Mortgage Finance: An Overview

1
Mortgage Finance An Overview

• Steven A. Bernstein
• Johannesburg, South Africa
• September 30, 2004

2
Agenda

• Overview of housing finance (Bernstein)
• Topics on primary mortgage markets (Stokley)
• Topics on bond market development (Gama)
• Advanced funding models securitization
  (Proxenos)
• Question and Answers

3
United States Africa Mortgage Market Initiative

• Announced by President Bush in July 2003
• Goal Help African countries develop sustainable
  primary, and if possible secondary, mortgage
  systems
• How is the USA helping?
• Refocus development policy toward housing finance
• Fund housing finance programs (USAID, OPIC)
• Technical assistance (Treasury, Ginnie Mae,
  Housing USAID)
• Engage the public and private sectors for market
  oriented solutions to housing finance
• Accomplishments to-date
• 20 projects in nine countries.
• Projects include guarantees for the construction
  of housing, long-term funding for mortgages and
  more importantly, technical assistance to develop
  the legal framework and institutions needed for
  strong mortgage markets

4
United States Africa Mortgage Market Initiative
Guiding Principles

• Engage the public and private sectors for market
  oriented solutions to housing finance
• Encourage limited government participation in the
  market. Government should enable the private
  sector to lend, not compete against it
• Recognize that housing finance models from
  developed countries are not completely
  transferable to developing countries

5
Why Housing Finance?

• Gives households access to proper housing
• Provides households with a means to acquire
  wealth
• Significant component of an economy 25 GDP in
  the USA
• Contributes to the development of retail banking
• Provides source of long-term investments

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Components of a Housing Finance System

• The Basics
• Stable economy
• Enforceable property rights
• Legal system that allows efficient foreclosure
  and eviction
• Retail operations
• Loan origination programs
• Loan products
• Branch network

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Components of a Housing Finance System (cont)

• Credit risk management
• Underwriting
• Servicing
• Insurance
• Loss mitigation programs
• Funding
• Deposits
• Loan sales
• Second floor banks
• Corporate debt, mortgage securities

8
Developing Countries Have Unique Housing Finance
Needs

• Mortgage design
• Loan programs Finished housing vs.
  incremental/rehab housing (Mortgages vs.
  Micro-lending)
• Managing credit risk
• Underwriting for informal sector applicants
• Comprehensive loan servicing
• Loss mitigation program
• Funding
• Securitization not appropriate but deposits not
  adequate
• Loan sales
• Second floor banks

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How the Public and Private Sectors Can Help
Jump-Start Mortgage Lending

• Credit Risk
• Introduction of loss-limit insurance programs
  with tiered risk sharing FHA (USA), SHF (Mexico)
• Funding
• Second floor bank FHLB (USA), FOVI (Mexico)
• Whole loan sale (Mali, possibly Uganda)
• For countries with developed primary market
  introduce bond guaranty program Ginnie Mae (USA)

10
US Government Resources for Companies Interested
in Developing Housing Finance Programs in Africa

• Overseas Private Investment Corporation (OPIC)
• Political risk insurance
• Currency convertibility insurance
• Project finance
• USAID
• USAID programs through local missions
• Technical Assistance
• Development Credit Authority (DCA)