Technical Brief to The Board

Housing Finance in Emerging Economies

World Bank Group Board Presentation - June 9, 2005

Outline

Why Housing Finance ? How to Expand Housing Finance World Bank Strategy, Products IFC Strategy, Products Challenges for the World Bank Group

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

30 20 10 0 199
2 0 .0 0 % 1 8 .0 0 % 1 6 .0 0 % 1 .0 0 % 1 2 .0 0 % 1 0 .0 0 % 8 .0 0 % 6 .0 0 %

. 1 .6 11.1 8.3

P r o pe r ty pr ic e s in s u b u r b a n M u m b a i b y a n n u a l ho u s e ho ld in c o m e
Housing Pr ices in subur ban M um bai by annual incom e

6.6

.3

.1

4.7

4.3

1996

1997

1998

1999

2000

2001

2002

2003

200

Mortgage Credit Interest Rates in India

l -0

l -0

l -0

l -0

l -9

l -9

l -9

l -9

l -9

n9

n9

n0

n0

n0

n0

Ju

Ju

Ju

Ju

Ju

n0 Ja

n9

n9

n9

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Ja

Mo n t s

Source: HDFC (2004)

Ja

Ju

Ju

Ju

Ju

Ju

l -0

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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Debt As % GDP
10% 20% 30% 40% 50% 60% 70% 0%

Dep h esiden ial Mortgage Markets

U EU SA C 1 Ho an 5 nk ad -K a M on al g ay Es si a t Th oni ai a la nd Ch i La le Co tv lo ia m bi Ch a M ina ex i Jo co rd Cr an oa Bo t ia Hu livi n a M ga or ry oc T u co Cz e c n is h ia R ep Br az i In l di Po a Sl lan ov d Sl ak Ba ov ia ng en la i a de sh Ira n Pe Sa A ru ud l ge i A ri a r Pa abi ki a st an ha na

Bank Project Opportunities (Loans, Guarantees, TA)

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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ENVIRONMENT/ INFRASTRUCTURE

PRIMARY MARKET

SECONDARY MARKET

Bank Organization and Operations

What do we do ?
Growing scope (up to 0 countries, ambitious reforms) Broader range of TA and loans Conferences & training programs HF flagship book in FY0 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
o o o U D on

$609 $613

$84

AFR $1,240 EAP ECA $334 LAC MNA SAR

$2,661

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Evolution of IFC Housing Finance Activities

we have reorganized ourselves to optimize our role 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.

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IFC Programmatic Approach

Technical Assistance and Information Building

Investment

Building Viable Mortgage Markets in Emerging Market Economies

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 investments at different levels in the value chain given the risks

Structured Finance:

IFC Investment Products

CAPITAL Capital Markets MARKETS

Credit En Risk Sharing ebt: Credit Lines Warehouse Credit Lines Liquidity Facilities Equity: Conduits Mortgage Ins Servicing Co Originators

MORTGAGE Mortgage Finance FINANCE CONSTR CTION Construction FINANCE Finance

Land Finance

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IFC: TA Products for Housing Finance

our regional facilities give us a comparative advantage to deliver focused TA
MARKET TA Products/Beneficiaries (in close coordination with project development facilities) SECTORAL PRIMARY Registries Legal rafting/ Implementation Market iagnostics/Needs Assessment (Algeria, Pakistan, Guatemala, Nicaragua, Honduras, Egypt, India, kraine) MBS Laws Market iagnostics (Romania, Russia, El Salvador) INSTIT TION Standardization Servicing Training (Peru, Russia, Central America, Ghana)

SECON ARY

Launch of MBS Market Feasibility Training (Colombia)

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IFC: Where Are We?

IFC

F
2 22

IFC

25 2

151 4

5%

8%

15 1

L e
F
   

300 250 200 15 0 10 0 50 0 F Y0 2 F

2 75 2 6 1.7

80

15

70 60

2 7.

75 80 100

F Y0 3

F Y0 4

e r

17

1 0)( '

&%

"

!

 







#

46

11

5 2 21 11

L Q 84%

CEU EA L AC MEN A SA SECA AF

Mortgage Warehouse Line (for a eveloper cum Originator)

Phase I IFC
International Finance Market

Mortgages Credit Line eveloper-cummortgage originator Trustee Collateral for IFC Phase II Security Vehicle
Local Mortgage Market

Home Buyers

Institutional Investors

Securitization
Local Capital Market

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

evelop 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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