Edited by Loïc Chiquier and Michael Lea 00-forematter.indd ii 6/16/09 8:40:45 PM Housing Finance Policy in Emerging Markets 00-forematter.indd i 6/16/09 8:40:44 PM 00-forematter.indd ii 6/16/09 8:40:45 PM Housing Finance Policy in Emerging Markets Edited by Loïc Chiquier and Michael Lea non-bank financial institutions group global capital markets development department financial and private sector development vice presidency 00-forematter.indd iii 6/16/09 8:40:45 PM iv housing finance policy in emerging markets © 2009  e International Bank for Reconstruction and Development/ e World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved First printing June 2009 1 2 3 4 5 13 12 11 10 09  is volume is a product of the sta of the International Bank for Reconstruction and Development/ e World Bank.  e  ndings, interpretations, and conclusions expressed in this paper do not necessarily re ect the views of the Executive Directors of  e World Bank or the governments they represent.  e World Bank does not guarantee the accuracy of the data included in this work.  e boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of  e World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions  e material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law.  e International Bank for Reconstruction and Development/ e World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www. copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the O ce of the Publisher,  e World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. Library of Congress Cataloging-in-Publication data has been applied for. ISBN: 978-0-8213-7750-5 eISBN: 978-0-8213-7751-2 DOI: 10.1596/978-0-8213-7750-5 Cover and publication design: James E. Quigley Cover photo: Photos.com 00-forematter.indd iv 6/16/09 8:40:45 PM v Contents Foreword xix Acknowledgments xxi Abbreviations xxiii Introduction xxix Introduction xxix Objectives xxix Evolution of Housing Finance Systems xxxi Policy Recommendations xxxiv Impact and Lessons of the U.S. Subprime Crisis xxxvii Housing Finance Is Interrelated with the Broader Economy xxxviii Structure of the Book xxxix Summary Conclusions xliv chapter 1 Housing Finance and the Economy 1 Developed Economies 1 Emerging Economies 3  e Importance of Housing Finance 5  e Demand for Housing Finance 11 Macroeconomic Factors 11 Financial Liberalization 13 00-forematter.indd v 6/16/09 8:40:45 PM vi housing finance policy in emerging markets Technological Change 13 Concerns and Opportunities 14  e E ect of Mortgage Finance on Savings 14  e E ect of Mortgage Finance on Investment 15 Mortgage Finance and Growth 15 Housing Finance, Business Cycles, and Economic Fragility 17 Mortgage Finance and the Distribution of Risk 20 House Prices, Housing Finance, and Economic Activity 22 Lessons for Emerging Markets 24 chapter 2 Structure and Evolution of Housing Finance Systems 29 Mortgage Lending Models 30 Building Societies/Savings & Loans 30 Commercial Banks 33 Contract Saving Schemes 35 Specialist Mortgage Banks 36 Combining Di erent Systems 37 Secondary Mortgage Markets 39 Introducing New Lending Models: Mexico and India 40 Unbundling of Mortgage Value Chain 42 State-owned Lenders 46 Conclusions 47 chapter 3 Mortgage Instruments 49 Fixed-Rate Mortgages 50 Adjustable-Rate Mortgages 52 Indexed Mortgages 56 Interest-Only Mortgages 60 Reverse Mortgages 62 Lessons for Emerging Markets 63 chapter 4 Primary Mortgage Market Infrastructure 65 Appraisal 68  e Importance of Sound Appraisal 68 Developing an Appraisal Industry 69 00-forematter.indd vi 6/16/09 8:40:45 PM contents vii International Standardization of Appraisal Methodology 69 Appraiser Quali cations, Appraisal Associations, Independence, and Ethics 72 Quantitative Appraisal Models and Real Estate Data 73  e Challenges of Establishing an Appraisal Industry in Emerging Markets 74 Mortgage-Related Insurance Products 76 Property Insurance 76 Mortgage Life Insurance 78 Catastrophic Insurance 80 Title Insurance 83 Credit Information Bureaus 85  e Importance of Credit Information in Mortgage Finance 85 Credit Bureaus in Developed Markets 86 Credit Bureaus in Emerging Markets 88 Membership 90 Ownership 91 Management and Development 91 Data 91 Consumer Protection 92 chapter 5 Enforcement of Mortgage Rights 93 Does Mortgage Collateral Matter? 95 Di erences between Legal Systems 97 Forms of Mortgage and Mortgage Documentation 100 Alternative Security Devices 100  e Land Charge 102  e Mortgage Certi cate 102 Mortgage Documentation 102 Secondary Mortgage Markets 103 Procedural Issues in Mortgage Enforcement 104 Non-judicial Enforcement 106 Negotiated versus Auction Sale 112 Responsibility for Sale 112 Auction Sale Prices 113 Creditor’s Right to Acquire the Mortgaged Property 113 Notice, Cure, Rights of Redemption, and Stays of Execution 114 Bankruptcy and Other Preferences 116 00-forematter.indd vii 6/16/09 8:40:45 PM viii housing finance policy in emerging markets Appeals 116 Eviction 117 Distributions 118 Alternatives to Mortgage Enforcement 118 Forbearance 119 Alternatives to Mortgage Collateral 120 Common Property Mortgage 122 Minimizing Enforcement Actions 123 chapter 6 Consumer Information and Protection 125 De ning the Consumer 127 Developed Markets 127 Emerging Markets 127 Consumer Protection Objectives 128 Information Asymmetry between Lenders and Consumers 129 Consumer Heterogeneity 130 Transaction Cost Asymmetries during the Going Concern 131 Vulnerability of the Consumer to Market Risks 131 Protecting the Consumer through the Loan Life Cycle 133 Before Borrowing 133  e Loan O er and Closing 137  e Ongoing Concern 139  e Back End: Default 147  e Costs of Consumer Protection 150 Opportunity Costs of Regulation 150 Alternative Implementation Forms, Costs 151 Enforcement Costs 152 Is Consumer Protection a Luxury Good for Emerging Markets? 