Housing Finance Policy In Emerging Markets potx

Edited by
Loïc Chiquier and Michael Lea
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Housing Finance Policy
in Emerging Markets
00-forematter.indd i 6/16/09 8:40:44 PM
00-forematter.indd ii 6/16/09 8:40:45 PM
Housing Finance Policy
in Emerging Markets
Edited by
Loïc Chiquier
and Michael Lea
non-bank financial
institutions group
global capital markets
development department
financial and private sector
development vice presidency
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iv housing finance policy in emerging markets
© 2009  e International Bank for Reconstruction and Development/ e World Bank
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Library of Congress Cataloging-in-Publication data has been applied for.
ISBN: 978-0-8213-7750-5
eISBN: 978-0-8213-7751-2
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Cover and publication design: James E. Quigley
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v
Contents
Foreword xix
Acknowledgments xxi
Abbreviations xxiii

Introduction xxix
Introduction xxix
Objectives xxix
Evolution of Housing Finance Systems xxxi
Policy Recommendations xxxiv
Impact and Lessons of the U.S. Subprime Crisis xxxvii
Housing Finance Is Interrelated with the Broader Economy xxxviii
Structure of the Book xxxix
Summary Conclusions xliv
chapter 1
Housing Finance and the Economy 1
Developed Economies 1
Emerging Economies 3
 e Importance of Housing Finance 5
 e Demand for Housing Finance 11
Macroeconomic Factors 11
Financial Liberalization 13
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vi housing finance policy in emerging markets
Technological Change 13
Concerns and Opportunities 14
 e E ect of Mortgage Finance on Savings 14
 e E ect of Mortgage Finance on Investment 15
Mortgage Finance and Growth 15
Housing Finance, Business Cycles, and Economic Fragility 17
Mortgage Finance and the Distribution of Risk 20
House Prices, Housing Finance, and Economic Activity 22
Lessons for Emerging Markets 24
chapter 2
Structure and Evolution of Housing Finance Systems 29

Mortgage Lending Models 30
Building Societies/Savings & Loans 30
Commercial Banks 33
Contract Saving Schemes 35
Specialist Mortgage Banks 36
Combining Di erent Systems 37
Secondary Mortgage Markets 39
Introducing New Lending Models: Mexico and India 40
Unbundling of Mortgage Value Chain 42
State-owned Lenders 46
Conclusions 47
chapter 3
Mortgage Instruments 49
Fixed-Rate Mortgages 50
Adjustable-Rate Mortgages 52
Indexed Mortgages 56
Interest-Only Mortgages 60
Reverse Mortgages 62
Lessons for Emerging Markets 63
chapter 4
Primary Mortgage Market Infrastructure 65
Appraisal 68
 e Importance of Sound Appraisal 68
Developing an Appraisal Industry 69
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contents vii
International Standardization of Appraisal Methodology 69
Appraiser Quali cations, Appraisal Associations,
Independence, and Ethics 72
Quantitative Appraisal Models and Real Estate Data 73

 e Challenges of Establishing an Appraisal Industry in
Emerging Markets 74
Mortgage-Related Insurance Products 76
Property Insurance 76
Mortgage Life Insurance 78
Catastrophic Insurance 80
Title Insurance 83
Credit Information Bureaus 85
 e Importance of Credit Information in Mortgage Finance 85
Credit Bureaus in Developed Markets 86
Credit Bureaus in Emerging Markets 88
Membership 90
Ownership 91
Management and Development 91
Data 91
Consumer Protection 92
chapter 5
Enforcement of Mortgage Rights 93
Does Mortgage Collateral Matter? 95
Di erences between Legal Systems 97
Forms of Mortgage and Mortgage Documentation 100
Alternative Security Devices 100
 e Land Charge 102
 e Mortgage Certi cate 102
Mortgage Documentation 102
Secondary Mortgage Markets 103
Procedural Issues in Mortgage Enforcement 104
Non-judicial Enforcement 106
Negotiated versus Auction Sale 112
Responsibility for Sale 112

