1. International Experience in Establishing Liquidity Facilities
Workshop on Housing Finance
June 26-29, 2011
Ulaanbaatar, Mongolia
N. Kokularupan
Views expressed in this paper are that of the authors and do not represent the views of IFC/World Bank

2. Housing Finance in Emerging Markets
Housing finance generally underdeveloped in emerging economies
Housing finance is deposit based
Housing loans not widely accessible
Housing finance is expensive
Lenders subject to interest rate, liquidity and credit risks
Population growth and urbanization calls for development of long-term sustainable housing finance systems

3. Capital Markets in Emerging Economies
Capital markets are underdeveloped with few capital market instruments
However, they provide an important source of long-term funding
Pension and provident funds and insurance companies can play an important role in providing long-term funds to primary lenders

4. Funding Models for Mortgage Financing
Deposit base
Securitization
Covered bonds
Liquidity Facility
Deposits, in particular core deposits will remain an important source of funding mortgages especially if the mortgage rates are variable
No one model is the best. All models should be considered in the context of the macroeconomic environment, capital market and needs of the mortgage originators

5. What is a Mortgage/Refinance Liquidity Facility
A specialized second tier institution which provides short term liquidity, long term funding or guarantees to housing finance lenders.
Acts as intermediary between lenders and capital markets
Issues bonds to raise long-term finance
Purchases loans with recourse or refinances mortgage loans
Low risk, simple institution

6. Objectives and Benefits of Liquidity Facilities
Develop the Primary Mortgage Market
Provide financial resources to enable primary lenders to grant more loans at fixed rates and for longer tenures
Help primary lenders to narrow the gaps between the maturity structure of the housing loans and the source of funds
Promote sound lending norms (eligibility criteria)
Allow smaller lenders to access long-term funding, and foster competition
Lower the cost of long-term funding (liquidity, prime standing, limited intermediation cost)

7. Objectives and Benefits of Liquidity Facilities (Contd)
Develop the Capital Market
Provide more private debt securities (Bonds) with different maturities and rates
Issues secured and simple instruments
Creates a Yield Curve to serve as a benchmark for other private sector issuers

8. Preconditions for establishing a Liquidity Facility
Some motivation for financial institutions to refinance/sell their loans, for e.g.:
Tight liquidity and capital constraints
Absence of long-term funding to meet demand for mortgages
Central Bank regulations/limits/caps on mortgage exposure of banks
Sufficient demand for and supply of housing and housing finance, e.g.:
Primary lenders willingness/ability to lend
Borrowers willingness/ability to afford mortgage payments

9. Preconditions for establishing a Liquidity Facility (Contd)
A functioning primary mortgage market, for e.g.
Legal framework for property ownership and transfer
Legal/statutory framework for extending a mortgage loan
Registration/cadastre facilities
Property appraisal facilities
Lenders’ ability to effectively enforce foreclosure
Critical mass (will vary from market to market) of eligible mortgage loans, for e.g.
Sufficient portfolio of local currency (vs. foreign currency) mortgages

10. Preconditions for establishing a Liquidity Facility (Contd)
Ability to effectively assign/transfer mortgage loans
Existence of a capital market and an investor base, for e.g.:
Existing fixed income/Government bond market
Presence of legal and regulatory infrastructure for bonds e.g. issuance rules/law, trading platform, depository, reporting, registering authority, etc.
Local currency/plain vanilla debt appetite among current and potential local investors
Existence of traditional local institutional investors, e.g. pension funds, insurers, banks
Commitment by the Central Bank and/or Government to initially take a minority ownership in the Liquidity Facility to lend credibility to the Liquidity Facility in its operations

11. Conditions for Success
Support from the Central Bank
To encourage mortgage originators to obtain refinance from
the LF
To encourage banks and insurance companies to invest in
the bonds/securities issued by the LF
Support from the Capital Market Authority
To encourage issuance of bonds/securities by the LF
To encourage investment in the bonds/securities of the LF
Support from the Revenue/Tax Authority
Good governance
Excellent rating
Concessions
to kick start
operations

12. Business Model Short-Term
Refinance/Purchase mortgages loans with recourse to primary lenders
Refinance/Purchase based on interest review periods
Issue unsecured debt securities (bonds)
Medium-Long Term (timing dependent on Board decisions)
Help establish the foundations of a sound securitization market (standardization, transparency, etc.)
Issue secured mortgage-backed securities (MBS) and Sukuks

