Housing finance and real estate securitization in China

1
Housing finance and real estate securitization
in China

• Ivan Ko
• Chairman CEO
• Advantage China Holdings Ltd.
• Presentation to CPD HKIS
• August 31, 2002

2
Brief Background

• More than 10 years experience in real estate
  development in Beijing and 5 years in Hong Kong
• Advantage China is a joint venture of
• Advantage original shareholders
• International Finance Corporation (IFC) of the
  World Bank
• Deutsche Bank Real Estate Private Equity Gp
• Netherlands Development Finance Company (FMO)
• Advantage China has operation in Beijing and will
  expand to other cities in China
• Advantage China is the first mortgage service
  provider in China

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Todays Agenda

• Real Estate Finance/Housing Finance
• Housing Finance
• Primary Market
• Secondary Market
• REITs

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What is Real Estate Finace? What is Housing
Finance?
Capital Market
Real Estate Finance
Housing Finance
Gov. Policy on Housing
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Transfer of Risk in the Real Estate Cycle 
Developer
Bank/ Lending Institution
Investing Public
Purchaser
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Real Estate Securitization

• Mortgage Loans (Mortgage-Backed Securities)
• Residential
• Commercial (shopping mall?office building?service
  apartment etc)
• Real Estate Properties (REITs)
• Development projects
• Incoming generating projects

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The Double-Cycle of Capital and Risk in Real
Estate
Bank/ Lender
Developer
Purchaser
Bank Project Finance
Investing Public
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The Impact of Mortgage on Asset and Liabilities
in Bank
Personal Debts Liabilities of Bank
Savings Loan Assets
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? American Dream vs Chinese
Dream
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China vs US

• 1.3 billion population
• Urban households 100 million
• Residential Mortgage O/S RMB650 billion
• No housing finance system

• 290 million population (1/4 Chinas)
• No. of households 100 million
• US6,200 billion in O/S (90 times Chinas)
• Strong and complicated housing finance system

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Mortgage Life Cycle 
Whole Loans  
Origination
Underwriting
Portfolio Management/ Servicing
Securitization
Primary Market
Secondary Market
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The Housing Finance Market In China

• Government Organizations
• Lending Institutions - Banks
• Market Players
• Market Structure/Infrastructure

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Primary MarketGovernment Organizations

• Ministry of Construction Department of Housing
  and Urban Development
• Center for Management of Housing Provident Fund
• PBOC
• Discussion How to design the institutions?

14
HUD born in 1965, but its history extends back
to the National Housing Act of 1934

• Mission
• A decent, safe, and sanitary home and suitable
  living environment for every American
• Creating opportunities for homeownership
   Providing housing assistance for low-income
  persons  
• Working to create, rehabilitate and maintain the
  nation's affordable housing  
• Enforcing the nation's fair housing laws  
• Helping the homeless  
• Spurring economic growth in distressed
  neighborhoods  
• Helping local communities meet their development
  needs

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HUD - FHA its inception in 1934Federal Housing
Administration

• provides vital public services contributing to
  the health and well-being of individuals and
  communities through its nationally administered
  programs. After being consolidated into the
  Department of Housing and Urban Development's
  (HUD) Office of Housing in 1965, the FHA
  continued its core mission of contributing to the
  building and maintenance of healthy, prosperous
  neighborhoods and expanding opportunities for
  affordable home ownership, rental housing and
  healthcare.

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HUD regulates the two housing GSEsFannie Mae
and Freddie Mac

• Fannie Mae and Freddie Mac (the GSEs) were
  chartered by Congress to create a secondary
  market for residential mortgage loans.
• These GSEs are the largest source of housing
  finance in the United States. They are created
  and established for their public purposes. Their
  Congressional charters require each corporation
  to achieve public purposes that include providing
  stability and liquidity in the secondary mortgage
  market, providing secondary market assistance
  relating to mortgages for low-and moderate-income
  families, and promoting access to mortgage credit
  throughout the nation, including underserved
  areas.
• Fannie Mae and Freddie Mac are exempt from state
  and local taxation and from registration
  requirements of the Securities and Exchange
  Commission. Each firm has a back-up credit line
  with the U.S. Treasury.

