public/private developers, building code, quality insurance, public contracting, etc. 10

Need of Effective Social Housing Policy State focus on social housing (use market to leverage

credit, no excessive reliance on earmarked and public funds)

Comprehensive urban development and social housing policy (infrastructure, rehabilitation, slum upgrade, subsidies, management/privatization public stock, titling)

Transparent, targeted demand-driven subsidies to beneficiaries (buy-down, vouchers, advisory), or partial guarantees to lenders and investors (SMM)

Micro-finance of housing for lowest income groups (limited affordability, but flexible for small amounts)` 11

Pre-Requisites for Housing Finance Macroeconomic stability (inflation, real rates, forex)

Liberalized financial system, playing field competition, end privileged financial circuits (monopoly, poor debt recovery, subsidies, earmarked funds)

Developed Financial Infrastructure Efficient regulations & oversight Efficient accounting and payment systems Credit information system, scoring tools adjusted

to lower/informal income groups Professional appraisal (standards & data issues) 12

Pre-Requisites for Housing Finance

Related insurance products (damage, death, disability)

Enforceable property rights as credit collateral

• registered undisputed property rights (various)

• actual foreclosure and eviction (law, practice)

• permitted non-judiciary fast track ?

• trust & leasing tools ? alternative debt recovery ?

• civil code / common law / Islamic regimes differ

• political & judiciary support/hostility to lenders?13

Banks limit credit accessibility to low-risk higher-income and apply large margins because of:

Conservative retail strategy, other profitable assets Hard to manage larger transformation & credit risks Limited experience in special multi-function industry (distribution, technology, funding, productivity, etc. ) Limited capital and long term funding Time needed to reach scale effects and profits

Limited role cross border integration (domestic markets, excessive long-term foreign exchange to households)

Pre-Requisites for Housing Lending

14

Potential growing role of public/private credit insurance: variants, adverse selection issues, regulations ?

Sound & affordable amortization (indexation issue), as well as proper standardization & information framework

Affordable Housing Finance

15

Useful complementary funding to depository (longer maturity, reduced cash-flow risks, etc.). Also sizeable, low-risk papers useful to build capital markets.

Multiple variants: complex vs. simple, centralized or not, securitization vs. refinancing, GSE or private, etc

Also adjust to capital markets, investors, benchmarks

Securitization : demanding and complex regulation issue

Failure to export HF models and institutions: S&Ls, Bausparkassen, housing banks, building s., securitization

Capital Markets Funding

16

Developed Country Funding Composition(source: Countrywide)

Developing Country Funding Comparison (source: Countrywide)

Mortgage Funding Sources: Emerging Markets

0%

10%

20%30%

40%

50%

60%70%

80%

90%

100%

Brazil China India Korea Mexico Poland South Africa Thailand

MBS Bonds Other (or Gov't) Deposits

CAPITAL MARKETS- Pension funds- Life insurance companies- Mutual funds- 0ther long-term investors

CAPITAL MARKETS- Pension funds- Life insurance companies- Mutual funds- 0ther long-term investors

1. TREASURY 2. CENTRAL BANK

SECONDARY MORTGAGE

FACILITY(Various versions)

Initial long-term loans

Funds

Securities

Primary Market Lenders:

1. RETAIL DEPOSIT BANKS2. FINANCE COMPANIES

- Co-signature/salary- Mortgage lien- Mortgage insurance

Loans and advancesLoan purchasesSecuritizationEquity

participation

Mortgage Loans

HOUSING FINANCE: WORLD TRENDS

Initial share equitywith private buyback

arrangements

SOCIAL HOUSING FUND

SOCIAL HOUSING FUND

CONTRACTUAL SAVINGS:- mandatory private pensions- voluntary private pensions

and insurance

CONTRACTUAL SAVINGS:- mandatory private pensions- voluntary private pensions

and insurance

Mortgage loancollateral

LOW INCOMEHOUSEHOLDS

INTERNATIONAL FINANCEINSTITUTIONS (WB, Others)

Mutual/private mortgage insurance

Government GrantsAnnual Budget Funding

PrivateDevelopers

UpfrontSubsidies

Various forms of funding for social housing

Various forms of funding for social housing

Social housingdevelopers

AllHouseholds

ALL OTHER HOUSEHOLDSHOUSEHOLDS WITHTARGETED SUBSIDIES

19

World Bank Examples of Recent Projects

Jordan: Liquidity Facility (JMRC)

Issue bonds to refinance more mortgage lenders, prudential standards, catalyst of mortgage markets

Issues: better mortgage insurance, new securitization products, use of vouchers

Peru: Registration Property Titles

Formalization of registered land titles (1.1 million) Challenges: land & urban development, credit

collateralization and accessibility (use public fund)20

Colombia – Part FSAL to rescue mortgage sector: S&L restructuring,

portfolio standardization and conversion, new prudential regulations, new securities, private securitization conduit

– Pending issues: margins, culture non payment, credit cap, court protection, macro instability, limits mortgage bonds

Mexico

– Reform FOVI agency (public funding) into SHF bank as catalyst of affordable mortgage markets

– Separated market finance from new upfront subsidies

– New mortgage credit insurance and MBS guarantees

– Issues: constrained Sofoles, awaited return of banks, comprehensive social housing policy, Infonavit role,

21

Thailand: TA to the Housing Bank– Improved bank mortgage performance (default +

prepayment models, property value indexes)

– Preparation of a National Real Estate Information Center and valuation standards (since 1997 bubble)

Egypt: TA to New Mortgage Markets

– Support to a new mortgage and real estate law and its further executive regulations and policy tools

– Issues: property rights & urban development, some banks hit by developers, improper subsidies, unprepared regulations, new regulatory body for non-bank lenders, small domestic bond markets.

22

New generation of Bank products ?

• LIL applied to housing finance reforms (Latvia) • Housing Investment Loans (APL) (Iran) • Housing Policy Adjustment Loan (Brazil) • Partial guarantee to non-tradable mortgage market risks (macro, legal) • Social housing policy reforms (including rental) •Other products supporting mortgage markets ?

23