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Technical Brief to The Board
Housing Financein Emerging Economies
World Bank Group Board Presentation - June 9, 2005
2
Outline
• Why Housing Finance ?• How to Expand Housing Finance• World Bank Strategy, Products• IFC Strategy, Products• Challenges for the World Bank Group
3
Why Housing Finance?
• Engine of equitable economic growth • Key for investment, households wealth, savings, consumption, labor
markets, fiscal returns, retirement system• Collateral to unlock capital (“dead” housing assets, De Soto)• ECA housing stock privatization: > $ 1 trillion (asset rich, cash poor)
• Meet a growing housing demand (urbanization, demographics)
• Prevent slum proliferation (cities built the way they are financed)
• Reduce poverty (asset building, retirement, empowerment, community strengthening, improved living conditions)
• Take part in the financial sector liberalization (banks, non bank lenders, domestic bond markets, pension funds, etc.)
4
How to build inclusive and sustainable HF system?
• Sizeable & durable investment that needs debt leverage
• Required sound foundations• Relative macroeconomic stability• Workable legal system (titles, foreclosure)• Risk management, funding tools & regulations• Competing private lenders• Affordable housing (cf. supply constraints)
• Enabling role of the State • Less of direct lender/builder, rather build conducive
market environment, catalyst role to expand accessibility
5
How to Expand Housing Finance
• Products• Credit products (term, rates, amortization) • Broader distribution channels• Mortgage credit insurance for lenders• Micro finance applied to housing• Housing saving schemes• Construction, infrastructure and rental finance
• Policy• Affordable land use & urban development rules• Efficient registration of property titles & liens• Smarter HF-related subsidies• Instruments to reallocate part of the additional risks• Framework for long-term mortgage securities (different models)
6
Improved Housing Affordability in India
22.015.6
11.18.3 6.6 5.9 5.3 5.1 4.7 4.3
0
10
20
30
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Housing Prices in suburban Mumbai by annual income
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
Months
Mortgage Credit Interest Rates in India
♦ Property prices in suburban Mumbai by annual household income
Source: HDFC (2004)
7
Grounds for Cautious Optimism
• Still gap between advanced economies (large and low-risk portfolios) and emerging economies
• Yet promising portfolio growth & affordability (Chile, Malaysia, Baltic, Mexico, Jordan, India...)
• No optimal model: customization & sequencing, menu of products for different target groups
• Key to develop primary local-currency mortgage markets before more sophisticated instruments
• Caution needed to develop this sensitive sector
8
Depth Residential Mortgage Markets
0%
10%
20%
30%
40%
50%
60%
70%
USA
EU - 15
Canad
a
Honk-K
ong
Mala
ysia
Eston
ia
Thaila
ndChile
Latvi
a
Colom
bia
China
Mex
ico
Jord
an
Croat
ia
Bolivia
Hungar
y
Mor
occo
Tunisi
a
Czech
Rep
.
Brazil
India
Poland
Slova
kia
Slove
nia
Bangl
ades
hIra
nPer
u
Alger
ia
Saudi
Ara
bia
Pakis
tan
Ghana
De
bt
As
% G
DP
9
Bank Project Opportunities (Loans, Guarantees, TA)
ENVIRONMENT/INFRASTRUCTURE
PRIMARYMARKET
SECONDARYMARKET
•Land use, urban development and housing policy •Property title registration and effective foreclosure•Construction quality, security and finance•Land infrastructure•Professional real estate intermediaries•Effective rental markets•Smarter subsidies
•Finance lower income housing •Safe lending regulations & standards •Consumer information & protection•Risk management tools (insurance, guarantees)•Micro finance, housing savings, Islamic finance•Capacity building & funding of lenders, insurers
•Choice of proper model (s)•Legal and regulatory framework•Access to longer-term matched funding•Take off funding or guarantee support
10
Bank Organization and Operations
What do we do ?
