Liquidity Facilities in Emerging Economies

Housing Finance in Emerging EconomiesHousing Finance in Emerging Economies

Loïc ChiquierLoïc ChiquierThe World BankThe World Bank

March 10-13, 2003March 10-13, 2003

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Liquidity Facilities

Issue Bonds, Refinance Mortgage LendersIssue Bonds, Refinance Mortgage Lenders

Help to reduce liquidity and interest rate risksHelp to reduce liquidity and interest rate risks (maturity matching, circumstantial back-stop)(maturity matching, circumstantial back-stop)

Minimum risk exposure (limited counterpart risk and Minimum risk exposure (limited counterpart risk and market risk, diversified low-risk mortgages as collateral), market risk, diversified low-risk mortgages as collateral), credit risk to primary lenders (over-collateral refinance credit risk to primary lenders (over-collateral refinance or purchase with recourse) or purchase with recourse)

Issue attractive bonds (low risk, sizeable, hopefully Issue attractive bonds (low risk, sizeable, hopefully liquid, and regular issuance) liquid, and regular issuance)

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Liquidity Facilities (II)

Cheap, robust, simple, secure system to mobilize private Cheap, robust, simple, secure system to mobilize private bonds and to insure liquidity access to more mortgage bonds and to insure liquidity access to more mortgage lenders with economies of scale.lenders with economies of scale.

Less demanding than securitization about legal, regulatory, Less demanding than securitization about legal, regulatory, standards infrastructure, but also more limited ALM standards infrastructure, but also more limited ALM capacities (and more capital needed). capacities (and more capital needed).

Compatible with multiple lenders (specialized or not, Compatible with multiple lenders (specialized or not, depositories,etc.) and alternative funding tools, but not depositories,etc.) and alternative funding tools, but not panacea funding solution. panacea funding solution.

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Liquidity Facilities (III) PrerequisitesPrerequisites

Relatively stable macro economic conditionsRelatively stable macro economic conditions Active and comprehensive homeownership housing policy Active and comprehensive homeownership housing policy

(effective legal and regulatory framework for private markets (effective legal and regulatory framework for private markets to operate, targeted efficient social housing instruments) to operate, targeted efficient social housing instruments)

Deregulated financial marketsDeregulated financial markets Transactions exempted from stamp duties/feesTransactions exempted from stamp duties/fees Developed bond market infrastructureDeveloped bond market infrastructure

Transition role to SMM conduitTransition role to SMM conduit (HMC Trinidad) although (HMC Trinidad) although adaptability challenges.adaptability challenges.

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Liquidity Facilities (IV)

Catalyst liquidity role rather than direct engine (limited Catalyst liquidity role rather than direct engine (limited impact on FRMs, residual market risks)impact on FRMs, residual market risks)

Tricky corporate governance client/lender/investorTricky corporate governance client/lender/investor

State support both as investor and bond guarantor (often State support both as investor and bond guarantor (often implicitly): Malaysia , Jordan, Trinidadimplicitly): Malaysia , Jordan, TrinidadGradual privatization FHLBs by members-usersGradual privatization FHLBs by members-usersFrench CRH: state bond guarantee for three years French CRH: state bond guarantee for three years

Rather regulatory/supervisory tool than object, although Rather regulatory/supervisory tool than object, although concentrated risks and debt leverage concentrated risks and debt leverage

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JMRC in Jordan

Jordan: small and open economy, with a small pre-1998 HF Jordan: small and open economy, with a small pre-1998 HF system (privileges Housing Bank)system (privileges Housing Bank)

Since 1998: JMRC operations to develop sound, competitive, Since 1998: JMRC operations to develop sound, competitive, and affordable mortgage industryand affordable mortgage industry

Mixed public-private capital (18% owned by CBJ) Mixed public-private capital (18% owned by CBJ)

Refinance participatory eligible banksRefinance participatory eligible banks Keeps at least 120% over-collateralized mortgages Keeps at least 120% over-collateralized mortgages (LTV< 80%, (LTV< 80%,

main residence purpose, fee-exempted transferred mortgage deeds, main residence purpose, fee-exempted transferred mortgage deeds, replacing collateral if needed)replacing collateral if needed)

Issues private bonds (3-5 Y) and short-term notesIssues private bonds (3-5 Y) and short-term notes Conservative risk management policyConservative risk management policy

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JMRC (II)

Attractive refinancing and ALM tool for banks (exempted Attractive refinancing and ALM tool for banks (exempted statutory reserves, better regulatory treatment of refinanced loans) statutory reserves, better regulatory treatment of refinanced loans)

Attractive fixed-rate bullet-bond bonds for investors (social Attractive fixed-rate bullet-bond bonds for investors (social security fund, banks) security fund, banks)

Bonds eligible to bank liquidity reserves, 20% risk-weighted for Bonds eligible to bank liquidity reserves, 20% risk-weighted for capital adequacycapital adequacy

Catalyst mortgage growth (8,000 loans, 8 banks)Catalyst mortgage growth (8,000 loans, 8 banks) Smooth re-directed banking strategy of the HBSmooth re-directed banking strategy of the HB

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JMRC (III)

