Liquidity Facilities in Emerging Economies Housing Finance in Emerging Economies Loïc Chiquier The World Bank March 10-13, 2003

2 Liquidity Facilities Issue Bonds, Refinance Mortgage Lenders Issue Bonds, Refinance Mortgage Lenders Help to reduce liquidity and interest rate risks Help to reduce liquidity and interest rate risks (maturity matching, circumstantial back-stop) (maturity matching, circumstantial back-stop) Minimum risk exposure (limited counterpart risk and market risk, diversified low-risk mortgages as collateral), credit risk to primary lenders (over- collateral refinance or purchase with recourse) Minimum risk exposure (limited counterpart risk and market risk, diversified low-risk mortgages as collateral), credit risk to primary lenders (over- collateral refinance or purchase with recourse) Issue attractive bonds (low risk, sizeable, hopefully liquid, and regular issuance) Issue attractive bonds (low risk, sizeable, hopefully liquid, and regular issuance)

3 Liquidity Facilities (II) Cheap, robust, simple, secure system to mobilize private bonds and to insure liquidity access to more mortgage lenders with economies of scale. Cheap, robust, simple, secure system to mobilize private bonds and to insure liquidity access to more mortgage lenders with economies of scale. Less demanding than securitization about legal, regulatory, standards infrastructure, but also more limited ALM capacities (and more capital needed). Less demanding than securitization about legal, regulatory, standards infrastructure, but also more limited ALM capacities (and more capital needed). Compatible with multiple lenders (specialized or not, depositories,etc.) and alternative funding tools, but not panacea funding solution. Compatible with multiple lenders (specialized or not, depositories,etc.) and alternative funding tools, but not panacea funding solution.

4 Liquidity Facilities (III) Prerequisites Prerequisites  Relatively stable macro economic conditions  Active and comprehensive homeownership housing policy (effective legal and regulatory framework for private markets to operate, targeted efficient social housing instruments)  Deregulated financial markets  Transactions exempted from stamp duties/fees  Developed bond market infrastructure Transition role to SMM conduit (HMC Trinidad) although adaptability challenges. Transition role to SMM conduit (HMC Trinidad) although adaptability challenges.

5 Liquidity Facilities (IV) Catalyst liquidity role rather than direct engine (limited impact on FRMs, residual market risks) Catalyst liquidity role rather than direct engine (limited impact on FRMs, residual market risks) Tricky corporate governance client/lender/investor Tricky corporate governance client/lender/investor State support both as investor and bond guarantor (often implicitly): Malaysia, Jordan, Trinidad State support both as investor and bond guarantor (often implicitly): Malaysia, Jordan, Trinidad Gradual privatization FHLBs by members-users French CRH: state bond guarantee for three years Rather regulatory/supervisory tool than object, although concentrated risks and debt leverage Rather regulatory/supervisory tool than object, although concentrated risks and debt leverage

6 JMRC in Jordan Jordan: small and open economy, with a small pre-1998 HF system (privileges Housing Bank) Jordan: small and open economy, with a small pre-1998 HF system (privileges Housing Bank) Since 1998: JMRC operations to develop sound, competitive, and affordable mortgage industry Since 1998: JMRC operations to develop sound, competitive, and affordable mortgage industry Mixed public-private capital (18% owned by CBJ) Mixed public-private capital (18% owned by CBJ) Refinance participatory eligible banks Refinance participatory eligible banks Keeps at least 120% over-collateralized mortgages (LTV< 80%, main residence purpose, fee-exempted transferred mortgage deeds, replacing collateral if needed) Keeps at least 120% over-collateralized mortgages (LTV< 80%, main residence purpose, fee-exempted transferred mortgage deeds, replacing collateral if needed) Issues private bonds (3-5 Y) and short-term notes Issues private bonds (3-5 Y) and short-term notes Conservative risk management policy Conservative risk management policy

7 JMRC (II) Attractive refinancing and ALM tool for banks (exempted statutory reserves, better regulatory treatment of refinanced loans) Attractive refinancing and ALM tool for banks (exempted statutory reserves, better regulatory treatment of refinanced loans) Attractive fixed-rate bullet-bond bonds for investors (social security fund, banks) Attractive fixed-rate bullet-bond bonds for investors (social security fund, banks) Bonds eligible to bank liquidity reserves, 20% risk-weighted for capital adequacy Bonds eligible to bank liquidity reserves, 20% risk-weighted for capital adequacy Catalyst mortgage growth (8,000 loans, 8 banks) Catalyst mortgage growth (8,000 loans, 8 banks) Smooth re-directed banking strategy of the HB Smooth re-directed banking strategy of the HB