13. Factors contributing to Limited Success/Failure of Liquidity Facilities (LF)
Lack of understanding of purpose of a LF
LFs set up without prevalence of preconditions for a LF
Lack of commitment on part of Central Bank to promote LF
Political interference
Leadership – Management must understand the business and Board should be competent and actively involved
Failure to consult the market participants (mortgage lenders and potential investors) when drawing up guidelines for operations
Pricing of products
Staffing – to keep lean in initial years
LFs become too ambitious – take on other roles thus losing their focus on core business
Lack of support from Central Bank/Securities Commission on terms of granting concessions to kick-start operations

14. Factors contributing to limited Success/Failure of LFs (Contd)
Over-estimation of growth of mortgage market and LFs’ share of business in the Business Plan before establishing the LF
Model of LF
Only shareholders have access to facility
Shareholders access to facility proportionate to their equity in the LF
All mortgage originators, irrespective of whether they are shareholders or not can avail the facility
Significant portion of mortgage loans originated by banks versus multifinance companies

15. Jordan Mortgage Refinance Company (JMRC)
Incorporated in 1996 as a public shareholder company started operations in 1997
Chaired and supervised by the Central Bank
16 shareholders – 3 from public sector {contribute 38% of paid-up capital of JD5 million (USD7.05 million)} and 13 from private sector
Has a long term subordinated loan of $19.6 million from GoJ/WB
20% over collateralization based on full recourse to primary lender
Exemptions granted:
For CAR, housing loans refinanced by JMRC have a 20% risk weight
Banks are not required to have a General Allowance for housing loans refinanced with JMRC
Bonds risk-weighted at 20% and eligible to serve as liquidity assets of banks
Bonds are exempted from ownership transfer fees and charges
Bonds are tax exempt from interest as well as capital gains
Till Dec. 31, 2010, refinanced loans of JD539 million with outstanding balance of JD150 million and issued bonds of JD628 million with outstanding balance of JD141 million

16. Egyptian Mortgage Refinance Company (EMRC)
Incorporated in 2006 as a Joint stock company with a current paid-up capital EGP214 million
27 Shareholders: Public sector - 40%, private sector - 60% (IFC-7.9%)
Only shareholders can benefit from the refinancing facility
20% over collateralization based on full recourse to primary lender
Primary mortgage shareholders to replace loans that are prepaid / redeemed or more than 3 months delinquent
Loans outstanding as at end December 2010 – EGP277 million
Company has done business with 6 clients – 3 banks and 3 MFCs
No bond issuance as yet

17. Palestine Mortgage & Housing Corporation (PMHC)
Started operations in 2000 as closed public shareholding company with paid-up capital of USD14.9 million
14 shareholders including PIF 15%, PDIC 30%, IFC 15%, Consolidated Construction Co 15%, Arab Bank 10%, DEG 10%
20-year WB loan of USD17 million
PMHC offers a maximum of 80% refinancing of appraised property value and PMIF can insure up to 70% of the loan
Declining volumes because:
Banks have introduced their own products which are better
Lenders are using their own liquidity
PMHC ties its mortgage insurance product to refinance
PMHC’s practice of seeking business directly has led to an unclear role
$15.4 million refinanced by PHFC as at end 2010

18. Lessons
Some motivation for financial institutions to refinance/sell their loans (Banks versus multi finance companies)
Sufficient demand for and supply of affordable houses 
A functioning primary mortgage market with the legal and regulatory framework in place 
Critical mass of eligible mortgage loans denominated in local currency 
Ability to assign/transfer mortgage loans 
Existence of a capital market and an investor base 
Commitment by the Central Bank and/or Government to initially take a minority ownership in the LF to lend credibility to the LF in its operations 
Shareholding Structure – Majority owned by private sector (mortgage originators with minority shares by Central Bank)

19. Lessons (Contd)
Support given by Government and Central Bank in initial stages of LFs 
Concessions given to LFs’ bonds to kick start the market 
Don’t overestimate growth of the mortgage market and LF’s share of the market in the business plan before establishment of the LF 
Recruitment of a capable CEO with well-known track record to drive the organization 
Ability of the LF to re-engineer and diversify into other products before reaching saturation point for refinancing of mortgage loans 
Organization Structure – Keep the organization “lean” in the initial years of operations until the volume of business builds up to sufficient scale 
Have good risk management practices particularly with regard to Asset Liability Management