dr. eric klopfer march 12, 2003 housing finance in emerging markets: a private sector perspective on...
TRANSCRIPT
Dr. Eric KlopferMarch 12, 2003
Housing Finance In Emerging Markets:
A Private Sector Perspective On Credit Insurance And Guarantee Programs
GE Insuranceg
g GE Mortgage Insurance
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Why is Private Mortgage Insurance Worth Discussing? Why is Private Mortgage Insurance Worth Discussing?
Potential Value Of Private Mortgage Insurance
Mortgage Insurance Encourages Development Of A Data-Driven And Risk-Sensitive Housing Market
Mortgage Insurance Encourages Development Of A Data-Driven And Risk-Sensitive Housing Market
“The Wealth Gap”. Once Macroeconomic Stability Is Achieved, Declining Interest Rates Can Be Expected. With Declining Interest Rates, Downpayment Size Matters More Than Debt Service As a Barrier to Homeownership
Housing As A Political Issue. Consistent Access To Low-Cost Mortgage Finance Allows Individual Wealth Accumulation, Strengthens Communities, And Reinforces Popular Support For Private Property Rights
Funding And Regulatory System Still Developing. With Limited Resources, Lenders And Regulators Need To Work Toward “Global” Standards To Access Investment Capital And Ensure Financial Stability
Improves Risk Selection And Reduces Non-Price Credit Rationing, By Encouraging Data Collection/use And Applying Risk-Decisioning Technologies
Improves Mortgage Process Management, By Putting Private Capital At Risk To Ensure Effective Property Valuation And Credit Information And Delinquency Management Systems
Provides Highly Rated Specialist Risk Protection To Lenders, Through Long-Term Commitment Of Risk Capital As Part Of A Global Mortgage Insurance Franchise
Acts As A Risk Transformer To Normalize Risk For Mortgage Investors, By Serving As The “Investor’s Eyes” And Providing A Source Of Credit Enhancement For MBS And Mortgage Bonds.
Housing Market Issues Value Of Private Mortgage Insurance
g GE Mortgage Insurance
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MI Claims Payments
Homeowner Acquires MI If Down Payment < 20-30%
Premium
Insurance Premium
Mortgage Lending Institutions
GE Mortgage Insurance
GE Mortgage Insurance
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MI Is A Tool To Encourage Lenders To Fulfill Housing Policy … Without Increasing Risk In Financial System
MI Is A Tool To Encourage Lenders To Fulfill Housing Policy … Without Increasing Risk In Financial System
Investors
Funding
Payments
Mortgage Insurance Works At Multiple Levels In The Mortgage Value Chain Mortgage Insurance Works At Multiple Levels In The Mortgage Value Chain
Benefits:• Serve Mortgage Market Without Increased Risk Or Capital Burden• Improved RAROC Or Secondary Market Execution
Benefits:• Access To High LTV Mortgage• Lower Interest Rate
Benefits:• Improved Confidence In MBS/
Mortgage Bond Quality And Performance
Ca
pita
l R
eq
uire
me
nts
Secondary Market Transactions
Private MI Model
Home Buyer
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Loss Assumptions Historic Portfolio Performance Economic Cycles Geographic Dispersion Lending Criteria Lender & Legal Process Depth Of Coverage LTV
Years
De
fau
lt
Loss Curve
Claims by Year
MI Provides
Price / LOI
MI Analyses Data
Lender Provides Loan By Loan
Data
MI Premiums Generally Are Expressed In Terms Of Basis Points
The Base Rate Is Determined By The LTV Ratio, Supplemented By Other Factors Like ...
Where The Base Rate Is Multiplied By The Original Principal Amount Of The Loan
Lender Specific Price
MI Is Priced To Reflect Lender Specific Mortgage Performance HistoryMI Is Priced To Reflect Lender Specific Mortgage Performance History
Pricing
Less Risk More RiskMortgage Type Fixed-Rate Adjustable
Occupancy Status Owner-Occupied Investor
Employment Status Employee Self-Employed
Mortgage Size Average Size Jumbo
Property Type Single-Family Detached Condominium
Mortgage Documentation Standard Limited
Credit Scoring High Score Low Score
Loan Purpose Purchase “Cash Out Refi”
Private Mortgage Insurance Uses An Actuarial Approach Drawn Heavily From Rating Agency Methodologies
Private Mortgage Insurance Uses An Actuarial Approach Drawn Heavily From Rating Agency Methodologies
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APPLICATION PROCESS FOLLOW UP FORECLOSURE PROCESS
ANALYSIS & APPROVAL
FORMALI- SATION OF OPERATION
LOAN APPLICATION
MI Application Commitment Certificate Premium Payment At Drawdown Date
MORTGAGE ENFORCEM.
