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Housing Finance in Turkey

Housing Finance in Turkey. November 17, 2005, Istanbul Loïc Chiquier The World Bank Housing Finance Business Group Financial Sector Operation and Policy Department. International Trends

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Housing Finance in Turkey

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  1. Housing Finance in Turkey November 17, 2005, Istanbul Loïc Chiquier The World Bank Housing Finance Business Group Financial Sector Operation and Policy Department

  2. International Trends • Multiple socio-economic benefits of a sound and affordable HF system set as a national priority (ex: Mexico vs. Brazil) • Mortgage markets integrated within financial sector and more global (investors, insurers, refinancing, lenders) • Models to be tailored to national realities; as markets expand, risks to manage & regulate, consumers to inform • Contrasted results in market depth and penetration • EU-15 mortgage debt 47% GDP; 4%-20% accession • Progress in other countries (Mexico, India, China, etc.) • Accessibility issues: low/undocumented incomes, equity

  3. A Promising Evolution in Turkey • Strong housing demand backed by urbanization pressure, housing stock to be replaced, housing as preferred investment by a growing population (plus reduced household size) • More favorable macroeconomic conditions but stability to be preserved (ex: EU convergence effect in South EU countries) • Competing / innovating private lenders (driven by retail banking and further cooperation with construction industry) • Expanding portfolio ($ 6 billion) as credit rates decline (1.2% monthly) and maturities extend, yet large room for expansion • Favorable market expectations about the draft law which was improved through consultations and TA (FIRST sponsored)

  4. Key Aspects of the Draft Law • Strengthened foreclosure proceedings • Improved appraisal standards • Adjusted consumer information rules • Induced competition (non-banks after a transition period?) • No mortgage market distorting subsidies (other state roles) • Expanded range of mortgage credit products • facilitated funding and risk management -> affordability gains • capped ARM & longer-term FRM (limited prepayment fee) • Bond funding instruments diversified choice for different needs (MBS, cover bonds, MFC conduits / liquidity facilities)

  5. Challenges Ahead (I) • Continuous steady expansion of mortgage markets, but emerging risks (ex: prepayment) and market testing phase • Macro stability vital to essential TL mortgage markets • Consistent secondary regulations needed for lenders, mortgage securities and MFCs (capital adequacy, matching rules, investment rules, ARM indices and caps,…) • Needed larger, seasoned and standardized primary markets before securitization, dissuasive anyway for many lenders • Possible catalyst conduit role of a centralized MFCs, but question about capitalization (for which risk exposure?)

  6. Challenges Ahead (II) • Large banks logically prefer to transform their deposits into TL ARMs or to issue cover bonds through Euro markets • Key to mobilize long-term funds from growing Turkish investors (pension funds) and develop a TL yield curve • Needed data about housing transactions and prices • Modernization of the Title Registry • Housing policy to fight against supply inertia (access to land, subsidies, rental markets, residence permits, construction finance, transaction costs, urban development norms, etc.)

  7. Other Tools for HF Accessibility (I) Mortgage Credit Insurance for Lenders • Credit risk management tool for lenders -> greater credit accessibility (not always lower rates) • Higher LTV loans and/or riskier borrowers • External enhancement for mortgage securities • Exposure to long-term real estate cycles + adverse selection  specific insurance activities and regulations • Implemented in 30 countries (mixed results) • Share risk with lenders and borrowers, actuarial pricing • Develop when expressed needs by maturing markets • Various forms of public private sponsorship (pioneer role)

  8. Other Tools for HF Accessibility (II) • Housing Savings • Build up creditworthiness (lower & informal income) • Various models between savings / credits (limit the risks) • Limit and target any related program of subsidies • Housing Micro-Finance • Micro finance answer (proximity, collateral, small size, etc) to inaccessible conventional mortgage finance • Non bank lenders (MFI, NGOs) but interested banks (yield) • Rather finance home improvement, progressive housing • Issues: land security, funding, expensive rates, etc.

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