Auction Sale Prices 113
Creditor’s Right to Acquire the Mortgaged Property 113
Notice, Cure, Rights of Redemption, and Stays of Execution 114
Bankruptcy and Other Preferences 116
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viii housing finance policy in emerging markets
Appeals 116
Eviction 117
Distributions 118
Alternatives to Mortgage Enforcement 118
Forbearance 119
Alternatives to Mortgage Collateral 120
Common Property Mortgage 122
Minimizing Enforcement Actions 123
chapter 6
Consumer Information and Protection 125
De ning the Consumer 127
Developed Markets 127
Emerging Markets 127
Consumer Protection Objectives 128
Information Asymmetry between Lenders and Consumers 129
Consumer Heterogeneity 130
Transaction Cost Asymmetries during the Going Concern 131
Vulnerability of the Consumer to Market Risks 131
Protecting the Consumer through the Loan Life Cycle 133
Before Borrowing 133
 e Loan O er and Closing 137
 e Ongoing Concern 139
 e Back End: Default 147
 e Costs of Consumer Protection 150

Opportunity Costs of Regulation 150
Alternative Implementation Forms, Costs 151
Enforcement Costs 152
Is Consumer Protection a Luxury Good for Emerging Markets? 153
Emerging Markets Are Part of the Global Consumer
Protection Trend 153
Appropriate Regulations May Support FinancialSector
Development 153
Conclusions 156
chapter 7
Construction Finance in Emerging Economies 159
Real Estate Development Process and Risks 162
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contents ix
Financing by Buyers 163
Financing by Banks 167
Funding from Capital Markets 170
Financing of Buyers 171
Other Regulatory Aspects 173
chapter 8
Risk Management and Regulation 175
 e Risks of Housing Finance 176
Credit Risk 178
Other Risks 182
Liquidity Risk 182
Market Risk 183
Agency Risk 186
Operational Risk 187
Systemic Credit Risk 188
Political Risk 189

 e Role and Tools of Regulation 189
International Standards for Reporting and Capital 192
Provisions 193
Capital Requirements for Primary Lenders 196
Basel II Capital Standards and Mortgage Lending 197
Capital Requirements—Supervisory Standards 200
Credit Concentration Risk 201
Market and Liquidity Risk 201
Mortgage Loan Design 203
Other Regulator Actions 203
Real Estate Market Information 204
Management and Reporting Standards 204
Taking Corrective Actions 205
Financial Reporting and Disclosures by Primary Lenders 206
Regulation of Secondary Mortgage Institutions 207
Case Study:  e U.S. Subprime Crisis 207
 e Property Boom and Loose Credit Underwriting 208
Reduced Reliance on Credit Enhancements 209
Risky Loan Design 209
Lack of Consumer Information 210
Breakdowns in the Behavior of Participants in the
Securitization Value Chain 210
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x housing finance policy in emerging markets
 e In uence of Trends in International Capital Markets 211
Reduced Transparency Resulting from Complex Security
Structures and Incomplete Information on Exposures 211
Regulatory Failures in the United States Contributed to the
Growth of Risky Subprime Lending Practices 212
 e Risks of Subprime Practices and  ose of Lending to

Moderate- and Low-income Households Should Not Be
Confused 212
 e Subprime Crisis Was Avoidable 213
chapter 9
Contractual Savings for Housing 215
Key Features of a Contractual Savings Scheme for Housing 216
General Character 216
Basic Structure of a CSH Contract 216
Open and Closed CSH Schemes 217
Financing Function of CSH 219
CSH and Other Housing Finance Products 219
Historical Development of CSH Schemes 220
Developed Mortgage Markets 220
CSH in Emerging Markets 222
Managing Risk under a CSH Scheme 223
Risk Pro le of CSH Contracts 223
Demand Fluctuations 225
In ation Risk 227
Contract Design Flaws 228
Misallocation of Excess Liquidity 230
CSHs as a Policy Choice in Emerging Markets 232
Mobilization of Savings 233
Lack of Long-Term Funding 234
Credit Risk Mitigation and Financial Stability 235
Stimulation of Modernization and Small Transactions
Lending Market 238
Institutional Requirements for CSH Lenders 239
Regulation of CSH Schemes 239
Subsidies for CSHs 241
CSH Subsidies in Emerging Markets 241

