WORLD BANK FINANCE FORUM 2002

1. WORLD BANKFINANCE FORUM 2002 Chantilly, Virginia USA June 19, 2002 Presentation By: Pamela Lamoreaux - IFC Head Housing Finance Group – Global Financial Markets

2. TODAY’S PRESENTATION • Importance of Housing Finance • Linkage Between Policy and Product • Where Has it Worked – Colombia Experience • Role of IFC • Where Do We Go From Here?

3. SOCIAL STABILITY: Enables households to purchase an asset which will represent their largest single investment. Personal residences account for 75-90% of household wealth worldwide, which amounts to 3 to 6 times their annual income. Housing represents 40% of the monthly expenditure of households worldwide. ECONOMIC DEVELOPMENT: Investment in housing accounts for 15-35% of aggregate investment worldwide. Housing finance supports a successful economic sector, and frees personal savings which can be invested in small businesses. Residential construction accounts for 5% of labor force worldwide, while real estate services (including finance) constitutes 4% of labor force worldwide. Role of Housing Finance/Capital Markets There is no dispute that housing finance and capital markets have tremendous development impact GLOBALLY.

4. FORWARD AND BACKWARD LINKAGES PRODUCTS POLICY HOUSING • Active Construction Industry • Primary mortgage lending • Secondary markets • Securitization • Bond Market Development • Rehab/Improvement Loans • SME Lending • Technology • Peripheral Services (credit • Bureau, title insurance, • Appraisal, tax services) • Land Reform/Usage • Title/Lien Registration • Taxation • Transfer of Ownership • Foreclosure/Bankruptcy • Subsidies/Incentives • Legal Framework (Real Estate, • Banking, Trust, Securitization) • Corporate Governance • Supervision/Regulatory Oversight • Infrastructure (water, electricity, • Sewer)

5. COLOMBIA EXPERIENCE Size of Mortgage Banking Operations Total Mortgage Credit

6. COLOMBIA EXPERIENCE Mortgage Banking

7. COLOMBIA EXPERIENCE Mortgage Banking

8. COLOMBIA EXPERIENCE Benefits of Secondary Market Colombian Mortgage Banks’ Assets LONGER-TERM (MARKETS) SHORT-TERM (FINANCIAL SECTOR) • Reduced balance sheet mismatch risk (UVR vs. DTF) • More efficient use of capital • Sharing or risks (credit, prepayment) • Marketability of assets (liquidity) • Increased servicing income • Tax benefit • Standardization of products, origination and servicing guidelines • Increased mortgage lending (use of proceeds for lending vs. hold in portfolio) • Lower mortgage rates to consumers (competition) • Provide credit enhancements to market (guaranty) • Ability to develop new non-UVR products • More domestic and international interest from variety of investors (pension funds, life insurance, financial, retail)

9. ROLES OF THE GOVERNMENT POLICY ISSUES - HITOS

10. COLOMBIA EXPERIENCE IMPACT OF HITOS Business Plan (US$ M) 2002 2003 2004 2005 2006 Mortgage sector Outstanding Balance of Residential Mortgages 5,550 5,478 5,417 5,365 5,321 New Loans 313 420 524 605 699 Titularizadora Colombiana Mortgage Balance 435 417 500 577 649 MBS Issuance 435 417 500 462 519 Portfolio 0 0 0 115 130 TC Mortgage Market Share 8% 14% 22% 30% 38%

11. FIRST ISSUANCE: TIPS E-1 • The first issue of the Titularizadora Colombiana “Hitos” was made on May 2, 2002. • The originator banks were: Davivienda, Colpatria, Granahorrar • The total issue size was about UVR 3.8 billion, or $215 million: • A senior class of bonds (Class A), in three tranches of varying maturities, 5, 10 and 15 years • A subordinated class of bonds (Class B). • The Class A bonds and the Class B bonds were rated ‘AAA’ and ‘A’ respectively, by Duff & Phelps Colombia.

12. FIRST ISSUANCE: TIPS E-1 • The issue involved the securitization of two types of mortgage loans rated as high quality performing loans: • (i) Social housing loans (subsidized loans) 27% • (ii) Non-social housing loans (non subsidized loans) 73%. • In addition the structure included two kinds of guarantees: • (i) A Colombian Government direct guarantee on the securities issued based on social housing loans • (ii) An IFC credit enhancement facility in the form of a local currency partial guarantee to the Class A bonds.

13. FIRST ISSUANCE: TIPS E-1 • The MBS issue of the Hitos was a complete success in the market.

14. Political risks (change of mortgage laws, terrorism) Unstable macroeconomic environment Increased levels of mortgage lending or creation of new specialized lending institutions (competition) Untested foreclosure laws (some pending civil suits) that could prove to be problematic for Hitos Investor education Inability to develop active secondary trading of MBS, continues to be swap and hold (not in line with government expectations for growth of markets) Regulator could establish regulatory guidelines (capital adequacy, liquidity ratios etc.) which inhibit business Regulator could establish oversight regime that is intrusive and provides too much information to markets COLOMBIA EXPERIENCE Challenges Ahead

15. GLOBAL ROLES FOR IFC “HOUSING THE WORLD” FUNCTIONING HOUSING FINANCE SYSTEM EQUITY LOANS WAREHOUSE LINES GUARANTEE TRAINING TECHNICAL ASSISTANCE ASSESSMENT OF MARKETS STRUCTURING TRANSACTIONS FUNCTIONING CAPITAL MARKET SYSTEM

16. CURRENT HOUSING FINANCE PROJECTS Where have we helped?

17. WHERE DO WE GO FROM HERE? DEVELOP STRATEGY COUNTRY ASSESSMENT LEVERAGE RESOURCES