Housing Finance in Turkey November 17, 2005, Istanbul Loïc Chiquier The World Bank Housing Finance Business Group Financial Sector Operation and Policy Department

International Trends Multiple socio-economic benefits of a sound and affordable HF system set as a national priority (ex: Mexico vs. Brazil) Mortgage markets integrated within financial sector and more global (investors, insurers, refinancing, lenders) Models to be tailored to national realities; as markets expand, risks to manage & regulate, consumers to inform Contrasted results in market depth and penetration EU-15 mortgage debt 47% GDP; 4%-20% accession Progress in other countries (Mexico, India, China, etc.) Accessibility issues: low/undocumented incomes, equity Turkey CMB objectives 8% GDP look feasible according to international benchmarks. Of course acceleration would depend on future perspectives of EU convergence. Most international lenders/insurers may be present through distinguished audience. Recently observed move of several global finance groups (BBVR, Citi, GE, SC, GMAC, HDFC) active as mortgage lenders in emerging economies.

A Promising Evolution in Turkey Strong housing demand backed by urbanization pressure, housing stock to be replaced, housing as preferred investment by a growing population (plus reduced household size) More favorable macroeconomic conditions but stability to be preserved (ex: EU convergence effect in South EU countries) Competing / innovating private lenders (driven by retail banking and further cooperation with construction industry) Expanding portfolio ($ 6 billion) as credit rates decline (1.2% monthly) and maturities extend, yet large room for expansion Favorable market expectations about the draft law which was improved through consultations and TA (FIRST sponsored) Considerable to stock of poor quality to replace (Mc Kinsey report). Portugal mortgage markets rose from 5% to 48% GDP within a decade. Portfolio close to 2% GDP. Nearly doubled in 6 months. Rates a year ago at 2.3% monthly now nearly divided by two. Maturity up to 20 years, but average less 5 years.

Key Aspects of the Draft Law Strengthened foreclosure proceedings Improved appraisal standards Adjusted consumer information rules Induced competition (non-banks after a transition period?) No mortgage market distorting subsidies (other state roles) Expanded range of mortgage credit products facilitated funding and risk management -> affordability gains capped ARM & longer-term FRM (limited prepayment fee) Bond funding instruments diversified choice for different needs (MBS, cover bonds, MFC conduits / liquidity facilities) Consumer info superior to non enforced code conduct. Not a luxury good when business practices are observed in other countries. Example CHF loans in Poland. Debatable 2 year transition for non banks, but needed adjusted BRSA regs and funding dependence on bonds (needed active MFC with 20 million as min. initial equity). Still low ratio mortgage loans/ deposits (<5%) but widening maturity gap. Best practice in terms of recent agnostic law.

Challenges Ahead (I) Continuous steady expansion of mortgage markets, but emerging risks (ex: prepayment) and market testing phase Macro stability vital to essential TL mortgage markets Consistent secondary regulations needed for lenders, mortgage securities and MFCs (capital adequacy, matching rules, investment rules, ARM indices and caps,…) Needed larger, seasoned and standardized primary markets before securitization, dissuasive anyway for many lenders Possible catalyst conduit role of a centralized MFCs, but question about capitalization (for which risk exposure?) Example emerging risk: credit risk with high LTV, high prepayment risks still to manage (low 2% indemnity fee). If mortgage market keep expanding in sound way, virtuous effects on economic growth. Consistent regulations require close coordination between CBT, BRSA, CMB. Major question: is there a national housing policy and who is leading ?

Challenges Ahead (II) Large banks logically prefer to transform their deposits into TL ARMs or to issue cover bonds through Euro markets Key to mobilize long-term funds from growing Turkish investors (pension funds) and develop a TL yield curve Needed data about housing transactions and prices Modernization of the Title Registry Housing policy to fight against supply inertia (access to land, subsidies, rental markets, residence permits, construction finance, transaction costs, urban development norms, etc.) Example emerging risk: credit risk with high LTV, prepayment risk when issued bond. If mortgage market keep expanding in sound way, virtuous effects on economic growth. Consistent regulations require close coordination between CBT, BRSA, CMB. Major question: is there a national housing policy and who is leading ?

Other Tools for HF Accessibility (I) Mortgage Credit Insurance for Lenders Credit risk management tool for lenders -> greater credit accessibility (not always lower rates) Higher LTV loans and/or riskier borrowers External enhancement for mortgage securities Exposure to long-term real estate cycles + adverse selection  specific insurance activities and regulations Implemented in 30 countries (mixed results) Share risk with lenders and borrowers, actuarial pricing Develop when expressed needs by maturing markets Various forms of public private sponsorship (pioneer role)

Other Tools for HF Accessibility (II) Housing Savings Build up creditworthiness (lower & informal income) Various models between savings / credits (limit the risks) Limit and target any related program of subsidies Housing Micro-Finance Micro finance answer (proximity, collateral, small size, etc) to inaccessible conventional mortgage finance Non bank lenders (MFI, NGOs) but interested banks (yield) Rather finance home improvement, progressive housing Issues: land security, funding, expensive rates, etc.