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Regulation of HUD on Fannie Mae and Freddie Mac

• Even though Fannie Mae and Freddie Mac are
  Congressionally chartered, they are also private,
  shareholder owned corporations that have been
  regulated by HUD since 1968 and 1989,
  respectively. Both GSEs fund residential
  mortgages by purchasing loans directly from
  primary market mortgage originators and holding
  these loans in portfolio or by issuing
  mortgage-backed securities.
• The Secretary of HUD is the mission regulator for
  Fannie Mae and Freddie Mac, with oversight
  authority to ensure that both GSEs comply with
  the public purposes set forth in their Charters.
  An independent office of HUD, the Office of
  Federal Housing Enterprise Oversight (OFHEO),
  regulates both GSEs for safety and soundness, by
  ensuring that they are adequately capitalized and
  operating their businesses in a financially sound
  manner.

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HUD - OFHEO OFFICE OF FEDERAL HOUSING ENTERPRISE
OVERSIGHT

• OFHEO was established as an independent entity
  within the HUD by the Federal Housing Enterprises
  Financial Safety and Soundness Act of 1992 (Title
  13 of P.L. 102-550). The Office is headed by a
  Director appointed by the President for a
  five-year term.
• OFHEO's primary mission is ensuring the capital
  adequacy and financial safety and soundness of
  two government-sponsored enterprises (GSEs) --
  Fannie Mae and Freddie Mac.
• Fannie Mae and Freddie Mac are the nation's
  largest housing finance institutions. Combined
  assets and off-balance sheet obligations of
  Fannie Mae and Freddie Mac were more than 2.4
  trillion at the end of 2000.

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Primary MarketGovernment Organizations What
is missing?

• Unified Institution for housing policy (HUD)
• Federal Housing Administration (FHA)/ Veteran
  Administration (VA)
• Discussion What is needed?

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Primary MarketLending Institutions What is
missing?

• Commercial Banks
• Mortgage Bankers
• Mortgage Insurers
• Pension Funds
• Discussion When will it open? What are the
  hurdles?

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Primary MarketMarket Players

• Commercial Banks
• General Insurers
• Guarantee Companies?
• Appraisal Companies?

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Primary MarketMarket Players - What is Missing?

• Title Insurance Company
• Mortgage Insurance Company
• Credit Bureau
• Discussion Are these companies viable?

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Primary Market Market Structure/Infrastructure
- What is missing?

• Product knowledge
• Legal protection to lenders
• Standardization Critical Mass
• Data accumulation/Modeling
• Second hand property transaction

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Secondary Market in Housing Finance

• Mortgage Corporation (Fannie Mae)
• Long-Term Funds
• Legal Infrastructure
• Professional Service Providers

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Secondary MarketMortgage Corporation - What is
missing?

• Fannie Mae, Freddie Mac
• Ginnie Mae
• Hong Kong Mortgage Corporation
• Korean Mortgage Corporation (Komoco)
• Discussion What does China need?

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Fannie Mae and Freddie Mac

• Fannie Mae is a private, shareholder-owned
  company that works to make sure mortgage money is
  available for people in communities all across
  America, with a public-spirited mission to tear
  down barriers, lower costs, and increase the
  opportunities for homeownership and affordable
  rental housing for all Americans.
• Fannie Mae was created by Congress in 1938 to
  bolster the housing industry during the
  Depression. At that time, Fannie Mae was part of
  the Federal Housing Administration (FHA) and
  authorized to buy only FHA-insured loans to
  replenish lenders' supply of money.In 1968,
  Fannie Mae became a private company operating
  with private capital on a self-sustaining basis.
  Its role was expanded to buy mortgages beyond
  traditional government loan limits, reaching out
  to a broader cross-section of Americans.Until
  1989, Freddie Mac was owned by the Federal Home
  Loan Bank System and its member thrifts and
  governed by the Federal Home Loan Bank Board
  (later reorganized into the Office of Thrift
  Supervision). FIRREA severed Freddie Mac's ties
  to the Federal Home Loan Bank System, created an
  18-member board of directors to run Freddie Mac,
  and subjected it to HUD oversight.