Foreclosure starts
ARREARS
NORMAL RISK FOLLOW UP
Insured To Give Notice Of Default To Insurer Delinquency Management Loss Mitigation Effort
Claim filing Claim
settlement
Doubtful Default
Loan Loans
LENDER
MI
INSURER
MASTER POLICY
AGREEMENT
CONTRACT
NORMAL FOLLOW
UP
Risk Monitoring Benchmarking
Analysis Delinquency
Reporting
Foreclosure ends
INDEMNITY
Mortgage Loan Process
Mortgage Insurance Is Integrated Into Existing Loan Processes …
Overall Strengthening Of Risk Management
Mortgage Insurance Is Integrated Into Existing Loan Processes …
Overall Strengthening Of Risk Management
Improved, Streamlined Process … Loans Are Covered IndividuallyImproved, Streamlined Process … Loans Are Covered Individually
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Although Mortgage Insurance Can Provide 100% Protection To Lenders, Generally It Covers Only The “Top-Slice” Portion Most Vulnerable To Loss,
Replacing A Large Portion Of The Borrower’s Down Payment …
Although Mortgage Insurance Can Provide 100% Protection To Lenders, Generally It Covers Only The “Top-Slice” Portion Most Vulnerable To Loss,
Replacing A Large Portion Of The Borrower’s Down Payment …
Mortgage InsuranceLender
80%
W/O MI
20%
Bank Financed
Customer Financed
80%
5%
15%
Bank Financed
Customer Financed Underwrites Loans Shares Credit Risk Markets Program Manages Customer
Relationships
Underwrites Referrals/Audits Underwriting
Takes Insurance Credit Risk Administers Program Risk Monitoring / Benchmarking
Analyses
W/ MI
€ 100 K
€ 95 K€ 5K
€ 95 K Loan(€ 15 K Insured)
Borrower
Loan
Proposed
Property Valuation € 100 KAgreed Loan € 95 K Borrower Equity € 5 K
Balance of Mortgage € 80,0 K € 80,0 K € 80,0 K € 80,0 K Property Sold/Valued 60,0 K 65,0 K 75,0 K 90,0 KGross Gain (Loss) (20,0 K) (15,0 K) (5.0 K) 1,7 KPayment by GE 15,0 K 15,0 K 5,0 K No Insurance ClaimNet Gain (Loss) To Bank € (5,0 K) € 0,0 €0,0 €10.0 K
* Irrespective Of The Reason For The Inability To Pay
Four Scenarios In Case Of Inability Of The Borrower To Pay* (For Example After 5 Years)
Coverage Levels Can Be Adjusted To Eliminate Any Bank Losses, Simplifying Provisioning
Coverage Levels Can Be Adjusted To Eliminate Any Bank Losses, Simplifying Provisioning
Product Structure And Example
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Favorable Risk Weighting
Standardization
Risk Appetite AndExpertise
Innovation And Efficiency
Public Sector Strengths
Private Sector Strengths
Emerging Market Countries Are Using Interest Subsidies, Tax Incentives, And Even MI To Advance Housing Policy
A Government Guarantee Allows Banks To Carry 0% Risk Weighted Assets For Regulatory Capital Purposes
The Government Can Specify Standards And Ensure Uniformity, Which Creates Necessary Preconditions For Easier Loan Origination/Sale And Greater Liquidity
Mortgage Credit Risk Specialists Like GE Want To Offer Their Services Developed In Other Markets On A Long-Term Basis
Customers Expect New Products And Services, And Shareholders Expect Increasing Returns, So Companies Like GE Are Under Constant Pressure To Improve
Partnering With Rated Private Mortgage Insurers Offers Powerful Possibilities For Homeownership While Limiting Additional RisksAn Approach To Managing Credit Risk That Combines The Best Attributes Of The Public And Private Sectors
But…
Public/Private Partnership (“PPP”)
PPP Could Be Used To Encourage Low Down Payment Mortgage Lending On A Cost-Effective Basis
PPP Could Be Used To Encourage Low Down Payment Mortgage Lending On A Cost-Effective Basis
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PGC
PurchasesInsurance
Insures Mortgage
PPP Could Work Either As An Insurance Or Securitization Program, With Flexibility And Benefits To All Participants
PPP Could Work Either As An Insurance Or Securitization Program, With Flexibility And Benefits To All Participants
Private Mortgage Insurers Assume Non-Catastrophic Credit Risk & Administer Credit Risk Program
Consumers, Lenders And Investors Benefit From Reduced Credit Risk Because Of Sovereign Guarantee … But Government Benefits By Having Most Of The Credit Risk Re-Assumed By Private Risk Capital
Lenders
AA Re-Insurers AA Re-Insurers AA Re-Insurers
Provides Liquidity/Assumes Interest-Rate Risk
Buy PGC-Guaranteed Mortgages
Investors
PPP – How It Might Work
Lower Credit Cost For Consumers, Capital Relief And Liquidity For Banks, Economic Growth And Risk Transfer For Government, And
Deeper, More Liquid Asset Pool For Investors
Lower Credit Cost For Consumers, Capital Relief And Liquidity For Banks, Economic Growth And Risk Transfer For Government, And
Deeper, More Liquid Asset Pool For Investors
Home BuyersProvides Lower Cost Financing Generated By PGC Structure
Borrows To Purchase Or Refinance
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Up To 90%
50-55%
