Initiative for the Palestinian Economy Construction Mortgage Market. Proprietary: Office of the Quartet Representative

Transcription

1 Initiative for the Palestinian Economy Construction Mortgage Market

2 Disclaimer The information contained in this presentation or document ( presentation ) is for general guidance on matters of interest only. It is provided on the basis that OQR and OQR advisers are not engaged in rendering any professional advice and/or services of any kind. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or any other advisers, nor should it be relied on in any way. While the OQR has made every attempt to ensure that the information contained in this presentation has been obtained from reliable sources, OQR is not responsible for any errors or omissions, accuracy, impressions or otherwise, or for any results which are consequential directly or indirectly from the use of this information. All information in this presentation is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance and fitness for a particular purpose. In no event will OQR, its advisers, agents or employees thereof be liable for any decision made, action taken or omission of an action in reliance on the information in this presentation and/or any discussions that followed it or for any consequential, special or other damages. 1

3 Sustainable growth of the mortgage market is crucial to unlock housing sector potential The Initiative for the Palestinian Economy (IPE) outlines significant potential for the housing and construction sector to grow over the next three years, with up to ~$2bn GDP impact, ~150k new jobs and 33,000 housing units built/year To achieve such an outcome would require ~$1.1bn/year in additional mortgage financing The mortgage market in the Palestinian Territories is currently relatively undeveloped, with a base of ~$600m in 2013 Rapid growth of the mortgage market to ~$3.9bn loans outstanding in 3 years poses systemic challenges and requires significant increased capacity in the mortgage sector To support sustainable growth of the mortgage market, five key areas must be addressed: 1) legal framework and institutional readiness, 2) consumer awareness and understanding, 3) underwriting capabilities of lending institutions, 4) funding of primary lending institutions, and 5) refinancing 2

4 Creating a functioning mortgage market is a crucial part of the construction and housing sector value chain Current status Key obstacles Potential and existing initiatives Ease of implementatio 11 n Understanding effective demand Insufficient understanding of household income and preferences Lack of robust data Unrealistic expectations from PL households about size of desired housing units Conduct detailed effective demand survey, by geography Identification of suitable land ~100K dunums of suitable land identified suitable for construction More thorough analysis (cost, ownership status, infrastructure) not carried out yet Political agreement on land to develop and prioritization Avoiding speculative bubbles Allocating land fairly and efficiently to developers, with appropriate incentive structures, to ensure affordable housing is prioritised National spatial Plan Ministry of Housing Plan? Setting up of land task force to drive identification and registration of suitable land Land registration Private sector housing development (construction) Only ~1/3 of WB registered (mainly in the north) Lack of registration drives up land prices, slows construction and prevents growth of mortgage market At current rate, ~80 years to register entire West Bank Mismatch of supply and demand Oversupply of high-end (>$70K) Undersupply (virtually none) of midto low-end segment ($30-60K) PLA institutional capacity Fragmented and absentee ownership delays registration Insufficient legal capacity to handle volume of land cases Cost of land Insufficient financing Inefficient rental framework Expensive building materials Complex and ineffective regulatory framework Ongoing WB-driven PLA systematic registration in Dura Independent PLA registration in Bethlehem and Salfit ongoing Scattered private sector initiatives Ramped up land registration PPP to drive affordable housing in large scale Donor financing of off-site infrastructure Construction in Rawabi, Reehan and Jinan Improved regulation Possible subsidies for low-income groups Mortgage financing Mortgage sector underdeveloped, ~$600m, ~5%of GDP), but growing quickly from low base Only 5-15% of area A/B fulfil conditions for mortgage, mainly due to lack of titling Banks mortgage capacities underdeveloped Potential home owners lack knowledge about mortgages Bank training schemes Home-owners education Affordable mortgage programs New mortgage and leasing law Product development Loan guarantees and 1 st loss schemes Underdeveloped real estate market Sales and transfers characterised by informal, inefficient process Inexperience Cultural preferences for finding housing through family and friends Development of specialized real estate agents, with broad portfolio of houses Sales + Rental 3 1 Based on expert interviews

