1. MORTGAGE MARKET AND CAPITAL MARKET DEVELOPMENT IN MONGOLIA
Presented by Mr. D.Boldbaatar
Director General
Monetary Policy and Research Department
The Bank of Mongolia

2. Mortgage Market Development
Outline
Mortgage Market Development
The Role of the Bank of Mongolia in Mortgage Market Development
Capital Market Development
Securitization of Residential Mortgages

3. Mortgage Market Development
As of April 2011 the total mortgage loan portfolio reached MNT bn.
The weighted average rate on mortgage loans is continuing to decrease. It reached 14.9% by April 2011.
Compared to other countries the mortgage loan maturity is considerably short, averaging to 9.5 years.

4. Mortgage Market Development
Until 2003 the issuance of mortgage loans were very limited
The mortgage market in Mongolia was initiated by ADB Housing Finance Project in 2003.
Nowadays almost all banks are originate mortgage loans and prevailing the mortgage market.
In 2010 and 2011 the mortgage market experienced a strong growth following after fall in previous year and increased by almost 80 per cent from the end of 2009.
Despite the rapidly increasing mortgage loan outstanding, there is still high potential for further growth.

5. Mortgage Market Development

6. Mortgage Market Development
The y-o-y growth of new residential building rose by 56.2 per cent at the end of 2010.
Mortgage loans perform better than other loans in banks asset, perhaps, due to standardization requirement of origination.

7. The Role of the Bank of Mongolia
The Bank of Mongolia played a major role in establishing the structure of housing finance. Followings are these contributions:
Establishment of “Mongolian Mortgage Corporation” (MIK): For the purpose of developing secondary market for asset backed securities in 2006 the Bank of Mongolia and other 10 banks established MIK. The main objective of MIK is to develop primary and secondary mortgage markets by issuing and selling MBS on foreign and domestic markets, providing save and long term funds to Housing Finance Sector.
Cooperation with National Statistic Committee (NSC) to develop a methodology of computing Housing price index: In 2007 the Bank of Mongolia participated in the working group to develop a methodology for computing Housing Price Index. Since 2008 Housing Price Index has been regularly disseminated on quarterly basis.

8. The Role of the Bank of Mongolia
MIK bond was included in the Central bank collateral list: to stimulate secondary mortgage market and to enhance MIK’s financial capacity, MIK bond has been included in the list of eligible collaterals for Central bank repo operations. Hence, MIK bonds are qualified equal to Government bonds.
Adoption of the “Regulation on mortgage loan operations”: in 2008 the Bank of Mongolia approved “Regulation on mortgage loan operations”. The standardization on primary mortgage market simplified the origination process, lowering risk and origination costs.
Improvement of legal environment: the Bank of Mongolia actively collaborated with other related institutions to improve legal environment in developing of primary and secondary mortgage markets.
The Law on Real Estate Collateral
The Law on Asset Backed Securities

9. The Role of the Bank of Mongolia
Agreement to implement KfW project on promoting housing finance: according to Agreement between KfW and Government of Mongolia credit line of EUR 4.8 million and grant of EUR 0.5 million will be channeled through Bank of Mongolia to MMC for the purpose to deepen market based and effective housing financing system.
Financing loans to civil servants: in the scope of financing “Project on Housing 4000 Households” the Bank of Mongolia purchased Government bond in amount of MNT 30 billion. This project is intended to resolve some difficulties faced by construction sector and provide affordable loans to civil servants.
Refinancing loans to construction sector: the Bank of Mongolia injected the liquidity to the construction sector through banks when it experienced some liquidity problems in 2008.

10. The Role of the Bank of Mongolia
Compiling and distributing mortgage loan report: since 2007 the Bank of Mongolia has been consolidating the Mortgage Loan Report, which is nowadays disseminated to the public on monthly basis.
Cooperation with International organizations: the Bank of Mongolia has actively cooperated with International Organizations such as IFC, KfW and EBRD providing technical assistance and consulting to MIK on issuing liquid mortgage securities.
Participation in organizing trainings and seminars: the Bank of Mongolia provided numerous trainings, courses and round table meetings aiming to improve legal environment and facilitate the development of the mortgage market.