• Growing scope (up to 30 countries, ambitious reforms)• Broader range of TA and loans• Conferences & training programs• HF flagship book in FY06• Limited anchor size• Challenge to access grant funds
11
Example: Colombia
• IBRD loans and TA• Rebuild after crisis sound infrastructure of primary and
secondary mortgage markets• Increase the accessibility for lower-income groups
• IFC: key support to a private securitization company
Example: Jordan
• Sustainable development in a small economy• Support to a liquidity facility (issue bonds, refinance lenders)• Reduce lending risks, catalyst of credit affordability gains• Targeted program of interest buy down vouchers
12
WBG Loans
• From 1982 to 2003: WBG: $ 5.1 billion of HF loans• High 89% satisfaction rate (OED, Bank projects)• Small part - 1.5% - of WBG loans • Large part - 46% - of urban shelter loans• Recent increase of HF activities• Stronger presence in MENA, LAC, South Asia• Business development stage in ECA, Africa
1982-2003 HF Portfolio (USD Million)
$84$1,240
$334
$2,661
$613$609
AFR
EAP
ECA
LAC
MNA
SAR
13
Evolution of IFC Housing Finance Activities
Key Elements of Current IFC HF Strategy
• Programmatic approach that blends TA with investment to maximize impact
• Wider regional representation requiring innovation and tailored solutions
• Expanded product menu
• Expanded and independent role of TA.
… we have reorganized ourselves to optimize our role
14
IFC Programmatic Approach
Legal/Regulatory Property
Rights/Foreclosure
Building Viable Mortgage Markets in Emerging Market Economies
Macroeconomic Stability
local currency
Role of Gov.
Financial Sector Dev.
Securities markets
Pension Funds
Investment Technical
Assistance and
Information Building
15
IFC Investment Products
CAPITAL MARKETS
MORTGAGE FINANCE
CONSTRUCTION FINANCE
Debt:
Credit Lines
Warehouse Credit Lines
Liquidity Facilities
Equity:
Conduits
Mortgage Ins.
Servicing Co.
Originators
Structured Finance:
Credit En.
Risk Sharing
Capital Markets
Mortgage Finance
Construction Finance
Land Finance
In. R
isks
… investments at different levels in the value chain given the risks
16
IFC: TA Products for Housing Finance
MARKET TA Products/Beneficiaries
(in close coordination with project development facilities)
SECTORAL INSTITUTION
PRIMARY Registries
Legal Drafting/ Implementation
Market Diagnostics/Needs Assessment
(Algeria, Pakistan, Guatemala, Nicaragua, Honduras, Egypt, India, Ukraine)
Standardization
Servicing
Training
(Peru, Russia, Central America, Ghana)
SECONDARY MBS Laws
Market Diagnostics
(Romania, Russia, El Salvador)
Launch of MBS
Market Feasibility
Training (Colombia)
… our regional facilities give us a comparative advantage to deliver focused TA
17
IFC: Where Are We?
113
53.2
232.2
4.6
151.4
32.111.3
0
50
100
150
200
250
CEU EA LAC MENA SA SECA AF
Region
IFC Housing Finance Portfolio IFC Housing Portfolio - Product
8% 3%
84%
5%
Equity
Guarantee
Loans
Quasi E
27.9
275
261.7
0
50
100
150
200
250
300
FY02 FY03 FY04
Fiscal Year
Committments (FY02-FY04) Housing Finance Pipeline - to FY06 (USD)
80
75
8015 70
60
100
CEU
EA
LAC
MENA
SA
SECA
AF
IFC
Developer-cum-mortgage originator Home Buyers
Security Vehicle
Securitization
Phase II
Phase I
Credit Line
Mortgages
Collateral for IFC
Mortgage Warehouse Line (for a Developer cum Originator)
Local Mortgage Market
International Finance Market
Local Capital Market
Institutional Investors
Trustee
19
IFC: the Challenges for the Future
• How to get to true poor? (“The case of Mexico”)
• Microfinance for housing; and • Remittance mortgages
• Impacting the supply side
• Increase house production via developer financing• Ensure affordability
• Creating new products/relationships to expand impact
• Access to long term local currency (NIPC program)• Islamic housing finance• Energy efficiency products• Mortgage finance provided by sub-sovereigns
20
World Bank Group Role
• Develop housing finance markets • Set up infrastructure, legal and regulatory framework for markets• Make housing markets more affordable & secure property rights• Develop framework for risk management and funding tools• IFC to support private transactions
• WBG comparative advantages• Honest broker role• Long-term presence during a process of reforms• World expertise & knowledge transfer • Integrated approach: urban & finance, public & private sectors
21
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