Guiding Principles 244
Conclusions for Emerging Markets 244
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contents xi
chapter 10
State Housing Banks 247
A Brief Overview of State Housing Banks 248
De nition and Classi cation 248
Types of State Housing Banks 249
 e Rationale for Creating a State Housing Bank 250
 e Model Failed in Many Countries 251
State Housing Bank Failings 254
Weak Corporate Governance 254
Lax Management of Credit Risk 255
Assets/Liability Mismatches 256
Misallocation of Subsidies and Rent-Seeking Policies 257
SHB as Obstacles to the Growth of Housing Finance Markets? 258
Available Safeguards and Alternative Options 258
Good Governance 259
Autonomy of Funding 260
Alignment of Corporate Interest with Market Development 260
Examples of SHBs Meeting  ese Conditions 261
Policy Alternatives 263
Regulatory or Contractual Credit Orientation 264
Second-Tier Institutions 264
Public-Private Partnerships 265
“Double Bottom Line”—Social and Commercial—
Private-Sector Lenders 266
Exit Strategies 267
Enable a “Corporatization Process” to Create a Commercially

Run Institution 267
Partial or Full Privatization 269
Conversion of an SHB into a Second-Tier Re nance Institution .271
State Support to Private Sector 271
Conclusion: A Decision Tree for Policy Makers 274
chapter 11
Housing Provident Funds 277
Description of HPF 277
Subsidies 278
Governance 280
Development of an HPF 281
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xii housing finance policy in emerging markets
International Experience 282
China 282
Singapore 284
Mexico 285
Brazil 287
Philippines 289
Nigeria National Housing Fund 290
chapter 12
Mortgage Securities in Emerging Markets 293
Why Are Mortgage Securities Important? 295
What Are the Prerequisites for Issuing Mortgage Securities? 297
What Has Been the Experience in Emerging Markets? 301
Covered Bond Issuers 302
MBS Issuers 304
Liquidity Facilities 306
Safety and Soundness Regulation in Mortgage Capital Markets 308
Mortgage-Backed Securities 308

Mortgage Bonds 310
Reporting for Secondary Market Instruments 312
 e Role of the Credit Rating Agencies 315
Lessons Learned 317
 e Basics 317
Market Demand 319
Simplicity 319
Role of Government 321
chapter 13
Mortgage Insurance 325
De nition and Unique Features of MI 326
Purposes of MI 326
Countries that Have MI Today 327
Prerequisite Conditions for MI Success 327
Key Program Characteristics 330
Individual Loan Coverage 331
Premium Rates 332
Eligible Loans 334
Underwriting Method 335
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contents xiii
Meeting Social Objectives 338
Special MI Products for Mortgage-Backed Securities (MBS)/
Structured Finance 339
Mortgage Pool Insurance 340
Timely Payment and Cash- ow Protection 340
Credit Risk Management 341
Regulatory Issues 341
Bank Risk-Based Capital Rules 345
Consumer Issues 347

Information Technology 349
Public-Private MI Partnerships 350
Public MI Provider Supported by Private Reinsurer(s) 351
Government Backup for Private MI Provider 352
Government-Sponsored Enterprises (GSEs), Privately Insured 354
Public-Private MI Competition 355
Lessons Learned 358
Conclusion 360
chapter 14
Residential Rental Housing Finance 363
Introduction 363
 e Rental Sector in Housing Policy 364
 e Importance of Enabling a Vibrant Rental Sector 364
Imbalance between Rental and Homeownership 366
Rental Housing as an Investment 367
 e Challenges of Developing Rental Housing in Emerging
Economies 369
Rights of Landlords and Tenants 371
Rent Control 372
Unfavorable Tax Regimes 374
Social Rental Housing 375
Some Market Financing Models for Rental Housing 377
All-Equity Based 377
Real Estate Investment Trusts (REIT) 378
Bank-Supplied Credit for Residential Rental Investment 380
Capital Market Financing 382
Credit Enhancements and Insurance Products 385
Country Examples 387
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xiv housing finance policy in emerging markets

