Housing Finance in Emerging Markets Washington DC – 16 March 2006 “Internationalisation of
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Transcript of Housing Finance in Emerging Markets Washington DC – 16 March 2006 “Internationalisation of
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Housing Finance in Emerging Housing Finance in Emerging MarketsMarkets
Washington DC – 16 March 2006Washington DC – 16 March 2006
““Internationalisation of Internationalisation of
Covered bonds”Covered bonds”
Cristina CostaCristina CostaSenior Adviser - ECBCSenior Adviser - ECBC
European Mortgage FederationEuropean Mortgage Federation
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European Mortgage European Mortgage FederationFederation
Founded in 1967 to represent mortgage lenders’ interests at EU level (retail & funding)
Groups national trade associations and credit institutions from EU Member States + acceding countries
New Member State membership: Czech Rep., Hungary, Latvia and Poland
Accession Country Membership: Romania
Just welcomed Ukraine as its latest member
Represents approx.75% of EU mortgage market
EU mortgage market amounts to approx. 49% of EU GDP
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I.I. Mortgage Market TrendsMortgage Market Trends
II.II. Covered Bonds: an attractive Covered Bonds: an attractive funding sourcefunding source
III.III. Expansion of covered bondsExpansion of covered bonds
IV.IV. The Spanish ExperienceThe Spanish Experience
V.V. Case Study : HungaryCase Study : Hungary
VI.VI. OutlookOutlook
AgendaAgenda
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EU Mortgage Market TrendsEU Mortgage Market Trends
Mortgages Outstanding: Total value of outstanding residential mortgage loans EUR 5.2 trillion at end 2005 (c. 49% of GDP)
Growth: Average annual growth rate approx. 8% per year over the last 10 years. Growth is much higher in the New MS
Interest Rates: The introduction of the Euro has resulted in significant falls in mortgage interest rates, which in turn has stimulated the markets
House prices: Big price increases in most countries over past few years, but there are signs of house price growth slowing down around Europe
Regulation: Capital adequacy and European retail FS integration dominate the regulatory agenda
Funding: Diversified access to capital market funding is increasingly important; EMF launches ECBC to represent covered bonds
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Mortgage Funding in EuropeMortgage Funding in Europe
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Denmark
Hungary
Sweden
Czech Republic
Spain
Germany
France
Austria
Latvia
I reland
Poland
UKEU:17%
Covered bonds outstanding as % of mortgage debt outstanding (2004)
Source: European Mortgage Federation
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Special character of covered bondsSpecial character of covered bonds
Covered Bonds
Specific legal framework/Contractual
provision
Strict supervision
High quality collateral
Quasi-bankruptcy remoteness
Preferential right of bondholders
Separated collateral pools
Source: ABN Amro
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Cb LegislationCb Legislation
Geographical Overview - Covered Bond Legislation in EuropeGeographical Overview - Covered Bond Legislation in Europe(as of January 2006)(as of January 2006)
Legislation in countries of the
EU/EEA/CH
Legislation infuture EU
member and further
countries in transition
Concrete legislation
in preparation
Legislation under
consideration
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22
2233
2288
1998
1997
1995
1998
1997
1999
2000
2000
2002
1999
2006
2004
19902003
2003
2003
1919
44
2005
2005
2005
2006
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Covered BondsCovered Bonds
Most European countries have adopted cb legislation
Competition has driven legislation to ever higher (safety) standards without sacrificing funding flexibility
No trend towards lowest common denominator
Regulated at EU level (Art. 22(4) of UCITS):
Issued by a credit institution
Subject to special supervision
Investment of proceeds effected in eligible assets
Outstanding issues covered by eligible assets until maturity
Priority claim of bondholders on subset of assets Recently adopted CRD lists set of eligible assets
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CB: an attractive funding sourceCB: an attractive funding source For issuersFor issuers
• Low funding costs• Flexible alternative to deposits and senior bonds• Possibility of extending the maturity profile of banks’
liability side to make it match with mortgage loans loan maturity
For investorsFor investors• Alternative to Government bonds (yield pick-up)• Secure instrument in case of issuer insolvency -
double protection (claim against issuer & cover pool) • Higher liquidity due to large issue sizes and market
maker commitments• Geographic and asset class diversification
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Record supply in European jumbo Record supply in European jumbo covered bondscovered bonds
Source: HVB
Prior to 1976 (pre Franco), parallels with Eastern Europe Laws date back to 1872 which saw first law allowing
‘Cédulas hipotecarias’. Mortgage Law 1946 (legal & operational security) Moncloa Pact 1977 (removal of obstacles) 1982 Mortgage Market Law
Securitisation law introduced in 1991
Spanish Economy:
Steady fall in unemployment from 26% to around 10%
Falling interest rates (Eurozone membership)
Cut National debt; Big increase in per capita income
Result - Housing, construction and Mortgage Markets booming
The Spanish ExperienceThe Spanish Experience
Covered Bonds in SpainCovered Bonds in Spain
Almost 1/5 of mortgages funded by Cédulas, and 1/3 of new lending
In 2005, issuance highest in Europe surpassing that of Jumbo Pfandbriefe
Issuance open to all types of institutions (multi-sellers, direct)
80% LTV limit on residential or 70% for commercial property
Strengthening status & demand of cédulas through:
2004 Insolvency Act
2005 Modification to Withholding tax regime
Expected Jumbo issuance for 2006 is approximately EUR 58 Billion.