5 Sustainable mortgage market growth is based on five key areas Opportunity IPE outlines significant potential for the housing and construction sector to grow in the next three years, with up to ~$2bn GDP impact ~150k new jobs 33,000 housing units built/year To achieve such an outcome would require ~$1.1bn/year in mortgage financing Challenges Mortgage market in Palestinian Territories is currently relatively undeveloped, with a base of ~$600m in 2013 Rapid growth in the mortgage market poses challenges, including Adequate legislative, but weak institutional framework Limited consumer understanding and awareness of mortgages Nascent underwriting capabilities, insufficient to support high growth Limited funding options for primary lending institutions Lack of secondary market Resolution Five key areas to support mortgage market growth 1. Enactment of mortgage law, capacity building in existing institutions 2. Building on the MMDP and PHEP initiatives for homebuyer education, ensuring local ownership (e.g. PMA or PMHC) 1 3. Standardized underwriting criteria, training of personnel 4. Establishment of mortgage liquidity facility, and increasing deposits and LTD ratio 5. Establishment of government or 3 rd party sponsored re-financing institution 4 1 MMDP = Mortgage Market Development Program, PHEP = Palestinian Homebuyer Education Program, PMA = Palestinian Monetary Authority, PMHC = Palestinian Mortgage and Housing Corporation

6 IPE proposes a step change in the number of housing units built, but variation is not uncommon in the housing sector Housing units 1 built in Palestinian Territories Number of units (000) Reference: PCBS % N/A Years 1-3: Estimated volumes based on PEI ambition level 1 Includes illegal units until based on actual construction based on permits issued, which PCBS considers a good approximation Assumptions in IPE IPE aims for construction of ~100K housing units in three years based on 3 assumptions 1 From 2007 to 2013, the average number of people per housing unit has increased from 5.4 to 6.0. Min. 25K units/year would have to be built to maintain this, and 40K units/year to reverse the trend 2 RAND arc study indicates that 32K units/year are needed to keep constant housing density. PCBS, UN and IPCC estimate demand at 25.40K units/year 3 Construction sector has proven capacity to build up to 33K units/year

7 Up to $1.1B would be needed in mortgage financing per year to support expansion of the housing market Value of annual housing construction ($ B) Total housing construction 1 Units sold w/o mortgages ~0.5 ~2.0 ~30% of units Based on demand segmentation, up to ~$0.2B per year of construction could enter a rental market An additional ~$0.3B per year could be purchased without mortgages Units sold w/ mortgages Household financing (down payments) Mortgage financing ~1.5 ~0.4 ~1.1 ~70% of units ~$1.1B per year is required for mortgage financing Existing affordable mortgage schemes (e.g. AMAL) could be revitalized to meet part of the need Potential partners include PMHC, OPIC, domestic banks, and other international partners 6 1 Includes developer profit margin; Calculated on the basis of 33,000 units per year 2 Assumes rental units are purchased without mortgages

9 There is scope to increase mortgage penetration to reach the IPE ambition PT needs to increase the mortgage market growth rate to reach the ambitious PEI target PT needs to increase the mortgage market growth rate to reach the ambitious PEI target Mortgage debt as percentage of GDP Percentage Current and estimated future outstanding mortgages in the Palestinian Territories USD millions US OECD average x 6.5x 3,900 South Africa Malaysia 32 Israel est. Japan 23 % of GDP Jordan Brazil 7 10 % of residential debt N/A India Palestinian territories 5 4 % of bank 6 7 N/A deposits References: 2011 or latest available, WMM (PT 2011), CESinfo (US 2010), Israel National Bureau of Statistics (2010), CIBC 2009 (others), National Mortgage Corporation (Malaysia 2012), EBRD (Jordan 2012) 2 Assuming 120m USD of outstanding loans in 2013 to be paid off by Total bank deposits

10 Challenges facing the Palestinian mortgage market Government Consumers Financial sector Questions Does the government have sufficient legal and regulatory capacity and capabilities to support mortgage market development? Will there be demand for housing financing? Do the consumers have sufficient understanding of the related risks and responsibilities? Can the base of borrowers be safely expanded with non-traditional credit scoring? Do PT mortgage lenders have sufficient HR capacity (e.g., underwriting) to increase the stock of loans? How do PT mortgage lenders compare with international benchmarks, e.g.: loan-to-value ratio? loan-to-deposit ratio? Will there be sufficient liquidity in the banking system to accommodate the rapid surge in mortgages? Challenges identified by stakeholders Adequate 1 legal and regulatory framework (e.g. foreclosure, insolvency) Inconsistent and inefficient application of written laws, and weak enforcement 2 Insufficient financial literacy among population, asymmetric information and lack of understanding of mortgages, resulting in limited demand Large percentage of population with no banking history (>50%) or assets to act as collateral (only 8% currently borrowing) Large areas under- or unbanked today Insufficient understanding of mortgage products (varies among banks, weaker understanding especially in rural areas) Nascent/emerging underwriting capabilities and standardized underwriting criteria Inaccurate valuation of collateral due to incomplete and asymmetric information about land (lack of price index) and land variations (A/B/C; tabo / non- tabo ) Limited funding options for primary lenders Under-developed capital markets complicate growth of institutional investors and FDI 1 Based on administrative foreclosure process, typically emphasizing protection of creditor rather than borrower rights (vs. judicial foreclosure process). 2 Reflects need for additional training of PLA, judiciary, banks and other key stakeholders 9 Reference: Expert interviews