8 JMRC (III) Improved housing credit affordability (20 years terms, max. LTV 75%, 10%-13% rates) Improved housing credit affordability (20 years terms, max. LTV 75%, 10%-13% rates) Budgetary relief (refinance public housing loans) Budgetary relief (refinance public housing loans) Mortgage lending regulatory safeguards Mortgage lending regulatory safeguards Regular issuer of low-risk private securities (implicit state guarantee) Regular issuer of low-risk private securities (implicit state guarantee) Prudential lending activities (de facto 153% over- collateral portfolio), effective cost recovery Prudential lending activities (de facto 153% over- collateral portfolio), effective cost recovery Key to develop new scheme for low-income civil servants (5% buy down, social housing) Key to develop new scheme for low-income civil servants (5% buy down, social housing)

9 JMRC Perspectives (IV) Needed Islamic housing debt window (refinance/purchase) Needed Islamic housing debt window (refinance/purchase) Needed fixed-rate mortgage markets and longer- term bonds (lack of Government benchmarks) Needed fixed-rate mortgage markets and longer- term bonds (lack of Government benchmarks) Further gains in credit affordability (credit rates) Further gains in credit affordability (credit rates) Non-recourse purchase of mortgage pools and issue of MBS (needed effective external MI program) Non-recourse purchase of mortgage pools and issue of MBS (needed effective external MI program) Possible privatization Possible privatization

10 Malaysia Cagamas Berhad (I) Created in 1987 after liquidity crunch and recession to provide more liquidity to mortgage lenders, reduce market risks, assist social housing finance, sustain construction sector, develop private fixed-income markets (now 16.6% share) Created in 1987 after liquidity crunch and recession to provide more liquidity to mortgage lenders, reduce market risks, assist social housing finance, sustain construction sector, develop private fixed-income markets (now 16.6% share) Cagamas purchases mortgage loans from lenders with recourse and obligation to repurchase (review periods: 3,5,7 years). Cagamas purchases mortgage loans from lenders with recourse and obligation to repurchase (review periods: 3,5,7 years). Cagamas debt amortized independently from mortgage pools (just collateral) Cagamas debt amortized independently from mortgage pools (just collateral)

11 Malaysia Cagamas Berhad (II) Islamic Islamic finance window (purchase of deferred payments sales and housing leasing contracts) Islamic Islamic finance window (purchase of deferred payments sales and housing leasing contracts) Cagamas issues matching term debt (variable-rate loans, fixed-rate securities) Cagamas issues matching term debt (variable-rate loans, fixed-rate securities) Cagamas as regular rated-AAA issuer Cagamas as regular rated-AAA issuer

12 Malaysia Cagamas Berhad (III) Central Bank (BNM) key investor (20%) as policy tool, capital diversified with 74 fin. institutions, Board chaired by BNM Deputy Governor. Central Bank (BNM) key investor (20%) as policy tool, capital diversified with 74 fin. institutions, Board chaired by BNM Deputy Governor. Incentives to lenders (exempted reserves) exposed to social housing lending quotas and rate ceiling. Incentives to lenders (exempted reserves) exposed to social housing lending quotas and rate ceiling. Incentives to bond investors (eligible to bank and insurance reserves, 10% risk-weighted) Incentives to bond investors (eligible to bank and insurance reserves, 10% risk-weighted) Limited role to renewed short-and medium term refinancing of variable rate mortgage credits Limited role to renewed short-and medium term refinancing of variable rate mortgage credits

13 Malaysia Cagamas Berhad (IV) Catalyst of booming mortgage lending (banks and finance companies) Catalyst of booming mortgage lending (banks and finance companies) Outstanding housing through banks: 21.7% GDP Outstanding housing through banks: 21.7% GDP THLD public originator as important initial user THLD public originator as important initial user Successful expansion of demand-driven products after 1992 (fixed/variable rate, maturities, recourse /non- recourse, Islamic debt, leasing/commercial property, etc.) Successful expansion of demand-driven products after 1992 (fixed/variable rate, maturities, recourse /non- recourse, Islamic debt, leasing/commercial property, etc.) Profitable institution, maybe monopolistic GSE ? Profitable institution, maybe monopolistic GSE ?

14 Malaysia Cagamas Berhad (V) Cagamas successful through its counter-cyclical liquidity role for the markets (“buffer”), and help lenders meet housing lending requirements Cagamas successful through its counter-cyclical liquidity role for the markets (“buffer”), and help lenders meet housing lending requirements Cagamas own mortgage market share normally fluctuates (up to 41% in 1997 as buffer to crisis, now down to 18%) Cagamas own mortgage market share normally fluctuates (up to 41% in 1997 as buffer to crisis, now down to 18%) Less business recently: liquid banks, lower market rates, possible direct securitization by banks Less business recently: liquid banks, lower market rates, possible direct securitization by banks Recent and gradual shift to conduit model Recent and gradual shift to conduit model But some lenders reluctant to securitize secure and profitable variable-rate mortgage assets, investors want higher yields for longer term amortizing debt, (plus adaptation to regulations, standards)