Improved housing credit affordability (20 Improved housing credit affordability (20 years years terms, max. LTV 75%, 10%-13% rates)terms, max. LTV 75%, 10%-13% rates)

Budgetary relief Budgetary relief (refinance public housing loans)(refinance public housing loans) Mortgage lending regulatory safeguardsMortgage lending regulatory safeguards Regular issuer of low-risk private securities Regular issuer of low-risk private securities (implicit (implicit

state guarantee)state guarantee) Prudential lending activities Prudential lending activities (de facto 153% over-(de facto 153% over-

collateral portfolio),collateral portfolio), effective cost recovery effective cost recovery Key to develop new scheme for low-income Key to develop new scheme for low-income civil civil

servants (5% buy down, social housing)servants (5% buy down, social housing)

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JMRC Perspectives (IV)

Needed Islamic housing debt window Needed Islamic housing debt window (refinance/purchase)(refinance/purchase)

Needed fixed-rate mortgage markets and longer-Needed fixed-rate mortgage markets and longer-term bonds (lack of Government benchmarks) term bonds (lack of Government benchmarks)

Further gains in credit affordability (credit rates)Further gains in credit affordability (credit rates) Non-recourse purchase of mortgage pools and Non-recourse purchase of mortgage pools and

issue of MBS issue of MBS (needed effective external MI program)(needed effective external MI program)

Possible privatizationPossible privatization

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Malaysia Cagamas Berhad (I)

Created in 1987 after liquidity crunch and recession to Created in 1987 after liquidity crunch and recession to provide more liquidity to mortgage lenders, reduce market provide more liquidity to mortgage lenders, reduce market risks, assist social housing finance, sustain construction risks, assist social housing finance, sustain construction sector, develop private fixed-income markets sector, develop private fixed-income markets (now 16.6% (now 16.6% share) share)

Cagamas purchases mortgage loans from lenders with Cagamas purchases mortgage loans from lenders with recourse and obligation to repurchase (review periods: 3,5,7 recourse and obligation to repurchase (review periods: 3,5,7 years).years).

Cagamas debt amortized independently from mortgage pools Cagamas debt amortized independently from mortgage pools (just collateral)(just collateral)

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Malaysia Cagamas Berhad (II)

Islamic Islamic finance window (purchase Islamic Islamic finance window (purchase of deferred payments sales and housing of deferred payments sales and housing leasing contracts) leasing contracts)

Cagamas issues matching term debt Cagamas issues matching term debt (variable-rate loans, fixed-rate securities)(variable-rate loans, fixed-rate securities)

Cagamas as regular rated-AAA issuerCagamas as regular rated-AAA issuer

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Malaysia Cagamas Berhad (III)

Central Bank (BNM) key investor (20%) as policy tool, capital Central Bank (BNM) key investor (20%) as policy tool, capital diversified with 74 fin. institutions, Board chaired by BNM diversified with 74 fin. institutions, Board chaired by BNM Deputy Governor.Deputy Governor.

Incentives to lenders (exempted reserves) exposed to social Incentives to lenders (exempted reserves) exposed to social housing lending quotas and rate ceiling.housing lending quotas and rate ceiling.

Incentives to bond investors (eligible to bank and insurance Incentives to bond investors (eligible to bank and insurance reserves, 10% risk-weighted)reserves, 10% risk-weighted)

Limited role to renewed short-and medium term refinancing of Limited role to renewed short-and medium term refinancing of variable rate mortgage creditsvariable rate mortgage credits

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Malaysia Cagamas Berhad (IV)

Catalyst of booming mortgage lending (banks and finance Catalyst of booming mortgage lending (banks and finance companies)companies)

Outstanding housing through banks: 21.7% GDPOutstanding housing through banks: 21.7% GDP

THLD public originator as important initial userTHLD public originator as important initial user

Successful expansion of demand-driven products after 1992 Successful expansion of demand-driven products after 1992 (fixed/variable rate, maturities, recourse /non-recourse, Islamic debt, (fixed/variable rate, maturities, recourse /non-recourse, Islamic debt, leasing/commercial property, etc.)leasing/commercial property, etc.)

Profitable institution, maybe monopolistic GSE ?Profitable institution, maybe monopolistic GSE ?

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Malaysia Cagamas Berhad (V)

Cagamas successful through its Cagamas successful through its counter-cyclical liquidity role for the counter-cyclical liquidity role for the markets (“buffer”),markets (“buffer”), and help lenders meet housing lending requirements and help lenders meet housing lending requirements

Cagamas own mortgage market share normally fluctuates (up to 41% in Cagamas own mortgage market share normally fluctuates (up to 41% in 1997 as buffer to crisis, now down to 18%)1997 as buffer to crisis, now down to 18%)

Less business recently: liquid banks, lower market rates, possible direct Less business recently: liquid banks, lower market rates, possible direct securitization by bankssecuritization by banks

Recent and gradual shift to conduit modelRecent and gradual shift to conduit modelBut some lenders reluctant to securitize secure and profitable variable-But some lenders reluctant to securitize secure and profitable variable-rate mortgage assets, investors want higher yields for longer term rate mortgage assets, investors want higher yields for longer term amortizing debt, (plus adaptation to regulations, standards)amortizing debt, (plus adaptation to regulations, standards)