 e Low-Income Housing Tax Credit (LIHTC) in the
United States 388
Brazil: the Residential Leasing Program (PAR) 389
Poland: the TBS Experience 391
Conclusions 393
chapter 15
Housing Microfi nance 395
 e Rise of Housing Micro nance 395
An Overview of Housing Micro nance 398
Potential Size of HMF Markets:  e Cases of Peru and
Guatemala 399
Financial Performance of HMF 402
Other Opportunities for Housing Micro nance 404
Limited Potential for Linking HMF and Housing Subsidies 404
Linkages between Commercial Banks and Housing
Micro nance 407
 e Limitations of Housing Micro nance 409
Market Size 409
Pricing and Access 410
Re nancing and Other Micro nance Limitations 412
Potential to Contribute to Entrenchment of Informality 414
Conclusion 414
chapter 16
Housing Finance Subsidies 417
Where to Start? Linking Housing Problems to Subsidy Policy 420
Analyzing the Causes of the Housing Problems 420
Subsidies and Other Types of Government Intervention 426
Why Subsidize Housing? 428
Subsidies and the Expansion of Housing Finance Systems 429
Housing Finance Sector Problems, Causes, and Subsidies 429

Housing Finance Subsidies, Market Structure, andVested
Interests 432
Housing Finance Subsidies to Alleviate Funding Constraints 434
Subsidies to Address Lending Risks and High Transaction
Costs 436
Problems with Subsiding a Housing Finance System 439
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contents xv
Subsidies for the Financing of Rental Housing 440
 e Rental Market 440
Rental Sector Regulations, Taxation, and Subsidies 441
Subsidies to the Rental Sector 443
Project Finance for Ownership Housing 447
Public-Private Partnerships for the Provision of A ordable
Rental Housing 447
Making Rental Subsidies Work 448
Housing Finance Subsidies to Households 449
Household Problems and Subsidies 449
Lower-Middle Income Households 453
Low-Income Households: Subsidies When Housing Supply
Markets Do Not Work 458
Conclusions 460
Bibliography 463
Contributors 485
Figures
1. Selected Housing Loan to GDP Ratios xxxii
2. Share of Urban Slum Dwellers and Housing Loan to GDP
Ratio, Asia and Latin America, 2001 xxxv
1.1. Mortgage Debt/GDP—Developed Markets 2
1.2. Mortgage Debt/GDP—Emerging Markets 3

1.3. Correlation of Private Consumption Growth with Real House
Price Changes 7
1.4. Marginal Propensities to Consume Out-of-Housing Wealth
and Mortgage Market Indicators 8
1.5. Mortgage Rates in Developed Countries 12
1.6. Mortgage Rates in Emerging Markets 12
2.1. Depository and Direct Lending 31
2.2. Mortgage Bank System 36
2.3. Mortgage Lenders by Type 37
2.4. Emerging Market Mortgage Funding 38
2.5. Housing Finance with a Secondary Mortgage Market 39
2.6.  e Bundled Home Mortgage Delivery 43
2.7. Unbundled Mortgage Delivery 43
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xvi housing finance policy in emerging markets
2.8. Mortgage Distribution Channels 44
3.1. Instrument Alternatives 50
3.2. Cost of the Danish Prepayment Option 52
3.3. Mortgage Products: Percentage of Adjustable Rate Loans 53
3.4. Mexican Mortgage Instrument Payment Performance 56
3.5. Mexican Mortgage Instrument Balance Performance 57
3.6. Amortization by Interest Rate Type in the United States
(U.S. H1 2006) 61
3.7. Method of Repayment United Kingdom 61
7.1. Basic Construction Finance Model 168
9.1. Basic Structure of a CSH Contract 217
9.2. Origins of Building Societies, Savings & Loans, and
Bausparkassen 221
9.3. Closed System CSH Contract Demand and Capital Market
Rates, Germany, 1973–2007 226

9.4. Role of CSH Deposits for the Financing Structure of
Monetary Financial Institutions, Czech Republic, 2002–07 233
15.1. Government and Banking Association Charter Target Group
in South Africa 397
15.2. E ective Interest Rates (inclusive of fees) for MFIs in 2004 410
Tables
1.1. Real Estate and Banking Crises—Selected Cases 23
5.1. Enforcing Mortgage Collateral 94
9.1. Main Di erences between Open and Closed CSH Schemes 218
9.2. CSH Subsidies in Central and Eastern Europe Compared 241
12.1. Capital Market Finance of Housing in Emerging Economies 302
12.2. Basel II Standardized Risk Weights for Long-Term Bonds 314
13.1. Selected Countries with MI Programs, 2008 328
13.2. MI Prerequisite Conditions for Success 329
13.3. LTV Correlates Strongly with Default Risk and Losses 330
13.4. Insurable Loans, Selected Countries 335
13.5. Credit Risk Management Tools 342
13.6. Advantages and Disadvantages of Public and Private MI
Schemes 350
13.7. MI Program Reversals and Resolutions—Selected Cases 357
15.1. HMF Performance Indicators for Six MFIs in Latin America .403
16.1. Potential Access to Housing Finance in Mexico, 2006 423
16.2. A ordable Loan/House Price Scenario 424
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contents xvii
16.3. Examples of System Subsidies 431
16.4. Examples of Housing Finance Subsidies to Households 452
Boxes
1.1. Real Estate and Financial Crises:  ailand 19
1.2. Mexican Past Crises and the Role of Housing Finance 21

