mortgage insurance international lessons housing finance in emerging markets pierre david executive...
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Mortgage Insurance International LessonsHousing Finance in Emerging Markets
Pierre DavidExecutive DirectorCMHC International
World Bank
March 2006
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)
• 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 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
• 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
• 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.
• Although this paper reflects expert current knowledge, it is provided for general information purposes only. Any reliance or action taken based on the information, materials, techniques and models described are the responsibility of the user. Readers are advised to consult appropriate professional resources to determine what is appropriate and suitable to their particular case. CMHC assumes no responsibility for any consequence arising from the use of the information, materials, techniques and models described in the papers.
• © 2006 Canada Mortgage and Housing Corporation. All rights reserved. No portion of this material may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, electronic, photocopying, recording or otherwise without the prior written permission of Canada Mortgage and Housing Corporation. Without limiting the generality of the foregoing, no portion of this material may be translated into any other language without the prior written permission of Canada Mortgage and Housing Corporation.