HOUSING FINANCE INEMERGING MARKETS

Policy and Regulatory Challenges

Sponsored by World BankMarch 10-13, 2003

Case Study of Korea

by:Pamela Lamoreaux – Manager Housing Finance Group –Global Financial Markets - IFC

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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

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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

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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

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SIZE OF MARKETS

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

Source: Bu-dong-san Bank (thousand won per 3.3 sq. meters)  

(Thousand won per 3.3 sq. meters) Nov. 1996

Oct. 97

Nov. 98 Aug.99

New towns, Chonsei Deposit

682 748 488 821

Exchange Rate (won/$) 829 965 1,234 1,185

Housing Price and Chonsei Deposit of Korean Homes

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SIZE OF MARKETS

  

  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

Trends of Monthly Real Estate Prices Increase Rate

Note: Monthly figures are computed in comparison to the previous month’s figures. Quarterly andannual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing and Commercial Bank

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SIZE OF MARKETS

  

  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

Trends of Monthly Real Estate Prices Increase Rate

Note: Monthly figures are computed in comparison to the previous month’s figures. Quarterly andannual figures are computed in comparison to the last month of the previous period. Source: Urban Housing Price Trends, the Housing and Commercial Bank

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SIZE OF MARKETS

  

Outstanding Mortgage to GDP Ratio of Korea, US, UK, and Japan

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SIZE OF MARKETS

  

Size of the Primary Mortgage Market (Unit: Trillion Korean Won)

     

     

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

%

Note: 1) For 2000, life insurances are not included. For 2001, life insurance companies and installment finance companies are not included.

1997 1998 1999 2000 2001

B/C 3.0% 2.7% 3.5% 4.1% 5.4%Source: Bank of Korea; Kookmin Bank

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SIZE OF MARKET

ITEM 1986 1996 1997 1998 1999 2000 2001PUBLIC SECTOR NHF

ACF (1)

50%

7%

50%

4%

48%

4%

53%

4%

56%

4%

56%

3%

55%

3%

PRIVATE SECTOR BANKS

NON-BANKS (2)

41%

2%

41%

5%

39%

10%

37%

6%

36%

5%

39%

1%

42%

N/a

MARKETSHARE OF KOOKMIN BANK TOTAL

PRIVATE SECTOR

BANKS

41%

96%

100%

38%

82%

92%

35%

72%

92%

34%

79%

92%

32%

79%

90%

35%

86%

88%

36%

85%

85%

TREND IN SHARE OF MORTGAGE MARKET BY SECTOR AND LENDER GROUP(Based on Outstanding Balance as of End of the Year)

(1) Agricultural Cooperative Federation(2) Life insurance companies and installment finance companies. Y2000 life insurance not includedSource: Kookmin Bank

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Overview of KoMoCo

OwnershipStructure

Ministry of Construction & Transportation 28.64% Housing and Construction. Bank 14.27% Kookmin Bank 14.27%KEB 14.27%Samsung Life Ins. Co. 9.51%IFC 9.51%KML Holdings (Merrill Lynch affiliate) 9.51%

Date ofIncorporation

September 1999

Incorporated as a financial institution and regulated by FSS under the MBS Act enacted in December 1999

Paid-in Capital(as of 12/31/00)

KRW 105 billion(USD 82 million)

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KOMOCO

ROLE OF THE GOVERNMENT

CREATION/OWNERSHIP

CORPORATEGOVERNANCE

FINANCIAL/BUSINESS

CAPITALMARKETS

In January 1999 enactment of Mortgage Corporation Company ActMoCT actively participated on Foundation Planning CommitteeMoCT owns 29% of company

Participates on Board and several committeesFSS as regulator and sets capital adequacy guidelines

Most MBS issued to date have been backed by public sector loans of the National Housing FundMoCT purchased subordinated tranches of several MBS deals done to dateConsidering legislative changes that will incent private sector to do MBS

Guarantee limit increased to 30X shareholders equity 2002Working with government to allow KoMoCo to buy mortgages and hold in own portfolio

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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

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ISSUANCE OF MBS – AS OF APRIL 2002

Number of

Issues

Amount of

Issuance

SENIOR MBS

SUB MBS

MARKET

SHARE

LAW BASED

KOMOCO 7 2,549.8KW

2,453.5(96.2%)

96.3(3.8%)

92.9% MBS COMPANY

ACT

SPCs ESTABLISHED BY NEWSTATE CAPITAL

8 154.2KW

111.7(72.4%)

42.5(27.6%

)

5.6% ABS ACT

SPCs ESTABLISHED BY WOOF CAPITAL 1 41.0

KW33.0

(80.5%)8.0

(19.5%1.5% ABS ACT

TOTAL16 2,745.0

KW2,598.2(94.7%)

146.8(5.3%

100%

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Successes and Challenges

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