12 Mitigating risk along the mortgage value chain Priority measure Heavy involvement Light involvement Potential stakeholder involvement Potential measures to mitigate risks PT Examples Banks Government 3 rd party Risk environment Distribution Processing Credit underwriting Funding Credit protection Securitization Legal and regulatory framework Institutional readiness Consumer education Training of sales personnel Products to answer consumer needs in developing countries Standardized application process Online application to speed up process and facilitate registration of information Standardized underwriting criteria Training of certified underwriting personnel Regular audits by government or 3 rd party institutions Increasing deposits base Affordable mortgage programs Down-payment credit support Government / 3 rd party guarantees and first loss schemes Extend mortgage insurance Re-financing company Securitization vs. Covered bonds Government or third party vs. private Draft mortgage law PMA, PCMA CHF, MMDP Mortgage products with long maturity, fixed rate CHF training of banking personnel MMDP training of underwriting personnel AMAL PMHC PMHC PMHC considering issuance of covered bonds Secondary market for MBS Servicing Mortgage based security product standardization to create liquidity in the secondary market Standardization of servicing procedures and collection Single point of contact in the bank N/A CHF training of banking personnel 11 Reference: Expert interviews

13 Five key areas to support mortgage market growth PRELIMINARY Key success factors Key activities and on-going initiatives Progress to target 1. Ensuring legal framework and institutional readiness to create a favourable risk environment 2. Increasing consumer awareness and understanding of mortgages 3. Improving underwriting capabilities of lending institutions 4. Ensuring suitable funding to lending institutions 5. Establishing government or 3 rd party sponsored re-financing institution Enactment of mortgage (including foreclosure) and leasing laws Ensuring institutional readiness of public and private sector key stakeholders Consumer education, building on existing initiatives of Palestinian Homebuyer Education Program, and CHF Mortgage Market Development Program Ensuring sustainability of the efforts, possibly through PMA or PMHC Establishing robust underwriting criteria, especially in aspirational underwriting context of PEI Training of underwriting personnel in the banking sector, building on CHF Mortgage Market Development Program Increasing the deposits base and LTD ratio Establishing a mortgage liquidity facility to provide short term liquidity and/or long term funding Leveraging government or 3 rd party guarantees, including 1 st loss schemes Initial development of the secondary markets for securities through the establishment of a government or third party sponsored re-financing institution 12 Reference: Expert interviews

14 1. Ensuring legal framework and institutional readiness to create a favourable risk environment Progress to target 2 Case example Potential learnings for PT 13 Indonesia Outstanding Housing and Apartment Loans USD billion % p.a Mortgage law (1996) No limit on the type of mortgage instruments used No legal requirement to use specific reference rates or caps on interest rates Prepayment of mortgages is allowed, and so is the use of pre-payment penalties Reserve requirements for mortgages were lowered in 2002 from 100% to 50% (in line with international standards) Banks are supervised by Bank of Indonesia, who also supports them in e.g. data standardization and collection Ministry of Housing, Bank Indonesia and Ministry of Finance established a Task Force in 2003 to coordinate and foster developments in housing finance Reference: Housing Finance Business Group, World Bank (2005) 1 Exchange rate 1 IDR = USD 2 Based on expert interviews Strengthen legal framework Description: Legal framework for creditor rights, including collateral systems, enforcement and registration. Legal framework for insolvency, based on the principles of rehabilitation and liquidation for maximum recovery On-going initiatives: Draft mortgage &leasing law Next steps: Enactment of mortgage &leasing law Ensure institutional readiness Description: Institutional readiness of the banking sector, including e.g. enabling legislation, and credit information systems. Court system, institutional and regulatory bodies setting standards and monitoring legislation On-going initiatives: PMA, PCMA, PLA and PMHC offering support, while court system requires enhancement to function effectively. Differences in level of maturity in banks. Next steps: Capacity building of the existing institutions, especially PLA, the judiciary and rural branches of banking system

