Transcript LESSONS LEARNED - Markets

World Bank
March 2006
Mortgage Insurance
International Lessons
Housing Finance in Emerging
Markets
Pierre David
Executive Director
CMHC International
OBJECTIVES OF THE PRESENTATION
• Mortgage Insurance in Canada and the role of CMHC
• CMHC International experience in emerging
economies/developing countries
• Lessons learned & observations
WHAT IS THE CANADIAN MORTGAGE & HOUSING CORP.?
• A national housing agency created in 1946 with
a mandate to promote:
 Housing affordability and choice
 Housing construction, repair and modernization
 Improvements to overall living conditions
• A federally owned Corporation: public
agency with a private sector culture/structure
 Majority of Board of Directors members are
from private sector
 Self-managing, but reports activities to
Parliament through Minister
HOUSING FINANCE IN CANADA (1954)
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Limited access to mortgage loans
Commercial banks excluded from mortgage lending
Inequal Access – Geographically and Socially
Active role of the Federal Gov. in the housing sector
but mismatch between needs and financial capacity
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CMHC authorized to make direct loan where funding not available
Provided 25% of overall 80% loan
Below market interest rates of federal funds
Free partial federal loan-loss guarantee provided to lenders
• No Credit Bureau, no building code, no MI
regulations
INTRODUCING MORTGAGE INSURANCE IN
CANADA
Canadian Model / Response
• Accompanying measures:
 Amendment to the Bank Act (major source of
private funds)
 Standardization of mortgage lending practices
supported by requirements for MI for LTV>75%
 Initially - restricted availability only to new
residential construction below prescribed loan
limits
 CMHC to operate at no cost to the Government
MI used as a policy lever
RESULTS: CMHC IN NUMBERS (2005)
• Net income after taxes: US $850 million
• New units insured:
746,000 units (33% serving Canadians in areas where
competition is not active)
• Insurance in force:
US $235 billion (> 40% total outstanding)
• Guarantees in force:
US $104 billion
• Since 1954, assisted one in three Canadian households to
obtain financing for their home
SUMMARY
• The Canadian Housing finance system is performing well.
• An effective balance between private and public involvement.
Lending is done by private sector. Competition on a level playing
field between private and public sector for mortgage insurance.
• Mortgage Insurance played a key role in the development of
Housing Finance.
• Mortgage insurance: an instrument of public policy.
What from the Canadian experience is
adaptable to other markets?
OBJECTIVES OF THE PRESENTATION
• Mortgage Insurance in Canada and the role of CMHC
• CMHC International experience in emerging
economies/developing countries
• Lessons learned & observations
CMHC INTERNATIONAL WORK IN M.I.
ASIA:
India, Thailand, China, South Korea (T)
MENA:
Jordan, Palestine, Algeria
EUROPE:
Serbia, Romania, Lithuania(T)
AFRICA:
Mali
AMERICAS: Mexico(T)
POSSIBLE OBJECTIVES FOR MORTGAGE
INSURANCE IN EMERGING ECONOMIES
1. Increase access to housing finance
 Reduce down payment required
 Reach out the underserved borrower
2. Encourage lenders to lend
3. Facilitates the creation of mortgage refinancing mechanism
4. Standardize legal and lending practices
5. Deepen financial system – different types of lenders; broader access to capital
market
6. Impacts growth in : job creation; building materials; taxes;
personal wealth; financial & professional services
7. Develop new and resale housing markets
PRE-REQUISITES FOR MORTGAGE INSURANCE
THE IDEAL WORLD
Enabling
Environment
System Foundations
Housing & Mortgage
Market
Macro-economy stable
Mortgage & Real estate
laws – title & foreclosure
Supply of affordable
housing
Priority for Housing
Regulation of financial
inst. – capital & credit
Long term funds &
Lenders with risk mgmt.
experience
Consumer demand &
confidence
Regulation of urban
development &
construction
Information & prof.
services for transactions
CHALLENGES
• Legal/Regulatory framework often limiting rather than enabling
• Foreclosure: an issue everywhere. Cultural sensitivity to the concept. (China)
• Title registration: complex, lengthy, costly or ineffective. (Egypt)
• Lenders: No experienced lenders or just a few, limited appetite. (Mali)
• Long term resources: unavailable or very limited (Everywhere)
• Historical data: very limited or unavailable (Thailand an exception)
• Professional services for transaction: Credit Bureau,
Real Estate professionals, market analysis:
very limited everywhere.
