West Africa High Level Peer Exchange Accra Nov 28- Dec 1, 2006

1. West Africa High Level Peer ExchangeAccra Nov 28- Dec 1, 2006 Development Paths for Affordable Housing Finance Systems Olivier Hassler The World Bank ohassler@worldbank.org Financial and Private Sector Development

2. Outline of the Presentation • Strengthening the market infrastructure is often blocked by conflicting objectives • What should lead what: primary or secondary market? • The liquidity trap • Expanding Housing Finance Outreach: Top-down or bottom-up? • Development engines/ Role of the government • 2 cases of market/government interaction based growth

3. Mortgage Lending Foundations: Conflicts of objectives often hinder its strengthening • Clear titles, reliable records, efficient collaterals: a condition for widening access to finance • ..often preempted by other objectives : • Anti-speculative goals can make property rights precarious ( deterrent for secured finance and large scale developments) Better practices: Senegal, Niger, South African countries (land proclamation) • High registration costs affect the formalization of rights and market dynamics ( counterproductive) Ex.: Pakistan: growth of revenues after lowering transaction costs (Sindh: 10% to 5%, Punjab 3.5% to .5%) • Ill focused defaulters protection encourages willful behaviors • Need of limiting motivations and timeframe of foreclosure contestations (Chile) • Earnest deposit requirements from contesters (Pakistan)

4. What leads what: primary or capital market? • Capital market funding is not a pre- condition of development … • …Except for: • Specialized, non- deposit taking institutions • Fixed rate lending • seeking to anchor lending on C.M. too early can be counterproductive (if small institutional savings, no liquidity…) • Banks deposits are an acceptable source of funds provided that • The bancarisation rate is growing • There are stable core deposit bases (factors: confidence- currency, banks-, dispersion of depositors, private sector deposits) • Loans carry adjustable rates See European markets: +/- 3/4 of mortgage loans stock [even USA: deposits fund nearly half of mortgages directly or indirectly]

5. What leads what: primary or capital market? Cnt • A well sequenced interaction between bank funding and C.M. can promote market development • Emergence of deposit based lending • Critical mass, portfolios valuation bases  secured funding through the C.M. can start • Quality lending and servicing standards required by C.M  primary market more efficient • Market liquidity allows banks to invest in mortgage securities , redistribution of resources from cash rich to constrained lenders • However, deadlocked situations are possible: vulnerable deposit bases + weak mortgage infrastructure -Ex: CEMAC • Choosing appropriate funding instruments is critical to spur integration • Transitional tools • Simplicity vs complexity

6. The liquidity trap • If a weak mortgage infrastructure restricts lending to a small high-end segment • If the bridge with the capital market is not functional • No long term yield curve • No proper investment vehicles • Insufficient market liquidity  • The financial system does not fulfill its intermediation function – independently of lacking investment opportunities : • Liquidity trap • Misallocation of long term resources(reverse term transformation)

7. Expanding the outreach: top down or bottom up? • The dualistic nature of African Economies cannot be ignored • Mainstream banks are often limited by strategic considerations • Alternative lenders exist Mali (Nyesigiso), Congo (Mucodec), Burkina Faso (Caisses Populaires), SACCOs • But they are often weak • Connecting alt. lenders to the formal financial sector is needed: • Removal of the funding constraints • Access to money market and last resort lender required for liquidity management • Credit information exchange • There are conditions for such a connection: • Soundness (apex, supervision, rating) • Governance • Technical arrangements ( whole sale lending, guarantees, brockerage agreements) • The 2 approaches are complementary Inducing banks to go “down market” needs to be encouraged (Ex.:South Africa Financial Charter), & alternative lenders to be strengthened

8. Development Engines and Government Role • “Organic” growth is rare (Indian commercial banks since 1999?) • Hence governments tendency to directly remedy “market failures” • Direct provision of housing A now widely recognized misallocation of resources. • State housing Banks more than often, disappointing social and economic outcomes • Housing Provident Funds often little impact, and negative side effects(regressive subsidization, distortions hampering the development of the global supply)

9. Development Engines and Government role • Government “Engineered growth” of the private sector: a development path with proven successes • Promotion of a conducive environment • Pakistan since 2001 (macro economics, liberalization, recovery law) • Support to specialized institutions • India: HDFC, and following HFCs (initial support, bank credit direction, NHB backing) • Mexico: SOFOLES driven market driven resumption after the Tequila crisis(multifacetted SHF support) • Ghana: HFC (Bank of G. initial stake, GoG & SNITT bond holders) • Liquidity Facility with catalytic impact • Malaysia: Cagamas (Central Bank 20% stake) • Jordan: JMRC • Transfer of risks exceeding a commercial threshold • USA, Europe: mortgage insurance on loans to moderate income groups • Mexico SHF: indexation gap risk

10. Case study: India (mortgage loans: from 2% to 4% GDP 2002-2005) • 1978: HDFC- a private sector lender & market developer • 1983: new HFCs, some with HDFC support • Beneficiaries of bank credit direction • Various regulatory and tax advantages • 1988: National Housing Bank • Public sector market developer • HFC regulator • Refinancier • 1991: securitization framework and first ABS issue • 1999: Commercial Banks entry • Liquidity & interest rates • Prudential norms • End 90s/early 00s: market environment measures: • Borrowers’ tax incentives • Repeal of Urban Land Ceiling Act in some states • Reduction of transfer costs • Out of court foreclosure (2002) • New securitization framework (2002)

11. Case study: Chile(mortgage loans: 18% GDP) • Mid 70s: Savings & Loans collapse • 1978: To induce bank lending, remedy instability and confidence crisis: • revitalization of mortgage bonds(on balance sheet debt, collateralized, pass-through structure) • Indexation(well accepted index since 1967) • 1978-80: Central Bank support to the new instrument • 1980: creation of fully funded pension funds Mortgage Bonds become their major assets. Loans up to 20 years • In parallel: • direct demand subsidy program, with prior savings requirement, open to all banks • Government guarantee on low income mortgages • 1988-90: Transitional, pre- securitization tools (Endorsable loans, non-bank originators) • 1995: Securitization framework • 2002: new subsidy policy, including a subsidy ($100 to 400) to the originators of small loans