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

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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.)

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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

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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)

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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)

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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