Private Sector Exposure To First Loss Position On Each Loan And For Substantially All Expected Losses Ensures That Underwriting Discipline/Risk-Based Pricing Is Maintained
PPP Reduces Risk Exposure To The Government To AAA Levels, With Private Sector Capital Incented To Manage Loans Rigorously
PPP Stimulates The Flow Of Funds Into Low Down Payment Mortgage Lending At A Minimal Cost To The Government With More Flexibility Than Other Alternatives
PGC Risk Exposure
Private Sector Risk Exposure
Borrower Equity
Illustrative Loan90% LTV
PGC Will Receive Premiums Sufficient To Cover Actuarially Calculated Losses, Which Will Make The Program Self-Funded
PPP – Credit Risk Allocation
Private Sector Risk Exposure
Private Capital Reinsures The Government Risk Down To 50-55% LTV, Which Includes All Loans Short Of Economic Catastrophe
PGC Risk Exposure
Property Values Must Fall 45-50%, “AAA” Stress Levels, Before Any Government Loss Is Incurred
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Basel II Is Data-Driven
Basel II Uses Probability Of Default (“PD”) As A Means Of Establishing Capital Levels
Basel II Uses Loss Given Default (“LGD”) As A Means Of Establishing Capital Levels
Basel II Encourages Banking Supervisors To Value Sound Risk Management Principles
Basel II Requires Timely And Meaningful Disclosures To Be Made About Bank Operations
Basel II Rewards Efficient Operations With Lower Capital Charges
Mortgage Insurance Can Help Emerging Market Banks Close The Gap On Basel II
Mortgage Insurance Encourages Generation Of Loan-Level Data
The Additional Underwriting, Servicing And Loss Mitigation Rigor Of Private Mortgage Insurance Can Reduce PDs
Third-Party Mortgage Insurance Minimizes LGD And Reduces Capital Requirements
Mortgage Insurance Has Facilitated Product Innovation And The Orderly Transfer Of Billions Of Dollars Of Credit Risk Exposures Outside The Banking System
Mortgage Insurance Provides Transparent Credit Risk Mitigation Well Understood By Regulators And Investors
Mortgage Insurance Streamlines Processes And Generates Better Delinquency Monitoring And Loss Mitigation
According To A Leading Authority*, “Asian Banks Currently Lack The Critical Data To Build Basel II – Compliant Internal Ratings – Based Systems,” Since …
• 80% Of Asian Banks Have <3 Years Of Probability Of Default Data• 100% Of Asian Banks Have <3 Years Of Loss Given Default Data• Operational Risk Data Are Lacking
* Standard & Poor’s (8/26/02)
Which Is Important Because IRB Banks Will Enjoy A Capital Advantage Even In Emerging Markets
Basel II Implications
How Can Mortgage Insurance Help?Why Is This Important?
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In Summary, We Would Like To Restate The Potential Benefits Of Private Mortgage Insurance In Emerging Markets
In Summary, We Would Like To Restate The Potential Benefits Of Private Mortgage Insurance In Emerging Markets
Potential Benefits
These Benefits Could Be Accelerated By Thoughtful Official ActionThese Benefits Could Be Accelerated By Thoughtful Official Action
Deconcentration Of Credit Risk – Several Transition Economies Already Have Embraced Mortgage Insurance As An Instrument, But Within Small Open Economies Characterized By Highly Concentrated Banking, Insurance And Asset Management Sectors. Credit Risk Transfer Outside The Financial System To Better Diversified Credit Risk Counterparties Reduces Systemic Risk.
Risk Management – In The Absence Of Meaningful Time Series Data, The Effectiveness Of Lenders’ Underwriting Criteria And Their Ability To Service Loans In A Sour Market Remains Unproved. Mortgage Insurers Can Facilitate Movement Toward Advanced Risk Management Techniques From The Perspective Of 40+ Years Of Managing Mortgage Credit Risk.
Credit Enhancement – Banks Need Additional Capital To Fund Loan Growth, And Flexibility In Balance Sheet Management. Mortgage Insurers Can Help With Capital Markets Solutions.
Supplemental Supervisory Resources – Since Mortgage Insurers Bear Risk Of First Loss, They Are Motivated To Demand Better Quality Credit Information, Robust Property Valuations, Rigorous Underwriting Standards, And Active Delinquency Management. Mortgage Insurers Are Consultants That Back Their Advice With Their Own Capital.
Homeownership Opportunity – Reducing Down Payment Restrictions Remains Critically Important, Especially To Leverage The Benefits Of Declining Interest Rates. Mortgage Insurers Can Suggest How A Public/Private Partnership Might Create A Prudent And Long-Term Alternative To Interest Rate Subsidy Programs.
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How To Contact Us
For Further Information
GE Mortgage Insurance
Eric KlopferVice President, Global Regulatory Affairs6601 Six Forks RoadRaleigh, NC 27615919-846-4153E-mail: [email protected]
Sacha PolveriniHead Of European Regulatory Affairs2-4 Rond Point SchumanBrussels 1040Belgium+32-2-235-6967E-Mail: [email protected]