OPPORTUNITIES
• Housing sector a priority in many countries.
• Clear recognition that the housing sector could be an engine of economic
growth & a factor of social stability (India)
• Huge housing needs (India, China, countries in transition)
• Macro-economic conditions improving (Inflation under control, rate of interest
declining)
• Strong lenders (India, Baltic States, Thailand)
• Better understanding of the need for a strong primary market to develop a
secondary market
• Transition to market economy (Baltic States, Serbia, China, Romania)
• Reduce capacity for government direct support (Mali)
• Need for standardization is well understood
OBJECTIVES OF THE PRESENTATION
• Mortgage Insurance in Canada and the role of CMHC
• CMHC International experience in emerging
economies/developing countries
• Lessons learned & observations
LESSONS LEARNED - Impact
• Need for a comprehensive approach
• New companies are viable in the short term
• Investors can be mobilized for MI companies in the most difficult
environment (Mali, Palestine)
• Need one or two full economic cycle to draw more definitive
conclusions. Too early to draw conclusions
• Difficult to isolate impact of MI: NKOSK SERBIA
after one year: 1500 loans (40 million euros insured,
9 active lenders, interest rate down from
12 to 7%)
LESSONS LEARNED – Institutional Model
• Need to be pragmatic, not ideological.
• The model will evolve over the years
• Where are the private investors? Can they meet the public
policy objective?
• Additional challenges when restriction on Foreign Direct
Investment
• Why not a Private-Public partnership?
• Markets that are too small …or too large
• Can a regional approach work?
LESSONS LEARNED - Product
• Need to be specifically designed to meet each specific
circumstances
• Don’t mix insurance products
• Crucial to share the risk (partial coverage) initially
• Creativity is required (gradual risk sharing, cap on
portfolio, etc…)
• What’s the right price?
LESSONS LEARNED - Regulation
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An absolute prerequisite
A difficult and lengthy process
What comes first: the regulator or the operator
Is it possible to implement a new set of regulation over time? By
regions?
• Need to regulate who can provide mortgage insurance/guarantee
• Need to regulate the reduced risk for the lender
of an insured loan
• If you wait too long, it could be too late
LESSONS LEARNED - Markets
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Need for a “push” strategy
Lenders need to be convinced proactively
Providing information/training is key. This should be a partnership.
Potential borrowers (looking to get access to a mortgage loan or
looking for a larger loan) are willing to pay
more than what lenders perceive
LESSONS LEARNED - Process
• The creation of a mortgage insurance institution can accelerate
the implementation of prerequisites
• The new institution can become an effective agent of change
• An incremental approach is required
• Need a champion, the appropriate one.
• The challenge of time and change of players
CONCLUSION
• GROWING INTEREST IN INTRODUCING MORTGAGE INSURANCE
IN NEW AND EVOLVING MARKETS.
 NEED TO SHARE EXPERIENCES
• TOO SOON TO SPEAK ABOUT BEST PRACTICES FOR EMERGING
MARKETS BUT A NUMBER OF LESSONS LEARNED SO FAR.
• THERE IS NOT A SINGLE INSTITUTIONAL MODEL.
 IT WILL BE DETERMINE TO A LARGE EXTENT BY : NATIONAL
GOALS, BUSINESS CULTURE, PERCEIVED RISKS, SIZE OF THE
ECONOMY, ATTITUDE VIS-À-VIS FOREIGN INVESTORS, ETC..
• IT MAY NOT BE APPROPRIATE TO WAIT UNTIL ALL THE
CONDITIONS ARE MET.
 THE INSTITUTION MAY BE A CATALYST.
• THE MODEL SHOULD EVOLVE OVERTIME.
• IFI’S HAVE A KEY ROLE.
Thank You
Pierre David
Executive Director
CMHC International
[email protected]
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