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Spanish Multi-cédula structureSpanish Multi-cédula structure
Cédulas Issuers (a number of Savings Banks)
CH CH
AyT Cédulas FundPortfolio of individual issues
AyT Cédulas Cajas(Issuer)
InvestorsSource: AyT, HVB
CH CH CH
Aaa/AAA/AAAJoint cédulas
CHCH
Liquidity Reserve&
Protection Deposit
Lessons to be learnt from SpainLessons to be learnt from Spain
Spanish Experience Highest home ownership rate in Western World Lowest State Housing in Western World Thriving covered bond market and securitisation
market One of Europe’s fastest growing mortgage markets
Achieved by… Diversified Funding Strategy Building programme to ensure supply of quality housing Macro-economic reform Solid primary market laws to ensure safety of collateral Minimising State involvement
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Housing & Mortgage Markets Housing & Mortgage Markets in in Hungary vs. EU 25 and CEECs-2004Hungary vs. EU 25 and CEECs-2004
EU 25 CEECs Hungary
Total value of residential loans, € million, (EU 25)
4,670,736 31,479 7,767
Residential Mortgage loans as % GDP
45.3% 6.9% 9.6%
Residential mortgage loans percapita, € 000s (EU 25)
10.2 0.43 0.80
Growth rates of residential mortgage market 9.7% 34.4% 35.0%
Home ownership 63.5%Above 80% in manyCEECs 92.0%
Outstanding covered bonds as % of residential mortgage lending outstanding
17.0% N/A 63%
Source: European Mortgage Federation, Hypostat 2004
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Regulatory Environment:
• Legal framework – Mortgage Banking Act (1997)
• State subsidy scheme (introduced 2001)
Well developed system of refinancing partner banks through purchasing mortgages
3 covered bond issuers - FHB, HVB, OTP
CB fastest growing market (6% of GDP) - total outstanding volume EUR4.9bn (EMTN Programme)
Since 2004: market based development
• High HUF interest rates have turned clients towards FX-based products
• Current monthly net growth (30-35 billion HUF) seems to be sustainable
Case Study: HungaryCase Study: Hungary
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Size of the domestic market
• Crowding-out effect of Govies (growing budget deficit)
Liquidity concerns• Primary issues are relatively small (c. EUR50m)
• Secondary turnover is moderate
Less supportive macro environment• Volatile interest rates and FX market
Growing role of foreign EUR issuances but majority of outstanding cb volume were domestic issues and HUF denomination
Cut in subsidy scheme and growing FX lending decreased the incentive of cb funding for non mortgage bank lenders
Hungary: ChallengesHungary: Challenges
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European Mortgage Markets show no signs of slowing, especially in new member states
Continued Growth of covered bonds
Emergence of new issuers: IT, PT, NL, UK….
FSA to implement EU compliant cb regime; NL next.
Increased level of investor interest (CEE, Asia)
Continued work of ECBC• Work on definition of common standards for covered bonds
European Commission working on European standard – funding likely to be one of the driving forces behind integration• Launch of Expert Group on Funding
Outlook 2006Outlook 2006
Thank you!Thank you!
E-mail : [email protected]
Tel: +32 2 285 40 30
EMF website: www.hypo.org
Address: European Mortgage Federation
Avenue de la Joyeuse Entrée, 14/2
Brussels 1040
Belgium