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Developing Mortgage Finance in Southeast Europe

This project aims to develop primary and secondary mortgage markets in Southeast Europe through a standardized, international best practice approach. It includes the Southeast Europe Mortgage Finance Network (SEEMFN) and the SEE Mortgage Fund.

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Developing Mortgage Finance in Southeast Europe

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  1. Developing Mortgage Finance in Southeast Europe Sally Merrill, Urban Institute Paul Sacks, Multinational Strategies Jean Lange, USAID/EE

  2. USAID Regional Mortgage Finance Projects in SEE (1) SEEMFN: Southeast Europe Mortgage Finance Network • Goal: develop primary markets and local secondary markets in SEE via a regional, standardized, international best practice approach (2) SEE Mortgage Fund: a “conduit” or pooled funding vehicle • Goal: access to funding for SEE lenders in international banking & capital market, esp. Euromarket

  3. Southeast Europe Mortgage Finance Network (SEEMFN) • Initiated with SEE Regional Conference: January 2003, Sofia; participants from SEE, CEE, Germany, U.K., U.S., USAID, EBRD, and IFC • SEEMFN Working Group. Meets semi-annually: 2003-2006 • Mortgage market studies: Croatia, Romania, and Bulgaria, Bosnia, and Serbia • Website: www.ceemortgagefinance.org

  4. SEEMFN Working Group • Primarily private sector: lenders from SEE (private members are self-funded) • IFIs & donors: USAID, EBRD, IFC, & KfW • Also: German Mortgage Bankers, Croatian Banks Association, USAID-sponsored Enterprise Funds in Bulgaria and Romania, Institute for Market Economics, Urban Institute, and MNS • Government participation limited: Central Banks and Ministries of Housing & Finance

  5. SEEMFN Working Group, May 2003, Sofia: Priorities • Host: Institute for Market Economics, Sofia • Legal Framework: legal infrastructure for primary & secondary mortgage markets • Standardized, best practice underwriting • Mortgage Guarantee (default) insurance • Regulatory Issues in mortgage finance • Support functions: credit bureaus, appraisal, data • Other areas as agreed by SEEMFN members

  6. SEEMFN: December 2003, Bucharest • Hosts: Ministry of Transportation, Public Works & Housing, Romanian-American Enterprise Fund, and Domenia Credit • Presentation: “Legal Framework for Primary & Secondary Mortgage Markets in SEE”: Bulgaria, Romania, and Croatia* • Primary Market: Mortgage laws, foreclosure, enforcement, judicial structure, & registration • Secondary Market: Mortgage bond laws & other secondary market legal infrastructure *Carol Rabenhorst,Urban Institute, & Stephen Butler, Jurisconsult

  7. SEEMFN: May 2004, Split • Host: Croatian Banks Association • Presentation: EBRD Mortgage Finance Manual: Best Practice Underwriting, EBRD & Bank of Ireland • Presentation: Successfully launching the Croatian Credit Bureau, Croatian Banks Association • Presentation: Efforts to Establish a Bulgarian Credit Bureau, Institute for Market Economics

  8. Future SEEMFN Topics • Regulation of Mortgage Finance • Mortgage Default (Guarantee) Insurance • Implementation Issues in the EBRD Best Practice Manual • Secondary Market Funding Options: Covered Mortgage Bonds, MBS • Secondary Mortgage Market Conduit

  9. SEE Mortgage Fund • Mortgage Fund is a “conduit”, or pooled funding vehicle • Funding for See lenders will be provided via a revolving structure loan facility • Conduit will acquire mortgage pools and mortgage bonds from SEE banks • Goal: provide secondary market funding from international banking and capital markets • USAID, IFC, KfW, EBRD, international banks

  10. Rational for SEE Conduit • Current SEE funding: deposits, parent bank financing, syndicated bank loans, MBB in Bulgaria • Conduit will enable SEE banks to diversify funding & access longer-term international capital market funds. Provides” • Diversification of funding sources • Access to international capital market • Economies of scale via sharing transaction costs by originators

  11. Mortgage Lenders Mortgage Borrowers Mortgage Funding SPVs MortgageLoans Mortgage LoanReceivables& Collateral Origination Fees On-Shore Pledge ofReceivables& Collateral FundingAdvances Off-Shore Mortgage Funding Vehicle Pledge ofReceivables& Collateral FundingAdvances Lenders Proposed Structure – Funding of New Loan Originations

  12. Mortgage Funding Vehicle Lenders Release ofCollateral Pledge ofCollateral Proceeds MBS Issuer GuaranteeProvider (optional) Guarantee Issuanceof MBS Proceeds MBS Investors Proposed Structure – Refinancing via MBS Issuance LoanRepayment

  13. Key Features of Conduit • Funding provided via a revolving structured loan facility, refinanced by issuing MBS • This funding used to fund new origination (meeting required standards) • Each mortgage lender has its own SPV • SPV will own the assets, lenders will originate service • Would begin with loans from 4 banks in Croatia & Bulgaria (due diligence nearly complete)

  14. Developing the Conduit • USAID: grants for conceptualization since 2003 • IFC, KfW, and EBRD: now may provide further grant funding and technical support • Several large international banks expressed interest in (1) providing the liquidity facility (structured loan facility) & (2) organizing securitization of bonds backed by SEE mortgages • Banks from Italy, France, Japan, Netherlands, U.S.

  15. Lessons Learned (1) • Regional approach has been very effective in bringing countries together • SEE regional “leaders”: share with each other & with those just beginning the reform process • Bulgaria: progress on mortgage bonds • Romania: progress on foreclosure law • Croatia: operating credit bureau, booming market

  16. Lessons Learned (2) • Focus on primary market first • Primary market must strive toward best practice before issuance of mortgage-backed debt can be cost-effective • Standardization enhanced the effectiveness of the regional focus • Then, focusing the secondary market development reinforces primary market development

  17. Lessons Learned (3) • Private sector must be involved: mobilizing and energizing the private sector is highly effective • Excellent way to create pressure on Government for market reform • Competition sharpened, as banks move to best practice & cost-effective funding strategies

  18. Lessons Learned (4) • International approach definitely justified • Primary market best practice looks to international standards • Legal infrastructure for secondary market should be flexible & able to accommodate numerous typologies of mortgage-backed debt • Donor cooperation is alive and well!

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