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Housing Finance in Emerging Markets Washington DC – 16 March 2006 “Internationalisation of Covered bonds” Cristina Costa Senior Adviser - ECBC European Mortgage Federation European Mortgage Federation Founded in 1967 to represent mortgage lenders’ interests at EU level (retail & funding) Groups national trade associations and credit institutions from EU Member States + acceding countries New Member State membership: Czech Rep., Hungary, Latvia and Poland Accession Country Membership: Romania Just welcomed Ukraine as its latest member Represents approx.75% of EU mortgage market EU mortgage market amounts to approx. 49% of EU GDP 2 Agenda I. Mortgage Market Trends II.Covered Bonds: an attractive funding source III. Expansion of covered bonds IV. The Spanish Experience V. Case Study : Hungary VI. Outlook 3 EU Mortgage Market Trends Mortgages Outstanding: Total value of outstanding residential mortgage loans EUR 5.2 trillion at end 2005 (c. 49% of GDP) Growth: Average annual growth rate approx. 8% per year over the last 10 years. Growth is much higher in the New MS Interest Rates: The introduction of the Euro has resulted in significant falls in mortgage interest rates, which in turn has stimulated the markets House prices: Big price increases in most countries over past few years, but there are signs of house price growth slowing down around Europe Regulation: Capital adequacy and European retail FS integration dominate the regulatory agenda Funding: Diversified access to capital market funding is increasingly important; EMF launches ECBC to represent covered bonds 4 Mortgage Funding in Europe Covered bonds outstanding as % of mortgage debt outstanding (2004) UK EU:17% Poland Ireland Latvia Austria France Germany Spain C zech Republic Sweden Hungary Denmark 0% 10% 20% 30% Source: European Mortgage Federation 40% 50% 60% 70% 80% 90% 100% 5 Special character of covered bonds Specific legal framework/ Contractual provision Preferential right of bondholders Quasi-bankruptcy remoteness Covered Bonds Separated collateral pools High quality collateral Strict supervision Source: ABN Amro 6 Cb Legislation Geographical Overview - Covered Bond Legislation in Europe (as of January 2006) Legislation in countries of the EU/EEA/CH 19 2000 2006 2003 2004 1998 2002 2003 Legislation in future EU member and further countries in transition 23 2005 1998 4 1997 2006 1995 2005 1999 2005 1990 1997 Concrete legislation in preparation 1999 3 2003 2000 Legislation under consideration 7 2 28 Covered Bonds Most European countries have adopted cb legislation Competition has driven legislation to ever higher (safety) standards without sacrificing funding flexibility No trend towards lowest common denominator Regulated at EU level (Art. 22(4) of UCITS): Issued by a credit institution Subject to special supervision Investment of proceeds effected in eligible assets Outstanding issues covered by eligible assets until maturity Priority claim of bondholders on subset of assets Recently adopted CRD lists set of eligible assets 8 CB: an attractive funding source For issuers • Low funding costs • Flexible alternative to deposits and senior bonds • Possibility of extending the maturity profile of banks’ liability side to make it match with mortgage loans loan maturity For investors • Alternative to Government bonds (yield pick-up) • Secure instrument in case of issuer insolvency double protection (claim against issuer & cover pool) • Higher liquidity due to large issue sizes and market maker commitments • Geographic and asset class diversification 9 Record supply in European jumbo covered bonds Source: HVB 10 The Spanish Experience Prior to 1976 (pre Franco), parallels with Eastern Europe Laws date back to 1872 which saw first law allowing ‘Cédulas hipotecarias’. Mortgage Law 1946 (legal & operational security) Moncloa Pact 1977 (removal of obstacles) 1982 Mortgage Market Law Securitisation law introduced in 1991 Spanish Economy: Steady fall in unemployment from 26% to around 10% Falling interest rates (Eurozone membership) Cut National debt; Big increase in per capita income Result - Housing, construction and Mortgage Markets booming Covered Bonds in Spain Almost 1/5 of mortgages funded by Cédulas, and 1/3 of new lending In 2005, issuance highest in Europe surpassing that of Jumbo Pfandbriefe Issuance open to all types of institutions (multi-sellers, direct) 80% LTV limit on residential or 70% for commercial property Strengthening status & demand of cédulas through: 2004 Insolvency Act 2005 Modification to Withholding tax regime Expected Jumbo issuance for 2006 is approximately EUR 58 Billion. Spanish Multi-cédula structure Cédulas Issuers (a number of Savings Banks) CH CH CH CH CH CH CH AyT Cédulas Fund Portfolio of individual issues AyT Cédulas Cajas (Issuer) Liquidity Reserve & Protection Deposit Aaa/AAA/AAA Joint cédulas Investors Source: AyT, HVB 13 Lessons to be learnt from Spain Spanish Experience Highest home ownership rate in Western World Lowest State Housing in Western World Thriving covered bond market and securitisation market One of Europe’s fastest growing mortgage markets Achieved by… Diversified Funding Strategy Building programme to ensure supply of quality housing Macro-economic reform Solid primary market laws to ensure safety of collateral Minimising State involvement Housing & Mortgage Markets in Hungary vs. EU 25 and CEECs-2004 EU 25 Total value of residential loans, € million, (EU 25) Residential Mortgage loans as % GDP Residential mortgage loans per capita, € 000s (EU 25) Growth rates of residential mortgage market Home ownership Outstanding covered bonds as % of residential mortgage lending outstanding CEECs Hungary 4,670,736 31,479 7,767 45.3% 6.9% 9.6% 10.2 0.43 0.80 9.7% 34.4% 35.0% Above 80% in many 63.5% CEECs 92.0% 17.0% Source: European Mortgage Federation, Hypostat 2004 N/A 63% 15 Case Study: Hungary Regulatory Environment: • Legal framework – Mortgage Banking Act (1997) • State subsidy scheme (introduced 2001) Well developed system of refinancing partner banks through purchasing mortgages 3 covered bond issuers - FHB, HVB, OTP CB fastest growing market (6% of GDP) - total outstanding volume EUR4.9bn (EMTN Programme) Since 2004: market based development • High HUF interest rates have turned clients towards FX-based products • Current monthly net growth (30-35 billion HUF) seems to be sustainable 16 Hungary: Challenges Size of the domestic market • Crowding-out effect of Govies (growing budget deficit) Liquidity concerns • Primary issues are relatively small (c. EUR50m) • Secondary turnover is moderate Less supportive macro environment • Volatile interest rates and FX market Growing role of foreign EUR issuances but majority of outstanding cb volume were domestic issues and HUF denomination Cut in subsidy scheme and growing FX lending decreased the incentive of cb funding for non mortgage bank lenders 17 Outlook 2006 European Mortgage Markets show no signs of slowing, especially in new member states Continued Growth of covered bonds Emergence of new issuers: IT, PT, NL, UK…. FSA to implement EU compliant cb regime; NL next. Increased level of investor interest (CEE, Asia) Continued work of ECBC • Work on definition of common standards for covered bonds European Commission working on European standard – funding likely to be one of the driving forces behind integration • Launch of Expert Group on Funding 18 Thank you! E-mail : [email protected] Tel: +32 2 285 40 30 EMF website: www.hypo.org Address: European Mortgage Federation Avenue de la Joyeuse Entrée, 14/2 Brussels 1040 Belgium