Housing Finance in Emerging Markets Washington DC – 16 March 2006 “Internationalisation of

1. Housing Finance in Emerging Markets Washington DC – 16 March 2006 “Internationalisation of Covered bonds” Cristina Costa Senior Adviser - ECBC European Mortgage Federation

2. European Mortgage Federation • Founded in 1967 to represent mortgage lenders’ interests at EU level (retail & funding) • Groups national trade associations and credit institutions from EU Member States + acceding countries • New Member State membership: Czech Rep., Hungary, Latvia and Poland • Accession Country Membership: Romania • Just welcomed Ukraine as its latest member • Represents approx.75% of EU mortgage market • EU mortgage market amounts to approx. 49% of EU GDP

3. Agenda • Mortgage Market Trends • Covered Bonds: an attractive funding source • Expansion of covered bonds • The Spanish Experience • Case Study : Hungary • Outlook

4. EU Mortgage Market Trends • Mortgages Outstanding: Total value of outstanding residential mortgage loans EUR 5.2 trillion at end 2005 (c. 49% of GDP) • Growth: Average annual growth rate approx. 8% per year over the last 10 years. Growth is much higher in the New MS • Interest Rates: The introduction of the Euro has resulted in significant falls in mortgage interest rates, which in turn has stimulated the markets • House prices: Big price increases in most countries over past few years, but there are signs of house price growth slowing down around Europe • Regulation: Capital adequacy and European retail FS integration dominate the regulatory agenda • Funding: Diversified access to capital market funding is increasingly important; EMF launches ECBC to represent covered bonds

5. Mortgage Funding in Europe Covered bonds outstanding as % of mortgage debt outstanding (2004) Source: European Mortgage Federation

6. Special character of covered bonds Specific legal framework/ Contractual provision Preferential right of bondholders Quasi-bankruptcy remoteness Covered Bonds Separated collateral pools High quality collateral Strict supervision Source: ABN Amro

7. Geographical Overview - Covered Bond Legislation in Europe(as of January 2006) Legislation in countries of the EU/EEA/CH 19 2000 2006 2003 Legislation infuture EU member and further countries in transition 23 2004 1998 2002 2003 2005 1998 4  1997 2006 1995 Concrete legislation in preparation 2005 1999 1997 1999 2005 3 1990 2003 2000 Legislation underconsideration 2 28 Cb Legislation

8. Covered Bonds • Most European countries have adopted cb legislation • Competition has driven legislation to ever higher (safety) standards without sacrificing funding flexibility • No trend towards lowest common denominator • Regulated at EU level (Art. 22(4) of UCITS): • Issued by a credit institution • Subject to special supervision • Investment of proceeds effected in eligible assets • Outstanding issues covered by eligible assets until maturity • Priority claim of bondholders on subset of assets • Recently adopted CRD lists set of eligible assets

9. CB: an attractive funding source • For issuers • Low funding costs • Flexible alternative to deposits and senior bonds • Possibility of extending the maturity profile of banks’ liability side to make it match with mortgage loans loan maturity • For investors • Alternative to Government bonds (yield pick-up) • Secure instrument in case of issuer insolvency - double protection (claim against issuer & cover pool) • Higher liquidity due to large issue sizes and market maker commitments • Geographic and asset class diversification

10. Record supply in European jumbo covered bonds Source: HVB

11. The Spanish Experience • Prior to 1976 (pre Franco), parallels with Eastern Europe • Laws date back to 1872 which saw first law allowing ‘Cédulas hipotecarias’. • Mortgage Law 1946 (legal & operational security) • Moncloa Pact 1977 (removal of obstacles) • 1982 Mortgage Market Law • Securitisation law introduced in 1991 • Spanish Economy: • Steady fall in unemployment from 26% to around 10% • Falling interest rates (Eurozone membership) • Cut National debt; Big increase in per capita income • Result - Housing, construction and Mortgage Markets booming

12. Covered Bonds in Spain • Almost 1/5 of mortgages funded by Cédulas, and 1/3 of new lending • In 2005, issuance highest in Europe surpassing that of Jumbo Pfandbriefe • Issuance open to all types of institutions (multi-sellers, direct) • 80% LTV limit on residential or 70% for commercial property • Strengthening status & demand of cédulas through: • 2004 Insolvency Act • 2005 Modification to Withholding tax regime • Expected Jumbo issuance for 2006 is approximately EUR 58 Billion.

13. Spanish Multi-cédula structure Cédulas Issuers (a number of Savings Banks) CH CH CH CH CH CH CH AyT Cédulas Fund Portfolio of individual issues AyT Cédulas Cajas (Issuer) Liquidity Reserve & Protection Deposit Aaa/AAA/AAA Joint cédulas Investors Source: AyT, HVB

14. Lessons to be learnt from Spain Spanish Experience • Highest home ownership rate in Western World • Lowest State Housing in Western World • Thriving covered bond market and securitisation market • One of Europe’s fastest growing mortgage markets Achieved by… • Diversified Funding Strategy • Building programme to ensure supply of quality housing • Macro-economic reform • Solid primary market laws to ensure safety of collateral • Minimising State involvement

15. Housing & Mortgage Markets in Hungary vs. EU 25 and CEECs-2004 Source: European Mortgage Federation, Hypostat 2004

16. Case Study: Hungary • Regulatory Environment: • Legal framework – Mortgage Banking Act (1997) • State subsidy scheme (introduced 2001) • Well developed system of refinancing partner banks through purchasing mortgages • 3 covered bond issuers - FHB, HVB, OTP • CB fastest growing market (6% of GDP) - total outstanding volume EUR4.9bn (EMTN Programme) • Since 2004: market based development • High HUF interest rates have turned clients towards FX-based products • Current monthly net growth (30-35 billion HUF) seems to be sustainable

17. Hungary: Challenges • Size of the domestic market • Crowding-out effect of Govies (growing budget deficit) • Liquidity concerns • Primary issues are relatively small (c. EUR50m) • Secondary turnover is moderate • Less supportive macro environment • Volatile interest rates and FX market • Growing role of foreign EUR issuances but majority of outstanding cb volume were domestic issues and HUF denomination • Cut in subsidy scheme and growing FX lending decreased the incentive of cb funding for non mortgage bank lenders

18. Outlook 2006 • European Mortgage Markets show no signs of slowing, especially in new member states • Continued Growth of covered bonds • Emergence of new issuers: IT, PT, NL, UK…. • FSA to implement EU compliant cb regime; NL next. • Increased level of investor interest (CEE, Asia) • Continued work of ECBC • Work on definition of common standards for covered bonds • European Commission working on European standard – funding likely to be one of the driving forces behind integration • Launch of Expert Group on Funding

19. Thank you! E-mail : emfinfo@hypo.org Tel: +32 2 285 40 30 EMF website: www.hypo.org Address: European Mortgage Federation Avenue de la Joyeuse Entrée, 14/2 Brussels 1040 Belgium