HOUSING FINANCE IN EMERGING MARKETS Policy and Regulatory Challenges Sponsored by World Bank March 10-13, 2003 Case Study of Korea by: Pamela Lamoreaux – Manager Housing Finance Group – Global Financial Markets - IFC

2 REGULATORY FRAMEWORK PRE-1997 Heavily regulated by government Interest rates regulated Control of residential price of housing – trying to avoid speculation and increase affordability Uniform price ceiling in 1977 (regardless of size of property), revised in 1985 to reflect size of property 1989 price was indexed to cost of production – to stimulate production No foreign ownership of property – relaxed in 1998

3 REGULATORY FRAMEWORK POST-1997 Interest rates deregulated Privatization of Korea Housing Bank to Housing and Commercial Bank (merged with Kookmin in 2001 to create Kookmin Bank) ABS and MBS Laws 1999 – support all asset-backed securitization MBS Company Act 1999 – establishment of special purpose corporations to issue MBS MBS Tax Reduction Plan – MOF is planning to deduct portion of the tax rate for small-sum purchasers of MBS to encourage retail buyers Non-construction Zone Deregulation – government plans to loosen restrictions placed on non-construction zones to support increased construction and real estate business Housing Plan – Ministry of Construction and Transportation has announced plans to finance new construction of 500,000 to 600,000 houses for 3-years to assist low-income buyers and renters

4 IMPACT OF DEREGULATION  Increase in mortgage originations  Stabilization of housing prices  Steady production of new housing  Creation of non-banking lending institutions (mortgage banks)  Creation of KAMCO to address NPL problem  Creation of KoMoCo – secondary market institution  Most active securitization program in region – including participation of foreign investors in MBS

5 SIZE OF MARKETS Housing price and Chonsei deposit of Korea house Seoul, Purchase Price 1,803 2,0091,6181,758 Seoul, Chonsei Deposit New towns, Purchase Price1,3181,7181,4361,636 Source: Bu-dong-san Bank (thousand won per 3.3 sq. meters) (Thousand won per 3.3 sq. meters)Nov Oct. 97 Nov. 98Aug.99 New towns, Chonsei Deposit Exchange Rate (won/$) ,2341,185 Notes: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing & Commercial Bank. Housing Price and Chonsei Deposit of Korean Homes

6 SIZE OF MARKETS Housing price and Chonsei deposit of Korea house year Q1Q2Q3Q4 yearQ1 Housing prices (all cities) ” (Apartment of Seoul ) Housing rents (all cities ) ” (Apartment of Seoul ) Notes: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing & Commercial Bank. Trends of Monthly Real Estate Prices Increase Rate Note: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing and Commercial Bank

7 SIZE OF MARKETS Housing price and Chonsei deposit of Korea house year Q1Q2Q3Q4 yearQ1 Housing prices (all cities) ” (Apartment of Seoul ) Housing rents (all cities ) ” (Apartment of Seoul ) Notes: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing & Commercial Bank. Trends of Monthly Real Estate Prices Increase Rate Note: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing and Commercial Bank

8 SIZE OF MARKETS Housing price and Chonsei deposit of Korea house Notes: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing & Commercial Bank. Outstanding Mortgage to GDP Ratio of Korea, US, UK, and Japan

9 SIZE OF MARKETS Housing price and Chonsei deposit of Korea house Notes: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing & Commercial Bank. Size of the Primary Mortgage Market (Unit: Trillion Korean Won) Outstanding Balance of Mortgage Loans New Origination of Mortgage Loans Gross Domestic Product (GDP) A/C11.7%12.5%12.7%13.0% 13.4 % Note: 1) For 2000, life insurances are not included. For 2001, life insurance companies and installment finance companies are not included B/C3.0%2.7%3.5%4.1%5.4% Source: Bank of Korea; Kookmin Bank