15 2. Increasing consumer awareness and understanding of mortgages Progress to target 1 Case example Mexico Potential learnings for PT Improve homebuyer-education programs 14 Consumer education as part of legal framework Financial illiteracy of consumers is considered to be at the core of consumer vulnerability to abusive lending practices Mexico established a New Consumer Protection Framework in 2002 The law incorporates consumer education within the legal and regulatory framework, e.g. Focus on enforcement of disclosure and transparency Federal housing finance agency, SHF, is mandated to provide monthly comparative loan-offer information to consumers 1 Based on expert interviews Reference: Housing Finance in Emerging Markets, WB Description: Improve households understanding and awareness of housing finance options available to them, and the associated responsibilities, requirements and risks. Address cultural aversions to debt. On-going initiatives: Palestine Homebuyer Education program, CHF Mortgage market development program. National Strategy for Financial inclusion (AFI). Anecdotal evidence that homebuyers becoming more sensitive to interest rate or guarantor terms; shopping around among banks; and negotiating with banks (e.g., requesting banks to drop guarantor reqs) Next steps: Build on existing initiatives to increase consumer awareness, leveraging e.g. MMDP workshops and Homebuyer Workbook. Improve quality of training material. Ensure sustainability of efforts through involvement and ownership by local institutions, e.g. PMA / PMHC. Explore potential incorporation of homebuyer education in the consumer protection legal framework.

16 3. Improving underwriting capabilities of lending institutions Progress to target 1 Case example Potential learnings for PT China Home mortgages outstanding Percentage of GDP 3 +7p.p. 10 Standardize underwriting criteria Description: Robust and homogeneous underwriting criteria, with required adaptation to developing markets for collateral requirements etc. On-going initiatives: PMA credit scoring, new Responsible lending criteria (LTV, DTI) to mitigate risks Next steps: Enforcement and auditing of robust underwriting criteria as a condition to funding by third party or government mortgage liquidity facility, especially in aspirational underwriting context of PEI Mortgage underwriting services (2002) IFC invested in Advantage China Holdings Ltd to establish joint venture companies in China ACH Ltd helps banks to strengthen their underwriting capabilities in residential mortgage lending through assistance in borrower credit analysis, and contracted underwriting services IFC presence helped to provide the ACH Ltd with the credibility it needed to establish relationships with Chinese banks Credit Assessment capability building (2003) IFC Program run by Citibank and funded by the government of Japan training employees from 12 Chinese banks in credit evaluation Train of underwriting personnel Description: Technical assistance and education of underwriting personnel. Computerisation On-going initiatives: MMDP/IFC Next steps: Build on existing initiatives of IFC, e.g. training of managers and frontline staff and training of trainers Improve appraisal process Description: Inaccurate valuation of collateral due to incomplete and asymmetric information about land (lack of price index) and land variations (A/B/C; tabo / non- tabo ) On-going initiatives: PCMA-backed certification process, new instructions, training course, exams Next steps: Develop land price index, ensure continued appraiser training 15 1 Based on expert interviews Reference: Presentation in ADFIAP, 2003, Milken Institute

17 Comparison of underwriting criteria between Palestinian lenders and international benchmarks Key criteria International benchmarks Criteria for PT lenders Notes Maximum Loan-tovalue (LTV) ratio Maximum debt to income (DTI) 80-90% 85% normally, 90% if PMHC backed 30-40% 40-50% (PMHC: HDS 40%, TDS 50%) PT in line with international benchmark For households unable to finance 10-20% down payment, down payment credit support may be option Higher DTI ratios may be problematic at lower income Consumer willingness/ability to pay 40-50% needs to be tested with effective demand survey Minimum income for mortgages N/A USD /months 1 If USD 700 minimum, ~50% of population, given current income distribution, ineligible for mortgages If USD 1,000 minimum, ~60% ineligible Maturity years years, average 17 yrs Slow transition towards longer maturities Traditionally, with informal financing, 7-10 years pay back period Longer maturities key to affordability Credit history/ credit worthiness Data on payment history, size of debt etc., key in evaluating mortgage application Proof of fixed income (salary transfers etc), employed>1.5 yrs, utility bills PMHC initiative to establish credit history database Given PEI aspirational targets, segments without credit history will need to be eligible, thus requiring proxy measures and flexible approach by banks Collateral Property to be purchased Property to be purchased, 2 nd property, 1-2 guarantors Over-collateralization reduces access to finance and reflects lack of consumer awareness and insufficient regulation Restrictions on sales of property acquired N/A N/A, could be applied to If buyer sells unit within 1-5 years, banks take % of profit reduce speculation 2 Require buyers to take out mortgages Target audience Varies; move away from sub-prime since 2007 Aspirational, new segments, sub-prime? Increasing access to finance and driving construction growth may require sub-prime lending 1 $700 if PA employment, and 40% DTI, with all obligations paid. PMA allows lower income than $700/month, but banks typically do not. 2 In the case of implementation of PEI 16

