Housing Finance in Emerging Markets Washington DC – 16 March 2006 Washington DC – 16 March 2006 “Internationalisation of Covered bonds” Cristina Costa Senior Adviser - ECBC European Mortgage Federation

2  Founded in 1967 to represent mortgage lenders’ interests at EU level (retail & funding)  Groups national trade associations and credit institutions from EU Member States + acceding countries  New Member State membership: Czech Rep., Hungary, Latvia and Poland  Accession Country Membership: Romania  Just welcomed Ukraine as its latest member  Represents approx.75% of EU mortgage market  EU mortgage market amounts to approx. 49% of EU GDP

3 I.Mortgage Market Trends II.Covered Bonds: an attractive funding source III. Expansion of covered bonds IV. The Spanish Experience V.Case Study : Hungary VI. Outlook Agenda

4 EU Mortgage Market Trends  Mortgages Outstanding: Total value of outstanding residential mortgage loans EUR 5.2 trillion at end 2005 (c. 49% of GDP)  Growth: Average annual growth rate approx. 8% per year over the last 10 years. Growth is much higher in the New MS  Interest Rates: The introduction of the Euro has resulted in significant falls in mortgage interest rates, which in turn has stimulated the markets  House prices: Big price increases in most countries over past few years, but there are signs of house price growth slowing down around Europe  Regulation: Capital adequacy and European retail FS integration dominate the regulatory agenda  Funding: Diversified access to capital market funding is increasingly important; EMF launches ECBC to represent covered bonds

5 Mortgage Funding in Europe Covered bonds outstanding as % of mortgage debt outstanding (2004) Source: European Mortgage Federation

6 Special character of covered bonds Covered Bonds Specific legal framework/ Contractual provision Strict supervision High quality collateral Quasi-bankruptcy remoteness Preferential right of bondholders Separated collateral pools Source: ABN Amro

7 Cb Legislation Cb Legislation Geographical Overview - Covered Bond Legislation in Europe (as of January 2006) Legislation in countries of the EU/EEA/CH Legislation in future EU member and further countries in transition Concrete legislation in preparation Legislation under consideration 

8 Covered Bonds  Most European countries have adopted cb legislation  Competition has driven legislation to ever higher (safety) standards without sacrificing funding flexibility  No trend towards lowest common denominator  Regulated at EU level (Art. 22(4) of UCITS):  Issued by a credit institution  Subject to special supervision  Investment of proceeds effected in eligible assets  Outstanding issues covered by eligible assets until maturity  Priority claim of bondholders on subset of assets  Recently adopted CRD lists set of eligible assets

9 CB: an attractive funding source  For issuers Low funding costs Flexible alternative to deposits and senior bonds Possibility of extending the maturity profile of banks’ liability side to make it match with mortgage loans loan maturity  For investors Alternative to Government bonds (yield pick-up) Secure instrument in case of issuer insolvency - double protection (claim against issuer & cover pool) Higher liquidity due to large issue sizes and market maker commitments Geographic and asset class diversification

10 Record supply in European jumbo covered bonds Source: HVB

 Prior to 1976 (pre Franco), parallels with Eastern Europe  Laws date back to 1872 which saw first law allowing ‘Cédulas hipotecarias’.  Mortgage Law 1946 (legal & operational security)  Moncloa Pact 1977 (removal of obstacles)  1982 Mortgage Market Law  Securitisation law introduced in 1991  Spanish Economy:  Steady fall in unemployment from 26% to around 10%  Falling interest rates (Eurozone membership)  Cut National debt; Big increase in per capita income  Result - Housing, construction and Mortgage Markets booming The Spanish Experience

Covered Bonds in Spain  Almost 1/5 of mortgages funded by Cédulas, and 1/3 of new lending  In 2005, issuance highest in Europe surpassing that of Jumbo Pfandbriefe  Issuance open to all types of institutions (multi-sellers, direct)  80% LTV limit on residential or 70% for commercial property  Strengthening status & demand of cédulas through:  2004 Insolvency Act  2005 Modification to Withholding tax regime  Expected Jumbo issuance for 2006 is approximately EUR 58 Billion.

13 Spanish Multi-cédula structure Cédulas Issuers (a number of Savings Banks) CH AyT Cédulas Fund Portfolio of individual issues AyT Cédulas Cajas (Issuer) Investors Source: AyT, HVB CH Aaa/AAA/AAA Joint cédulas CH Liquidity Reserve & Protection Deposit

Lessons to be learnt from Spain Spanish Experience  Highest home ownership rate in Western World  Lowest State Housing in Western World  Thriving covered bond market and securitisation market  One of Europe’s fastest growing mortgage markets Achieved by…  Diversified Funding Strategy  Building programme to ensure supply of quality housing  Macro-economic reform  Solid primary market laws to ensure safety of collateral  Minimising State involvement

15 Housing & Mortgage Markets in Hungary vs. EU 25 and CEECs-2004 EU 25CEECsHungary Total value of residential loans, € million, (EU 25) 4,670,73631,4797,767 Residential Mortgage loans as % GDP 45.3%6.9%9.6% Residential mortgage loans per capita, € 000s (EU 25) Growth rates of residential mortgage market9.7%34.4%35.0% Home ownership63.5% Above 80% in many CEECs92.0% Outstanding covered bonds as % of residential mortgage lending outstanding 17.0%N/A63% Source: European Mortgage Federation, Hypostat 2004

16  Regulatory Environment: Legal framework – Mortgage Banking Act (1997) State subsidy scheme (introduced 2001)  Well developed system of refinancing partner banks through purchasing mortgages  3 covered bond issuers - FHB, HVB, OTP  CB fastest growing market (6% of GDP) - total outstanding volume EUR4.9bn (EMTN Programme)  Since 2004: market based development High HUF interest rates have turned clients towards FX-based products Current monthly net growth (30-35 billion HUF) seems to be sustainable Case Study: Hungary

17  Size of the domestic market Crowding-out effect of Govies (growing budget deficit)  Liquidity concerns Primary issues are relatively small (c. EUR50m) Secondary turnover is moderate  Less supportive macro environment Volatile interest rates and FX market  Growing role of foreign EUR issuances but majority of outstanding cb volume were domestic issues and HUF denomination  Cut in subsidy scheme and growing FX lending decreased the incentive of cb funding for non mortgage bank lenders Hungary: Challenges

18  European Mortgage Markets show no signs of slowing, especially in new member states  Continued Growth of covered bonds  Emergence of new issuers: IT, PT, NL, UK….  FSA to implement EU compliant cb regime; NL next.  Increased level of investor interest (CEE, Asia)  Continued work of ECBC Work on definition of common standards for covered bonds  European Commission working on European standard – funding likely to be one of the driving forces behind integration Launch of Expert Group on Funding Outlook 2006

Thank you! Tel: EMF website: Address: European Mortgage Federation Avenue de la Joyeuse Entrée, 14/2 Brussels 1040 Belgium