2.1. SOFOLs—Mexican Mortgage Companies 41
2.2. HDFC—Creating a Market 42
3.1.  e Limits of Adjustable-Rate Mortgages (ARMs) 55
3.2. Colombia: Di culties with Indexed Mortgages 58
4.1. Developing the Appraisal Industry 75
4.2. Examples of Property and Disaster Insurance 82
4.3. Croatian Credit Bureau Development: HROK 89
5.1.  e Crisis of Mortgage Markets in Colombia 96
5.2. Judicial Enforcement of Mortgages in West Africa 105
5.3. Judicial Enforcement in Mexico 106
5.4. Non-judicial Enforcement of Mortgage Rights in Croatia 107
5.5. Non-judicial Enforcement of Mortgage Rights in Sri Lanka 108
5.6. Time in Foreclosure in Power of Sale and Judicial Procedure
States in the United States 109
5.7. Non-judicial Enforcement of Mortgage Rights in India 109
5.8. Reforms of Mortgage Rights in Pakistan 110
5.9. France: Guarantees as a Substitute for Mortgages 121
5.10. Housing Lending in Indonesia 122
6.1. “High” and “Low” Levels of Consumer Protection—
 e Clash of Approaches in Europe 132
6.2. De ning the Annual Percentage Rate of Charge 135
6.3. Prepayment Indemnities—How Much is Too Much? 139
6.4. Foreign Currency Mortgages—Low Rates, High Risk 142
6.5. Consumer Protection in the United States and the Subprime
Market 144
6.6.  e Legacy of Brazil’s Old Housing Finance System 146
6.7. A New Consumer Protection Framework for Mexico 155
8.1. Innovative Underwriting in  ailand 181
8.2. Proactive Servicing in Mexico 182
8.3. Managing Market Risk 184

8.4. Polish Foreign Exchange Lending Requirements 185
8.5. Keystone Bank 190
8.6. Spain’s Statistical Provision 195
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xviii housing finance policy in emerging markets
8.7. Colombia Crisis 198
9.1. CSH—an Islamic Finance Product in Iran 223
9.2. Prepayment Risk in the Austrian Market 227
9.3. Illiquidity of the Iranian Housing Savings Scheme 229
9.4. Liquidity Fluctuations and Disconnect from the Housing
Finance System in Tunisia 231
9.5. CSH System Choice in Transition Countries in the 1990s 236
9.6. Attempts to Introduce CSH in India 238
9.7. CSH Subsidies in Hungary 242
9.8. Planned CSH Law and Subsidies in Russia 242
10.1.  e Fiscal Cost of Bailing Out State Housing Banks 252
10.2.  e Case of BancoEstado (Chile) 261
10.3.  e Case of the Government Housing Bank (GHB) of
 ailand 262
10.4.  e Case of the Federal Mortgage Bank of Nigeria 272
11.1.  e Reforms of INFONAVIT in Mexico 286
14.1. Returns on Formal Rental Housing in São Paulo, Brazil 371
14.2. Underwriting Criteria for Multifamily Rental Loans 381
14.3. Securitization of Multifamily Rental Loans and Social
Housing Loans 383
14.4. Bond Enhancement Products for Multifamily Rental
Housing 387
16.1. Example of Income and Finance A ordability 425
16.2. De ning Subsidies 426
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xix
Foreword
 is book is a magni cent e ort to pull together both knowledge and expe-
riences from advanced and emerging markets to help policy makers in all
markets establish sound housing  nance policies.
 e book covers all the important aspects of housing  nance. Having
been actively involved in this topic as a policy maker in the past, I can
say this book would have made our options more clear, our thinking more
focused, and our decision-making faster, if we could have had this publica-
tion at that time.
It will be a very valuable tool for policy makers going forward.
 is volume could not be more timely.  e debacle of the U.S. subprime
mortgage market is distorting the discussion around housing  nance in
emerging markets. To cut through the maze, this book o ers insights
around all the building blocks of a housing  nance system—including
mortgage securitization—and guides the reader through the di erent
policy options available in each case and the most common mistakes
policy makers must avoid.
 e vastness of the experiences related from around the globe, and the
cross-cutting perspective of the World Bank technical experts, will surely
enable the reader to relate the topics discussed with the situation faced in
his or her country. While reading it, I understood that the problems we
face in the Mexican housing market are strikingly similar to those of other
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xx housing finance policy in emerging markets
emerging economies.  ere is a lot we may learn from each other, and this
book just made that so much easier.
Guillermo Babatz
President
Comisión Nacional Bancaria y de Valores, Mexico

