Liquidity Facilities in Emerging Economies

1. Liquidity Facilities in Emerging Economies Housing Finance in Emerging Economies Loïc Chiquier The World Bank March 10-13, 2003

2. Liquidity Facilities • Issue Bonds, Refinance Mortgage Lenders • Help to reduce liquidity and interest rate risks • (maturity matching, circumstantial back-stop) • Minimum risk exposure (limited counterpart risk and market risk, diversified low-risk mortgages as collateral), credit risk to primary lenders (over-collateral refinance or purchase with recourse) • Issue attractive bonds (low risk, sizeable, hopefully liquid, and regular issuance)

3. Liquidity Facilities (II) • Cheap, robust, simple, secure system to mobilize private bonds and to insure liquidity access to more mortgage lenders with economies of scale. • Less demanding than securitization about legal, regulatory, standards infrastructure, but also more limited ALM capacities (and more capital needed). • Compatible with multiple lenders (specialized or not, depositories,etc.) and alternative funding tools, but not panacea funding solution.

4. Liquidity Facilities (III) • Prerequisites • Relatively stable macro economic conditions • Active and comprehensive homeownership housing policy (effective legal and regulatory framework for private markets to operate, targeted efficient social housing instruments) • Deregulated financial markets • Transactions exempted from stamp duties/fees • Developed bond market infrastructure • Transition role to SMM conduit (HMC Trinidad) although adaptability challenges.

5. Liquidity Facilities (IV) • Catalyst liquidity role rather than direct engine (limited impact on FRMs, residual market risks) • Tricky corporate governance client/lender/investor • State support both as investor and bond guarantor (often implicitly): Malaysia , Jordan, Trinidad Gradual privatization FHLBs by members-users French CRH: state bond guarantee for three years • Rather regulatory/supervisory tool than object, although concentrated risks and debt leverage

6. JMRC in Jordan • Jordan: small and open economy, with a small pre-1998 HF system (privileges Housing Bank) • Since 1998: JMRC operations to develop sound, competitive, and affordable mortgage industry • Mixed public-private capital (18% owned by CBJ) • Refinance participatory eligible banks • Keeps at least 120% over-collateralized mortgages (LTV< 80%, main residence purpose, fee-exempted transferred mortgage deeds, replacing collateral if needed) • Issues private bonds (3-5 Y) and short-term notes • Conservative risk management policy

7. JMRC (II) • Attractive refinancing and ALM tool for banks (exempted statutory reserves, better regulatory treatment of refinanced loans) • Attractive fixed-rate bullet-bond bonds for investors (social security fund, banks) • Bonds eligible to bank liquidity reserves, 20% risk-weighted for capital adequacy • Catalyst mortgage growth (8,000 loans, 8 banks) • Smooth re-directed banking strategy of the HB

8. JMRC (III) • Improved housing credit affordability (20 years terms, max. LTV 75%, 10%-13% rates) • Budgetary relief (refinance public housing loans) • Mortgage lending regulatory safeguards • Regular issuer of low-risk private securities (implicit state guarantee) • Prudential lending activities (de facto 153% over- collateral portfolio), effective cost recovery • Key to develop new scheme for low-income civil servants (5% buy down, social housing)

9. JMRC Perspectives (IV) • Needed Islamic housing debt window (refinance/purchase) • Needed fixed-rate mortgage markets and longer-term bonds (lack of Government benchmarks) • Further gains in credit affordability (credit rates) • Non-recourse purchase of mortgage pools and issue of MBS (needed effective external MI program) • Possible privatization

10. Malaysia Cagamas Berhad (I) • Created in 1987 after liquidity crunch and recession to provide more liquidity to mortgage lenders, reduce market risks, assist social housing finance, sustain construction sector, develop private fixed-income markets (now 16.6% share) • Cagamas purchases mortgage loans from lenders with recourse and obligation to repurchase (review periods: 3,5,7 years). • Cagamas debt amortized independently from mortgage pools (just collateral)

11. Malaysia Cagamas Berhad (II) • Islamic Islamic finance window (purchase of deferred payments sales and housing leasing contracts) • Cagamas issues matching term debt (variable-rate loans, fixed-rate securities) • Cagamas as regular rated-AAA issuer

12. Malaysia Cagamas Berhad (III) • Central Bank (BNM) key investor (20%) as policy tool, capital diversified with 74 fin. institutions, Board chaired by BNM Deputy Governor. • Incentives to lenders (exempted reserves) exposed to social housing lending quotas and rate ceiling. • Incentives to bond investors (eligible to bank and insurance reserves, 10% risk-weighted) • Limited role to renewed short-and medium term refinancing of variable rate mortgage credits

13. Malaysia Cagamas Berhad (IV) • Catalyst of booming mortgage lending (banks and finance companies) • Outstanding housing through banks: 21.7% GDP • THLD public originator as important initial user • Successful expansion of demand-driven products after 1992 (fixed/variable rate, maturities, recourse /non-recourse, Islamic debt, leasing/commercial property, etc.) • Profitable institution, maybe monopolistic GSE ?

14. Malaysia Cagamas Berhad (V) • Cagamas successful through its counter-cyclical liquidity role for the markets (“buffer”), and help lenders meet housing lending requirements • Cagamas own mortgage market share normally fluctuates (up to 41% in 1997 as buffer to crisis, now down to 18%) • Less business recently: liquid banks, lower market rates, possible direct securitization by banks • Recent and gradual shift to conduit model But some lenders reluctant to securitize secure and profitable variable-rate mortgage assets, investors want higher yields for longer term amortizing debt, (plus adaptation to regulations, standards)