Download HOW THE THAI REAL ESTATE BOOM UNDID FINANCIAL INSTITUTIONS

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
Germany
Denmark
Chile
Malaysia
24% **
44% *
59% *
33% ***
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)
Mortgage Debt/GDP & Homeownership: 2000
90.0%
80.0%
Ow ner-Occupancy Rate
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
S
Source : IUHF, EMF & CMHC
(*1999 for Japan)
Mortgage Debt / GDP
Owner-Occupancy Rate
U
S
U
K
w
ed
en
pa
in
S
Ja
pa
n
an
y
G
er
m
ar
k
D
en
m
C
an
ad
a
us
t
ra
lia
0.0%
A
Mortgage Debt/GDP
70.0%
Emerging Countries: Size Mortgage Markets
(source: Countrywide, IUHF)
Mortgage Debt/GDP & Homeownership: Emerging Markets
90.0%
Ow ner-Occupancy Rate
Mortgage Debt/GDP
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Brazil
Korea
Mexico
Poland
Thailand
China
Source: IUHF (1998-99 data)
Mortgage Debt / GDP
Ow ner-Occupancy Rate
India
Access to Housing Finance: MEXICO
4%
12%
15%
Commercial Banks
Autofinanciamientos
FOVI
INFONAVIT
SOFOLES
15%
FOVISSSTE
FONHAPO
State Agencies
Population
54%
Informal Sector
3
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
Pre-Requisites for Housing Lending
 Banks limit credit accessibility to low-risk higherincome 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)
14
Affordable Housing Finance
 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
15
Capital Markets Funding
 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
16
Developed Country Funding Composition
(source: Countrywide)
Mortgage Funding Sources: Developed Markets
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
MBS
Bonds
Other (or Gov't)
Deposits
US
UK
en
Sw
ed
in
Sp
a
Ja
p
G
er
an
y
m
an
k
m
ar
D
en
a
ad
C
an
Au
st
ra
lia
0%
Developing Country Funding Comparison
(source: Countrywide)
Mortgage Funding Sources: Emerging Markets
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Brazil
China
India
MBS
Korea
Bonds
Mexico
Other (or Gov't)
Poland
Deposits
South Africa
Thailand
HOUSING FINANCE: WORLD TRENDS
1. TREASURY
2. CENTRAL BANK
Government Grants
Annual Budget Funding
INTERNATIONAL FINANCE
INSTITUTIONS (WB, Others)
Initial share equity
with private buyback
arrangements
Initial long-term loans
SOCIAL
SOCIALHOUSING
HOUSING
FUND
FUND
SECONDARY
MORTGAGE
FACILITY
Securities
Funds
(Various versions)
Upfront
Subsidies
Various
Variousforms
forms
of funding for
of funding for
social housing
social housing
Social housing
developers
Mortgage loan
collateral
Equity
participation
Primary Market Lenders:
Mutual/private
mortgage insurance
1. RETAIL DEPOSIT BANKS
2. FINANCE COMPANIES
- Co-signature/salary
- Mortgage lien
- Mortgage insurance
LOW INCOME
HOUSEHOLDS
Loans and advances
Loan purchases
Securitization
HOUSEHOLDS WITH
TARGETED SUBSIDIES
CAPITAL MARKETS
CAPITAL MARKETS
- -Pension
Pensionfunds
funds
- -Life
insurance
Life insurancecompanies
companies
- -Mutual
Mutualfunds
funds
- -0ther
0therlong-term
long-terminvestors
investors
CONTRACTUAL
CONTRACTUALSAVINGS:
SAVINGS:
- - mandatory
mandatoryprivate
privatepensions
pensions
- - voluntary
private
pensions
voluntary private pensions
and
andinsurance
insurance
Private
Developers
All
Households
Mortgage Loans
ALL OTHER HOUSEHOLDS
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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