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xxi
Acknowledgments
We would like to express our immense gratitude to the authors and co-
authors of the chapters in this book.  eir contributions have been of the
upmost professional quality, and re ect decades of international exposure
and experience as well as a capacity to synthesize their unbiased and in-depth
knowledge. We take also this opportunity to thank them for their incred-
ible support and patience. A special thanks is given to Roger Blood, Robert
Buckley, Steve Butler, Franck Daphnis, Hans-Joachim Dübel, Richard Green,
Britt Gwinner, Olivier Hassler, Marja Hoek-Smit, David Le Blanc, Sally
Merrill, Bertrand Renaud, Claude Ta n, and Simon Walley. Many more in
developed and emerging economies should be thanked for their direct and
indirect contributions. As the list would simply be too long, we can only sin-
cerely and collectively thank all of those we have had the privilege to work
with throughout these past years.
 is book represents a pioneering e ort to  ll a very large knowledge gap
in this important but poorly understood area of housing  nance in emerging
economies.  is publication should be improved through subsequent ver-
sions. As markets and policies keep changing rapidly, we can only encourage
all contributors to keep updating the collective knowledge and wisdom by
taking further initiatives to share their experiences.
A fantastic e ort was deployed by the GCMNB Department of the World
Bank, spearheaded by Olivier Hassler, Colleen Mascenik and Simon Walley
00-forematter.indd xxi 6/16/09 8:40:47 PM
xxii housing finance policy in emerging markets
in order to update, adjust, edit and assemble the various part of this book,
including updates related to the crisis. Without their tenacious and profes-
sional involvement, this book would have not become a reality. A special
thanks as well to Patricia Braxton and Megan Gerrard of the World Bank,

and Mellen Candage of Grammarians for their superb editorial contribution.
James Quigley has done a highly professional job designing and laying out
the book.
As authors and editors of the book, we are also especially thankful to our
great peer reviewers, Guillermo Babatz and Mila Freire, who made the time
to provide us with detailed and constructive comments, which have been
critical to improve the quality of the book.
Last but not the least, we would like to thank Rodney Lester and Bertrand
Renaud for their inspirational, intellectual and managerial support.  is
book is also largely theirs.
Loïc Chiquier and Michael Lea
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xxiii
Abbreviations
abs asset backed securities
aids acquired immune de ciency syndrome
anil L’Agence Nationale pour Information sur Logement (National
Agency for Housing Information, France)
apr annual percentage rate
ara Housing Finance and Development Centre of Finland
arm adjustable (or variable) rate mortgages
avm automated valuation model
bafin Bundesanstalt für Finanzdienstleistungsaufsicht (Federal
Financial Supervisory Authority, Germany)
bhsa Banco Hipotecario SA (Argentina)
bhu Banco Hipotecario del Uruguay
bis Bank for International Settlements
bkn Statens bostadskreditnämnd (National Housing Credit
Guarantee Board, Sweden)
camel capital, assets, management, earnings, liquidity

cee Central and Eastern Europe
cef Caixa Econômica Federal (Federal Housing Bank, Brazil)
cfr Code of Federal Regulations
cmbs Commercial Mortgage-Backed Securities
cmhc Canada Mortgage and Housing Corporation
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