10 SIZE OF MARKET ITEM PUBLIC SECTOR NHF ACF (1) 50% 7% 50% 4% 48% 4% 53% 4% 56% 4% 56% 3% 55% 3% PRIVATE SECTOR BANKS NON-BANKS (2) 41% 2% 41% 5% 39% 10% 37% 6% 36% 5% 39% 1% 42% N/a MARKETSHARE OF KOOKMIN BANK TOTAL PRIVATE SECTOR BANKS 41% 96% 100% 38% 82% 92% 35% 72% 92% 34% 79% 92% 32% 79% 90% 35% 86% 88% 36% 85% TREND IN SHARE OF MORTGAGE MARKET BY SECTOR AND LENDER GROUP (Based on Outstanding Balance as of End of the Year) (1)Agricultural Cooperative Federation (2)Life insurance companies and installment finance companies. Y2000 life insurance not included Source: Kookmin Bank

11 Overview of KoMoCo Ownership Structure  Ministry of Construction & Transportation 28.64%  Housing and Construction. Bank 14.27%  Kookmin Bank 14.27%  KEB 14.27%  Samsung Life Ins. Co. 9.51%  IFC 9.51%  KML Holdings (Merrill Lynch affiliate) 9.51% Date of Incorporation September 1999 Incorporated as a financial institution and regulated by FSS under the MBS Act enacted in December 1999 Paid-in Capital (as of 12/31/00) KRW 105 billion (USD 82 million)

12 KOMOCO ROLE OF THE GOVERNMENT CREATION/ OWNERSHIP CORPORATE GOVERNANCE FINANCIAL/ BUSINESS CAPITAL MARKETS  In January 1999 enactment of Mortgage Corporation Company Act  MoCT actively participated on Foundation Planning Committee  MoCT owns 29% of company  Participates on Board and several committees  FSS as regulator and sets capital adequacy guidelines  Most MBS issued to date have been backed by public sector loans of the National Housing Fund  MoCT purchased subordinated tranches of several MBS deals done to date  Considering legislative changes that will incent private sector to do MBS  Guarantee limit increased to 30X shareholders equity 2002  Working with government to allow KoMoCo to buy mortgages and hold in own portfolio

13 Strengthening of KoMoCo  Foreign Technical Partners (Countrywide Holding International (Operations/Business Development, Fannie Mae (IT), Merrill Lynch (Capital Markets)  Senior Resident Advisor – in place from Y2000 to Y2002  Active participation/guidance by Shareholders/Board Members (particularly foreign shareholders and MoCT) on all key aspects of the corporation

14 ISSUANCE OF MBS – AS OF APRIL 2002 Number of Issues Amount of Issuance SENIOR MBS SUB MBS MARKET SHARE LAW BASED KOMOCO 72,549.8 KW 2,453.5 (96.2%) 96.3 (3.8%) 92.9% MBS COMPANY ACT SPCs ESTABLISHED BY NEWSTATE CAPITAL KW (72.4%) 42.5 (27.6%) 5.6%ABS ACT SPCs ESTABLISHED BY WOOF CAPITAL KW 33.0 (80.5%) 8.0 (19.5% 1.5%ABS ACT TOTAL 162,745.0 KW 2,598.2 (94.7%) (5.3% 100%

15 Successes and Challenges  Regulators want sound and prudent environment which is transparent and will help develop capital markets  Ability to securitize fairly large amount of public sector loans (NHF)  Developed strong appetite by domestic investors for MBS and pushed out maturities with more frequent issues  First foreign investors in MBS (IFC) including foreign exchange swap  Some growth (albeit it small) of non- banks and private sector lenders to provide housing finance  Private sector banks and non-banks have to increase level of mortgage lending  Consolidation of banking sector  Continue to develop new products  Develop risk-based pricing regime for mortgage origination  Continue to support development of new entrants to encourage competition and funding  Encourage private sector banks to securitize more of their portfolio  Standardization of mortgage loan documentation (may allow that borrowers would not need to be notified of transfer)  Rapid growth of consumer lending points out need for enhanced underwriting systems, risk management and IT  Ability of KoMoCo to buy mortgages and retain in portfolio  Develop secondary market for ABS/MBS