4 th Global Conference on Housing Finance in Emerging Markets Global Housing Finance after the Crisis Mortgage Refinance Facilities Recent Experiences May 26-27, Washington, D.C. By: N. Kokularupan Consultant, Housing Finance International Finance Corporation 1
Table of Contents Housing Finance in Emerging Markets Capital Markets in Emerging Economies Funding Models for Mortgage Finance Alternatives to Securitization? Typical Business Model Objectives of a Liquidity Facility Preconditions for establishing a Liquidity Facility Some examples of Liquidity Facilities Experiences of some of the Liquidity Facilities during financial crisis Role played by Liquidity Facilities Important considerations in setting up of Liquidity Facilities Conditions for success Lessons 2
Housing Finance in Emerging Markets Housing finance generally underdeveloped in emerging economies. Housing finance is deposit based. Market loans typically small and poorly accessible. Lenders are subject to interest rate, liquidity and credit risks. Housing finance is expensive. Population growth and urbanization calls for the development of long-term sustainable housing finance systems. 3
Capital Markets in Emerging Economies Capital markets are underdeveloped with few capital market instruments. However, they provide an important source for long-term funding. Pension and provident funds and insurance companies can play an important role in providing long-term funds to primary lenders. 4
Funding Models for Mortgage Financing Deposit Base Securitization Covered Bonds Liquidity Facility Focus of Paper is on Liquidity Facility. Deposits, in particular core deposits will remain important source of funding especially if mortgage rates are variable rates. No one model is the best. All models should be considered in the context of the macroeconomic environment, development of the primary mortgage market and capital markets. 5
Alternatives to Securitization? Liquidity Facility An institution that provides short-term liquidity, long-term funding or guarantees to mortgage lenders. Acts as intermediary between lenders and capital markets. Issues bonds to raise long-term finance. Purchases mortgage loans with recourse or refinances with recourse. Low risk, simple institution. 6
Liquidity Facility A Liquidity Facility: Reduces cost of funding and provides longer term maturities. Allows smaller lenders to access capital markets. Creates greater competition. Risk management tool for lenders. Provides investment avenue for insurance companies and pension and provident funds. 7
Typical Business Model Short-Term Refinance/Purchase mortgages loans with recourse to primary lenders. Refinance/Purchase based on interest review periods. Issue unsecured debt securities (bonds). Medium-Long Term (timing depends on pace of development of primary and secondary mortgage markets) Help establish the foundations of a sound securitization market (standardization, transparency, master servicer role, etc.). Issue secured mortgage-backed securities (MBS) and Sukuks. 8
Objectives of a Liquidity Facility 1. Develop the Primary Mortgage Market Provide financial resources to enable primary lenders to grant more loans at fixed rates and for longer tenures. Ensure BASEL II compliance by primary lenders by narrowing the gap between the maturity structure of the housing loans and the source of funds. Ensure loan standardization across primary lending institutions which is necessary for any future securitization. 2. Develop the Capital Market Provide more private debt securities (Bonds) with different maturities and rates for investment of surplus funds. Promote ABS as a tool for raising funds from the capital market. Create a Yield Curve to serve as a benchmark for other institutions. 9
Preconditions for establishing a Liquidity Facility Some motivation for financial institutions to refinance/sell their mortgage loans. Sufficient demand for and supply of housing and housing finance. A functioning primary mortgage market. Critical mass (will vary from market to market) of eligible mortgage loans. Ability to effectively assign/transfer mortgage loans. Existence of a capital market and an investor base. Commitment by the Central Bank and/or Government to initially take a minority ownership in the Liquidity Facility to lend credibility to the Liquidity Facility in its operations. 10
Some Examples of Liquidity Facilities: USA : Federal Home Loan Banks (FHLB) France : Caisse de Refinancement de Hypothecaire (CRH) Malaysia : Cagamas Indonesia : SMF Jordan : Jordan Mortgage Refinance Company Egypt (JMRC) : Egyptian Mortgage Refinance Company (EMRC) Trinidad & Tobago : Home Mortgage Bank (HMB) Armenia : National Mortgage Company (NMC) Tanzania : Tanzania Mortgage Refinance Company (TMRC) Pakistan : Pakistan Mortgage Refinance Company (PMRC) (On-going) 11
Experiences of Liquidity Facilities during financial crisis Discuss experiences of some of the Liquidity Facilities during the Asian Financial Crisis of 1997-1998 and the Financial Crisis of 2007-2008 12
Role played by Liquidity Facilities What is the role played by Liquidity Facilities and going forward, what is their expected role? 13
Important Considerations in setting up Liquidity Facilities Ownership Structure and Government Support Regulation Corporate Governance 14
Ownership Structure and Government Support Cooperative approach (joint ownership by primary lenders) and Government participation. Government either shareholder or takes a lead role in creation of the Liquidity Facility. Government can provide explicit or implicit guarantee to the bonds or alternatively grant some concessions. Sunset provision for concessions and Government participation. 15
Regulation Transparent and effective regulation of Liquidity Facilities (LF) key to building confidence in the bonds issued by LF. Given unique role of LF, difficult to determine the Regulators. Role of Regulator to include powers to review financial information, review risk management practices, monitor capital adequacy and assess quality of management. 16
Corporate Governance Usually quasi-governmental institutions with clear market objectives. Customers are also shareholders creates conflicts. Risks more limited if the public sector is represented by the Central Bank. Ideal solution is for LF to be treated as Public-Private partnerships with commercial mandate and limit the control the public sector can exercise. 17
Conditions for Success Support from the Banking Authorities To encourage the primary lenders to obtain refinance from the Liquidity Facilities (LF) To encourage primary lenders to invest in the LF s bonds/securities Support from the Capital Authority To facilitate issuance of bonds/securities by the LF To encourage investment in LF s bonds/securities Support from the Revenue/Tax Authority Excellent rating Support from the users Good governance 18
Lessons A tool well-fitted to a nascent housing finance market: Simple Secure Catalyst for mortgage market development Instrument for deepening the bond market Can be a first step to move sophisticated funding instrument, in particular by promoting the preliminary standardization and quality of the primary mortgage market Key conditions: existence of a mortgage market, corporate governance and regulations 19
Disclaimer: Views in this paper are solely that of the author. 20