153 Emerging Markets Are Part of the Global Consumer Protection Trend 153 Appropriate Regulations May Support FinancialSector Development 153 Conclusions 156 chapter 7 Construction Finance in Emerging Economies 159 Real Estate Development Process and Risks 162 00-forematter.indd viii 6/16/09 8:40:45 PM [...]... 414 chapter 16 Housing Finance Subsidies 417 Where to Start? Linking Housing Problems to Subsidy Policy 420 Analyzing the Causes of the Housing Problems .420 Subsidies and Other Types of Government Intervention 426 Why Subsidize Housing? 428 Subsidies and the Expansion of Housing Finance Systems .429 Housing Finance Sector Problems, Causes, and Subsidies 429 Housing Finance Subsidies,... (approach) information technology International Union for Housing Finance International Valuation Standards Committee Jordan Mortgage Refinance Corporation National Housing Fund (Poland) Korea Housing and Commercial Bank Korea Housing Bank Kazakhstan Mortgage Guarantee Fund Latin America and the Caribbean low-income housing tax credit xxv xxvi housing finance policy in emerging markets lmi ltv mba mbs mdg... book continues by laying out some of the policy alternatives and models of housing finance (products, infrastructure, risk management, regulations, funding) In line with the priorities of many governments, the book is focused on solutions; in particular the role of government in contributing to the growth of housing finance and in increasing access to housing finance for lower and informal income households... of housing in terms of both quantity and quality The purpose of this book is to provide fact-based information and guidance to policy makers concerned with housing finance in emerging markets An overarching goal is to improve the understanding of the importance of housing finance to the economy This includes covering the prerequisites for an effective housing finance system together with the main characteristics... worked in many emerging economies Evolution of Housing Finance Systems Since 1993, the penetration of housing finance has increased dramatically in developed economies In the United States, in European countries, Australia, or Japan, residential mortgage markets represent between 50 and 100 percent of the gross domestic product (GDP) Housing finance has also been developing in more emerging markets, ... microfinance in housing remains limited, this activity can represent an important source of funding for those in the informal sector introduction In the last decade, a few far-reaching trends have been significant drivers for the expansion of housing finance in emerging economies These include the following: Favorable macro conditions, notably in terms of falling inflation and mortgage rates (both in. .. imf infonavit irb it iuhf ivsc jmrc kfm kh&cb khb kmgf lac lihtc government-sponsored enterprise House Building Finance Corporation Housing Development Board Housing Development Finance Corporation housing equity withdrawal Housing Finance Companies Hong Kong, China Mortgage Corporation Home Loan Guarantee Company (South Africa) Home Guaranty Corporation (Philippines) Housing Microfinance Housing Provident... funds, state-owned housing banks, and so forth) can be an important stimulant for housing finance The housing sector is too large for any government to finance it alone Liberalization is a universal trend that mobilizes savings from the public through banks and, in later stages of development, through xxxiii xxxiv housing finance policy in emerging markets capital markets, as long as housing loans can offer... developed and emerging markets, but the overall environment, in particular for housing and financial services, presents greater challenges These include less favorable financial and economic conditions; greater range and quantum risks to manage; limited fiscal space, which can constrain government policy; and, importantly, xxix xxx housing finance policy in emerging markets emerging markets, which... Opportunities for Housing Microfinance 404 Limited Potential for Linking HMF and Housing Subsidies 404 Linkages between Commercial Banks and Housing Microfinance .407 The Limitations of Housing Microfinance 409 Market Size 409 Pricing and Access .410 Refinancing and Other Microfinance Limitations 412 Potential to Contribute to Entrenchment of Informality .414 . xliv chapter 1 Housing Finance and the Economy 1 Developed Economies 1 Emerging Economies 3  e Importance of Housing Finance 5  e Demand for Housing Finance. ect of Mortgage Finance on Savings 14  e E ect of Mortgage Finance on Investment 15 Mortgage Finance and Growth 15 Housing Finance, Business Cycles, and