Liquidity Facilities in Emerging Economies

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Liquidity Facilities in Emerging Economies

• Housing Finance in Emerging Economies
• Loïc Chiquier
• The World Bank
• March 10-13, 2003

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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)

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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.

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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.

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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
  (LTVlt 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

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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

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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)

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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

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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)

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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

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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

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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 ?

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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)