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HOUSING FINANCE IN EMERGING MARKETS Policy and Regulatory Challenges

HOUSING FINANCE IN EMERGING MARKETS Policy and Regulatory Challenges. Sponsored by World Bank March 10-13, 2003 Case Study of Korea by: Pamela Lamoreaux – Manager Housing Finance Group – Global Financial Markets - IFC. REGULATORY FRAMEWORK PRE-1997. Heavily regulated by government

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HOUSING FINANCE IN EMERGING MARKETS Policy and Regulatory Challenges

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  1. HOUSING FINANCE INEMERGING MARKETSPolicy and Regulatory Challenges Sponsored by World Bank March 10-13, 2003 Case Study of Korea by: Pamela Lamoreaux – Manager Housing Finance Group – Global Financial Markets - IFC

  2. REGULATORY FRAMEWORKPRE-1997 • Heavily regulated by government • Interest rates regulated • Control of residential price of housing – trying to avoid speculation and increase affordability • Uniform price ceiling in 1977 (regardless of size of property), revised in 1985 to reflect size of property • 1989 price was indexed to cost of production – to stimulate production • No foreign ownership of property – relaxed in 1998

  3. REGULATORY FRAMEWORKPOST-1997 • Interest rates deregulated • Privatization of Korea Housing Bank to Housing and Commercial Bank (merged with Kookmin in 2001 to create Kookmin Bank) • ABS and MBS Laws 1999 – support all asset-backed securitization • MBS Company Act 1999 – establishment of special purpose corporations to issue MBS • MBS Tax Reduction Plan – MOF is planning to deduct portion of the tax rate for small-sum purchasers of MBS to encourage retail buyers • Non-construction Zone Deregulation – government plans to loosen restrictions placed on non-construction zones to support increased construction and real estate business • Housing Plan – Ministry of Construction and Transportation has announced plans to finance new construction of 500,000 to 600,000 houses for 3-years to assist low-income buyers and renters

  4. IMPACT OF DEREGULATION • Increase in mortgage originations • Stabilization of housing prices • Steady production of new housing • Creation of non-banking lending institutions (mortgage banks) • Creation of KAMCO to address NPL problem • Creation of KoMoCo – secondary market institution • Most active securitization program in region – including participation of foreign investors in MBS

  5. Housing price and Chonsei deposit of Korea house (Thousand won per 3.3 sq. meters) Nov. 1996 Oct. 97 Nov. 98 Aug.99 Seoul, Purchase Price 1,803 2,009 1,618 1,758 Seoul, Chonsei Deposit 930 970 648 876 New towns, Purchase Price 1,318 1,718 1,436 1,636 New towns, Chonsei Deposit 682 748 488 821 Exchange Rate (won/$) 829 965 1,234 1,185 Source: Bu-dong-san Bank (thousand won per 3.3 sq. meters) SIZE OF MARKETS Housing Price and Chonsei Deposit of Korean Homes Notes: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing & Commercial Bank.

  6. Housing price and Chonsei deposit of Korea house 1999 2000 2001 year Q1 Q2 Q3 Q4 year Q1 Housing prices (all cities) 3.4 1.2 -0.3 0.4 -0.8 0.4 0.6 ” (Apartment of Seoul) 12.5 3.6 -0.1 2.1 -1.4 4.2 0.9 Housing rents (all cities) 16.8 6.5 1.2 3.5 -0.4 11.1 2.4 ” (Apartment of Seoul) 32.5 8.7 1.5 4.7 -3.0 12.1 2.5 SIZE OF MARKETS Trends of Monthly Real Estate Prices Increase Rate Note: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing and Commercial Bank Notes: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing & Commercial Bank.

  7. Housing price and Chonsei deposit of Korea house 1999 2000 2001 year Q1 Q2 Q3 Q4 year Q1 Housing prices (all cities) 3.4 1.2 -0.3 0.4 -0.8 0.4 0.6 ” (Apartment of Seoul) 12.5 3.6 -0.1 2.1 -1.4 4.2 0.9 Housing rents (all cities) 16.8 6.5 1.2 3.5 -0.4 11.1 2.4 ” (Apartment of Seoul) 32.5 8.7 1.5 4.7 -3.0 12.1 2.5 SIZE OF MARKETS Trends of Monthly Real Estate Prices Increase Rate Note: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing and Commercial Bank Notes: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing & Commercial Bank.

  8. Housing price and Chonsei deposit of Korea house SIZE OF MARKETS Outstanding Mortgage to GDP Ratio of Korea, US, UK, and Japan Notes: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing & Commercial Bank.

  9. Housing price and Chonsei deposit of Korea house 1997 1998 1999 2000 2001 Outstanding Balance of Mortgage Loans 53.0 55.5 61.3 67.6 72.9 New Origination of Mortgage Loans 13.4 12.1 17.1 21.4 29.7 Gross Domestic Product (GDP) 453.3 444.4 482.7 522.0 545.0 A/C 11.7% 12.5% 12.7% 13.0% 13.4% B/C 3.0% 2.7% 3.5% 4.1% 5.4% Note: 1) For 2000, life insurances are not included. For 2001, life insurance companies and installment finance companies are not included. SIZE OF MARKETS Size of the Primary Mortgage Market (Unit: Trillion Korean Won) Source: Bank of Korea; Kookmin Bank Notes: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and annual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing & Commercial Bank.

  10. SIZE OF MARKET TREND IN SHARE OF MORTGAGE MARKET BY SECTOR AND LENDER GROUP (Based on Outstanding Balance as of End of the Year) • Agricultural Cooperative Federation • Life insurance companies and installment finance companies. Y2000 life insurance not included • Source: Kookmin Bank

  11. Overview of KoMoCo

  12. KOMOCO ROLE OF THE GOVERNMENT

  13. Strengthening of KoMoCo • Foreign Technical Partners (Countrywide Holding International (Operations/Business Development, Fannie Mae (IT), Merrill Lynch (Capital Markets) • Senior Resident Advisor – in place from Y2000 to Y2002 • Active participation/guidance by Shareholders/Board Members (particularly foreign shareholders and MoCT) on all key aspects of the corporation

  14. ISSUANCE OF MBS – AS OF APRIL 2002

  15. Regulators want sound and prudent environment which is transparent and will help develop capital markets Ability to securitize fairly large amount of public sector loans (NHF) Developed strong appetite by domestic investors for MBS and pushed out maturities with more frequent issues First foreign investors in MBS (IFC) including foreign exchange swap Some growth (albeit it small) of non-banks and private sector lenders to provide housing finance Private sector banks and non-banks have to increase level of mortgage lending Consolidation of banking sector Continue to develop new products Develop risk-based pricing regime for mortgage origination Continue to support development of new entrants to encourage competition and funding Encourage private sector banks to securitize more of their portfolio Standardization of mortgage loan documentation (may allow that borrowers would not need to be notified of transfer) Rapid growth of consumer lending points out need for enhanced underwriting systems, risk management and IT Ability of KoMoCo to buy mortgages and retain in portfolio Develop secondary market for ABS/MBS Successes and Challenges

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