WORLD BANK FINANCE FORUM 2002 Chantilly, Virginia USA June 19, 2002 Presentation By: Pamela Lamoreaux - IFC Head Housing Finance Group – Global Financial Markets

Importance of Housing Finance Linkage Between Policy and Product Where Has it Worked – Colombia Experience Role of IFC Where Do We Go From Here? TODAY’S PRESENTATION

Role of Housing Finance/Capital Markets SOCIAL STABILITY:  Enables households to purchase an asset which will represent their largest single investment.  Personal residences account for 75-90% of household wealth worldwide, which amounts to 3 to 6 times their annual income.  Housing represents 40% of the monthly expenditure of households worldwide. ECONOMIC DEVELOPMENT:  Investment in housing accounts for 15-35% of aggregate investment worldwide.  Housing finance supports a successful economic sector, and frees personal savings which can be invested in small businesses.  Residential construction accounts for 5% of labor force worldwide, while real estate services (including finance) constitutes 4% of labor force worldwide. There is no dispute that housing finance and capital markets have tremendous development impact GLOBALLY.

FORWARD AND BACKWARD LINKAGES POLICY HOUSING PRODUCTS Land Reform/Usage Title/Lien Registration Taxation Transfer of Ownership Foreclosure/Bankruptcy Subsidies/Incentives Legal Framework (Real Estate, Banking, Trust, Securitization) Corporate Governance Supervision/Regulatory Oversight Infrastructure (water, electricity, Sewer) Active Construction Industry Primary mortgage lending Secondary markets Securitization Bond Market Development Rehab/Improvement Loans SME Lending Technology Peripheral Services (credit Bureau, title insurance, Appraisal, tax services)

Total Mortgage Credit COLOMBIA EXPERIENCE Size of Mortgage Banking Operations

Mortgage Banking COLOMBIA EXPERIENCE

Mortgage Banking COLOMBIA EXPERIENCE

Colombian Mortgage Banks’ Assets Benefits of Secondary Market Reduced balance sheet mismatch risk (UVR vs. DTF) More efficient use of capital Sharing or risks (credit, prepayment) Marketability of assets (liquidity) Increased servicing income Tax benefit Standardization of products, origination and servicing guidelines COLOMBIA EXPERIENCE SHORT-TERM (FINANCIAL SECTOR) LONGER-TERM (MARKETS) Increased mortgage lending (use of proceeds for lending vs. hold in portfolio) Lower mortgage rates to consumers (competition) Provide credit enhancements to market (guaranty) Ability to develop new non-UVR products More domestic and international interest from variety of investors (pension funds, life insurance, financial, retail)

POLICY ISSUES - HITOS ROLES OF THE GOVERNMENT CREATIONCORPORATE GOVERNANCE FINANCIAL/ BUSINESS CAPITAL MARKETS Sponsored TA (Fannie Mae) with input from World Bank to help determine appropriate capital adequacy and oversight guidelines for Colombia Supervalores as regulator will monitor capital adequacy and manage risks of corporation – TA provided by World Bank and others Fogafin guarantee program May offer public sector loans for sale to Hitos May be able to use Hitos MBS backed by social housing to meet 25% of origination guideline With input from World Bank and others implemented comprehensive Capital Market Law Appoint advisor to Board to represent various investors Anticipate favorable risk weighting for MBS May be eligible for repo program

Business Plan (US$ M) Mortgage sector Titularizadora Colombiana Outstanding Balance of Residential Mortgages 5,550 5,478 5,417 5,365 5,321 New Loans Mortgage Balance MBS Issuance Portfolio TC Mortgage Market Share 8% 14% 22% 30% 38% IMPACT OF HITOS COLOMBIA EXPERIENCE

The first issue of the Titularizadora Colombiana “ Hitos ” was made on May 2, The originator banks were: Davivienda, Colpatria, Granahorrar The total issue size was about UVR 3.8 billion, or $215 million: A senior class of bonds (Class A), in three tranches of varying maturities, 5, 10 and 15 years A subordinated class of bonds (Class B). The Class A bonds and the Class B bonds were rated ‘ AAA ’ and ‘ A ’ respectively, by Duff & Phelps Colombia. FIRST ISSUANCE: TIPS E-1

The issue involved the securitization of two types of mortgage loans rated as high quality performing loans: (i) Social housing loans (subsidized loans) 27% (ii) Non-social housing loans (non subsidized loans) 73%. In addition the structure included two kinds of guarantees: (i) A Colombian Government direct guarantee on the securities issued based on social housing loans (ii) An IFC credit enhancement facility in the form of a local currency partial guarantee to the Class A bonds. FIRST ISSUANCE: TIPS E-1

The MBS issue of the Hitos was a complete success in the market. Million USD Serie ATotal DemandTotal IssuanceCover Ratio , ,122, ,14, Total466,952,48.90 FIRST ISSUANCE: TIPS E-1

COLOMBIA EXPERIENCE Political risks (change of mortgage laws, terrorism) Unstable macroeconomic environment Increased levels of mortgage lending or creation of new specialized lending institutions (competition) Untested foreclosure laws (some pending civil suits) that could prove to be problematic for Hitos Investor education Inability to develop active secondary trading of MBS, continues to be swap and hold (not in line with government expectations for growth of markets) Regulator could establish regulatory guidelines (capital adequacy, liquidity ratios etc.) which inhibit business Regulator could establish oversight regime that is intrusive and provides too much information to markets Challenges Ahead

“HOUSING THE WORLD” GLOBAL ROLES FOR IFC FUNCTIONING HOUSING FINANCE SYSTEM FUNCTIONING CAPITAL MARKET SYSTEM EQUITY WAREHOUSE LINES LOANS GUARANTEE TRAINING STRUCTURING TRANSACTIONS ASSESSMENT OF MARKETS TECHNICAL ASSISTANCE

Where have we helped? CURRENT HOUSING FINANCE PROJECTS Secondary Market Institutions Primary Market Institutions On-LendingCapital Market or Structured Finance Argentina – BACS Colombia – Hitos Korea – KoMoCo West Bank/Gaza – PMHC Caribbean - ECHMB Argentina - BHN Bangladesh – Delta BRAC China – Advantage China India – HDFC, Sundarem, TATA Mexico – General Hipotecaria, Su Casita Korea – Primary Market Corporation Pakistan – IHFL Senegal – BHS South Africa – South Africa Home Loans (SAHL) Sri Lanka – NDB Bulgaria - BACB Estonia – Eesti Uhispank Russia – Delta Credit Lebanon – Librano Francaise, Bylblos Bank, Fransabank, BBAC Brazil – MSF Holdings India – NIIT and NHB,, Korea - SOGEKO, KoMoCo, KDLC South Africa – Kiwane and SAHL Turkey-Garanti Leasing

WHERE DO WE GO FROM HERE? COUNTRY ASSESSMENT DEVELOP STRATEGY LEVERAGE RESOURCES