1 IUHF World Congress June 25, 2004 Lessons from Best International Practices Loïc Chiquier The World Bank Housing Finance Business Group Financial Sector Operation and Policy Department

2 Housing Finance in Emerging Economies Visible and recognized socio-economic impacts Visible and recognized socio-economic impacts Higher policy and political priority Higher policy and political priority Growing urban demand for housing Growing urban demand for housing Housing price vs. credit affordability issue: no housing finance miracle when inelastic housing supply, high HPI ratios (from 3 to 16), informal “dead” assets Housing price vs. credit affordability issue: no housing finance miracle when inelastic housing supply, high HPI ratios (from 3 to 16), informal “dead” assets Gradual market-base integration through financial sector (liberalization, reforms of closed circuits / public lenders, mortgage securities, leverage for the best or the worse) Gradual market-base integration through financial sector (liberalization, reforms of closed circuits / public lenders, mortgage securities, leverage for the best or the worse)

3 Housing Finance in Emerging Economies Credit and market risks to be managed and regulated Credit and market risks to be managed and regulated Contrasted results: mortgage debt from 0% to 20% GDP Contrasted results: mortgage debt from 0% to 20% GDP Mainly national primary mortgage markets Mainly national primary mortgage markets Path dependent process, multiple products & models Path dependent process, multiple products & models Foreign models need to be adjusted, lessons to be learned Foreign models need to be adjusted, lessons to be learned Permanent need for knowledge sharing (IUHF role) Permanent need for knowledge sharing (IUHF role)

4 Housing Finance Reforms: Don’t skip the basics Long-term macro stability (inflation, incomes, rates) Long-term macro stability (inflation, incomes, rates) Effective collateral and foreclosure Effective collateral and foreclosure Competition and innovation through private sector Competition and innovation through private sector Development of domestic capital markets & investors Development of domestic capital markets & investors Role of the State: regulator, infrastructure, catalyst Role of the State: regulator, infrastructure, catalyst Subsidies: effective, transparent, targeted ? Subsidies: effective, transparent, targeted ? Better risk management and funding tools Better risk management and funding tools Achievable productivity gains Achievable productivity gains Credit design adapted to market realities: FRM sometimes a luxury good (--> mortgage securities) Credit design adapted to market realities: FRM sometimes a luxury good (--> mortgage securities) Non-depository lenders if access to capital markets Non-depository lenders if access to capital markets Lending regulations + selective consumer information Lending regulations + selective consumer information What about infrastructure, construction, rental finance ? What about infrastructure, construction, rental finance ?

5 Savings Products Savings Products –Build score-equity for lower informal income groups –Adjust parameters and financial management –Avoid institutional rent-seeking dependence Housing micro-finance Housing micro-finance –Outreach (home improvement, progressive housing) –Specific and profitable lending, but its own limits Credit/Pool Insurance Credit/Pool Insurance –Improved affordability, reallocated risks, reduced subsidies, external enhancement for m. securities –No 100% coverage, no monopoly, no state garbage –Actuarial pricing and reserves, monoline regulations –Possible state sponsorship (systemic risks, sunset)

6 Slow Development of Mortgage Securities Slow Development of Mortgage Securities Still dominant model: transformation of deposits Still dominant model: transformation of deposits Not much funding leveraged but growing opportunities (public debt, growth investors, mortgage markets) Not much funding leveraged but growing opportunities (public debt, growth investors, mortgage markets) Various effective models to transfer market and prepayment risks (from borrowers to investors)? Various effective models to transfer market and prepayment risks (from borrowers to investors)? Few confirmed successes (Chile, Colombia, Malaysia) but promising evolution in several other countries Few confirmed successes (Chile, Colombia, Malaysia) but promising evolution in several other countries Delays and costs related to MBS pre-requisites (laws, regulations, data, standards, sizeable and competitive primary markets, attractive yields, willing sellers, etc.) Delays and costs related to MBS pre-requisites (laws, regulations, data, standards, sizeable and competitive primary markets, attractive yields, willing sellers, etc.) Civil code vs. common law legal systems Civil code vs. common law legal systems

7 Slow Development of Mortgage Securities Slow Development of Mortgage Securities Often overlooked regulatory package (ex: repo) Often overlooked regulatory package (ex: repo) Other efficient “simple” models: direct sales, cover/mortgage bonds (pass-through vs. overcollateralized), liquidity facility Other efficient “simple” models: direct sales, cover/mortgage bonds (pass-through vs. overcollateralized), liquidity facility Trade off simplicity vs. complexity (costs vs. ALM) Trade off simplicity vs. complexity (costs vs. ALM) Evolutionary process Evolutionary process Several doors open as different needs (ex: Colombia) Several doors open as different needs (ex: Colombia)