18 4. Ensuring suitable funding to lending institutions Progress to target 2 Case example Indonesia Potential learnings for PT Increase deposits and LTD ratio 17 Million Houses National Movement (2003) Government provided mortgage subsidy to low income groups for building their own houses, known as Healthy Simple House (150k houses, ~$48k/house) Participating financial institutions were responsible for provision of required basic loan, while government provided required subsidy fund for interest difference and down payment 2004 target 120k houses, of which 80k were realized In addition to the subsidy, the program included a tax holiday for VAT (10% of house price >Rp40m) Description: An important base for funding mortgages around the world still predominantly funded by deposits. However, do not provide sufficient maturity On-going initiatives: Current growth rate Next steps: Increase branch penetration and LTD ratio Affordable housing programs Description: Non-banking institution providing short term funding and/or long term finance or subsidies 1 to primary lending institutions, aimed at specific target group On-going initiatives: AMAL, PMHC Next steps: Explore potential to build on existing initiatives, or establish new mortgage liquidity facility Loan guarantees & mortgage insurance Description: Non-banking institution providing guarantees for loans or mortgage insurance On-going initiatives: AMAL, PMHC Next steps: Explore potential to build on existing initiatives, or establish new mortgage liquidity facility, including larger scale 1 st loss schemes, guarantees, and insurance Reference: Presentation in ADFIAP, Subsidies can also directed to the developer to decrease the building cost, including covering off-site infrastructure 2 Based on expert interviews

19 Potential measures to increase deposit base and loan-to-deposit ratio Increase the number of branches and prioritize mortgage activities Population per branch 19,000 16,500 11,000 10,000 ~200 more branches (PMA target) implies ~10 000/ branch Increase marketing of mortgage products Increase number of staff dealing with mortgages Develop additional mortgage products Increase staff training in mortgage provision and underwriting criteria PT 2010 PT 2011 Jordan 6,500 Int l. UAE benchmark 1 5,000 Bahrain 5 Loosen tight lending criteria Minimize practice of overcollateralization, e.g., asking for excessive guarantees (salary guarantees in addition to house) Consider accepting less formal registration Increase mortgages originated in Area B 18 1 Average international benchmark based on expert interviews Reference: PMA Financial stability report 2011

20 5. Establishing government or 3 rd party secured re-financing institution Progress to target 2 Case example Malaysia Housing credit outstanding USD million 120, ,000 80,000 60,000 40,000 20, , % p.a. 25,952 77, , Targeted government efforts to create a secondary mortgage market in the 1980s, including publishing of pre-emptive guidelines to avoid moral hazard Establishment of Cagamas Berhad, later incorporated as the National Mortgage Corporation (1986) Leading issuer of AAA debt securities in Malaysia, and regarded as a success case example by the World bank Range of positive impact, including Generating strong competition among FIs to grant housing loans Providing long term liquidity to the financial sector Enhancing the quality of the capital market Providing an alternative form of investment in high quality Private Debt Securities (PDS) Developing the Islamic Finance and Sukuk market Potential learnings for PT Government / 3 rd party sponsored re-financing institution Description: Non-banking financial institution, sponsored by government or 3 rd party institution. Injects liquidity into the financial sector by buying mortgages, funded by securitization and sale of the MBS in international capital markets, and/or issuance of covered bonds. Solves for term mismatch. On-going initiatives: PMHC considering issuance of covered bonds, AMAL has explored possibility of securitization (however no short term action expected due to low volume of mortgages) Key next steps: Building legal and institutional readiness for the establishment of a government or third party secured re-financing institution. Ensuring development of primary market pre-requisites (e.g. standardization of underwriting criteria, high quality and standardization of servicing procedures and collection, and standardization of appraisals) and establishment of sound guidelines for the creation and bankruptcy remoteness of special purpose entities and mortgage bonds. Ensuring sound legal and regulatory framework for monitoring and surveillance. On-going discussions with PMHC and AMAL to understand status of initiatives and support needed Exchange rate 1RM = 0.31 USD 2 Based on expert interviews Reference: Cagamas Berhad