11. Impediments to housing finance development
Legislative incompleteness
Brand new hypothec (mortgage) law
Law on Securities Collateralized by Asset
Origination standard for hypothec contract
Other regulations for securitization process
Cultural barrier
Politics of housing finance
Absence or inefficiency of capital market
Illiquid market
Incomplete regulatory structure
Absence of infrastructure

12. Capital Market Development
Following 3 instruments are mainly traded in the primary
markets in the MSE.
Stocks
Government bond
Corporate bond
The secondary market operations for Government bond and
corporate bond are almost non-existing and the market
development is stagnant. Some reasons are:
Main investors of these bonds are only banks
Lack of institutional investors and absence of rating agencies
Absence of market based yield curve
No constant issuance of Government bond

13. Capital Market Development
Trading statistics of past 5 years shows that the capital market is dominated by stock trading…

14. Capital Market Development
Market capitalization is growing…
In the first 5 months of 2011 market capitalization reached MNT 1,803.8 billion, increasing 127% from the previous period.
MSE is still challenged by low trade volume.
Top 5 companies added more than 80% in the market capitalization in 1Q2011.

15. Capital Market Development
MSE Top-20 Index has reached its highest point in history or 32,955 units…
In 2010 MSE was the best performing equity market globally (having gained 138.4%).
Top-20 index continued its rally to peak 32,955 on February 25. Since then it has seen correction, falling to 18,748 as of May 31.

16. Capital Market Development
Market cap to GDP ratio reached 16.6 per cent.
Compared to well developed capital market countries the ratio is still modest.
However, it has increased by almost 14 percentage points since 2005.
Market cap to total loan ratio reached 42 per cent .
It was 6.5 per cent in 2005 and 42.1 per cent in 2010.
Market cap increasing faster than credit growth.

17. Capital Market Development
Government bond market is expected to expand in the next years…

18. Capital Market Development
Mortgage backed security as MIK bond
In 2009 MIK was approved to issue MNT 25 billion bond
Between 2009 and 2010 MNT 6.3 billion bond was sold
The MIK bond could not be wide spread instrument in the capital market
However, the MIK bond is potentially attractive instrument for mid-term
Assuming inverted yield curve
More liquid (included in the central bank collateral list)

19. Capital Market Development
Prerequisites of developing bond market:
Macroeconomic factors
Fiscal policy
Monetary condition
Exchange rate regime
Financial sector stability and innovation
Information infrastructure
Monitoring and supervision
Market based flexible interest rate
Competition

20. Capital Market Development
Further contributions of the Bank of Mongolia into capital market development:
In the extent of influence:
to promote development of the primary and secondary capital markets by improving money market operations
to take a measure to have a long-term funding instrument and to improve liquidity of the bond market (for example, MIK bond)
to consult to develop infrastructure of the payment settlement system

21. Capital Market Development
In the extent of main activities:
to keep inflation at low and stable level, therefore to maintain macroeconomic stability and to create a favorable economic condition for investors
to develop financial market and to maintain financial sector stability through banking sector stability

22. Securitization of Mortgage Loans
Rationales for introducing Mortgage Securities
New funds for housing
Increasing liquidity of mortgages
Increasing competition in the primary market
Increasing efficiency in the housing finance system
Lengthening maturity of loans
Smoothing housing cycles

23. Securitization of Mortgage Loans
Prerequisites for Issuing Mortgage Securities
Market need for funding by the capital market
Capital constrain
Liquidity constrained
Risk management needs
Investor demand for mortgage-related securities
Institutional investors are potential investors
Attractive risk-adjusted returns
Capacity for mortgage-related securities
Feasibility to invest in mortgage-related securities

24. Securitization of Mortgage Loans
Infrastructure requirements
Legal, tax and accounting framework for securitization
Facilities for lien registration
Ability to enforce lien
Ability to transfer security interest
Protection of investors against bankruptcy of originators
Primary market prerequisites
Standardization of documents and underwriting practices
High quality servicing and collection
Professional standards of property appraisal

25. Securitization of Mortgage Loans
Government Role in Developing Mortgage Securities
Creation and maintenance of a strong legal system
Creating new public institutions
Guarantees
Market liquidity support
Providing incentives to investors

26. Current risks to housing finance structure
Government over -subsidized housing finance
Real estate development plan ( houses)
Delay in building infrastructure
Dominance of Government financing (HFC)
Interest rate subsidy
Higher LTV ratio
Involvement in housing construction

27. Thank you for your attention