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Fannie Mae

• As a private company since 1968, Fannie Mae has
  provided more than 3.0 trillion in home
  financing for 40 million American families,
  reducing the cost of buying a home and increasing
  the homeownership rates in America.
• Currently, buy mortgages up to a loan limit of
  300,700.
• The growth of the mortgage-backed securities
  (MBS) market outstanding to over 4 trillion.
  Fannie Mae MBS outstanding reached over 960
  billion at the end of 1999.

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OFHEO's oversight responsibilities

• Conducting broad based examinations of Fannie Mae
  and Freddie Mac Developing a risk-based capital
  standard, using a "stress test" that simulates
  stressful interest rate and credit risk
  scenarios Making quarterly findings of capital
  adequacy based on minimum capital standards and a
  risk-based standard Prohibiting excessive
  executive compensation Issuing regulations
  concerning capital and enforcement standards and
  Taking necessary enforcement actions.
• OFHEO is funded through assessments of Fannie Mae
  and Freddie Mac. OFHEO's operations represent no
  direct cost to the taxpayer.

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The GSE Act

• The Federal Housing Enterprises Financial Safety
  and Soundness Act of 1992 (the GSE Act)
  established the current regulatory structure for
  the GSEs. The legislation divided the Federal
  government's regulatory responsibilities over
  Fannie Mae and Freddie Mac between the Secretary
  of HUD and the Director of OFHEO. Under the GSE
  Act, the Secretary of HUD is charged with general
  regulatory authority over Fannie Mae and Freddie
  Mac in all areas other than the GSEs' financial
  safety and soundness which is the responsibility
  of the Director of OFHEO.
• Specifically, the Secretary's authority includes
  setting and enforcing three affordable housing
  goals, monitoring compliance with fair lending
  principles, collecting loan-level data from the
  GSEs on their loan purchase activities, creating
  and distributing a public use data base of
  non-proprietary GSE purchase data, and providing
  oversight for new program approval.

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Secondary MarketLong Term Investment Funds
What is missing?

• Pension
• Housing Provident Fund
• Insurance
• Discussion When it will open? What will be the
  impact?

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Secondary MarketLegal Infrastructure What is
missing?

• Trust Law
• Guarantee Companies
• Enforcement of Mortgage Law
• Offshore Companies/Securitization Law
• Discussion What else needed?

32
Secondary MarketProfessional Service Providers
- What is missing?

• Trust business
• Fund Management Companies
• Servicers
• Rating Agency
• DiscussionWhich will happen soon?

33
Real Estate Investment Trust

• Legislated in 1960 so as to allow small investors
  can enjoy the income of large scale quality
  properties
• Not until 1992 before becoming popular
• Tax Reform Act in 1986 allows management to
  operate
• 100 REITs in 92 with 44 billion assets
• 300 REITs in 01 with 324 billion assets
• In the past 5 years, the yield was 150 bp higher
  than 10 years Treasury
• Before that, the yield of the two were similar

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Real Estate Investment TrustsSpecial Features

• Income Sources
• Holding income generating properties, some also
  have development properties
• Holding mortgage loans or Mortgage-Backed
  Securities
• Rules
• In the form of company or trust
• Minimum number of shareholders 100
• No 50 of shares held by 5 or less shareholders
• Over 90 of net profit has to be distributed to
  shareholders
• At least 75 assets are real estate
• 75 of income comes from rental or interest from
  loans
• No more than 20 of its assets are held by
  subsidaries

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? American Dream vs Chinese
Dream ? Your Dream
36
Thank You!

• email ivanko_at_advantagesvc.com