Covered Bonds
Covered Bonds 1769: creation of Pfandbrief in Prussia by Frederick The Great 1797: Realkreditobligationer Danish Covered Bonds were created after the Great Fire of Copenhagen, when a quarter of the city burnt to the ground. 1852: creation of Obligations Foncières French Covered Bonds
Covered Bond Legislation in Europe Source: ECBC Fact Book
EU Bank Debt Issuance EUR bn equivalent 1,400 1,200 1,000 800 600 400 200 1,328 Covered GGB Senior Sub Securitisation 1,050 943 892 778 0 2007 2008 2009 2010 2011 Source: RBS
Through the crisis Covered Bond Markets Markets remained open most of the time Access to Central Bank liquidity Risk now linked to institution and sovereign Securitisation Markets 2011: 75% Retained 60% of placed is UK RMBS Many legislative and Regulatory changes Basel 2a/Basel 3 (CRD 2/3/4) Capital & Liquidity MiFID/EMIR/CRA/Solvency 2 5
EU Residential Mortgage Market 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0 Total Outstanding Mortgage Lending, EUR m (right scale) Year-on-year growth rates, % (left scale) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 7,000,000 6,500,000 6,000,000 5,500,000 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Source: European Mortgage Federation. 6
Outstanding Mortgage Balances UK Germany France Spain Netherlan Italy Sweden Denmark Belgium Ireland Portugal Austria Finland Greece Poland Luxembo 2011 2010 0 250,000 500,000 750,000 1,000,000 1,250,000 1,500,000 Source: European Mortgage Federation. EUR millions. 7
Development of Covered Bonds Source: ECBC Fact Book
Mortgage Covered Bonds Spain Denmark Germany UK France Sweden Netherlands Ireland Portugal Italy Greece Finland Austria Czech Hungary Slovakia Poland 40,764 29,037 27,730 26,925 19,750 10,125 9,647 8,242 6,191 3,442 511 219,947 205,370 200,585 188,750 341,321 332,505 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 Source: European Mortgage Federation/ECBC. EUR millions. 9
The Economist 2012 10
European Crisis The Problem: too much debt; too little growth 60% Debt/GDP target exceeded by all Reliance on Central Banks for Funding and Liquidity Unsustainable levels of funding: Low economic growth Role of Central Bank Increased range of collateral, Central Bank co-ordination Purchase of Sovereign Bonds; Covered Bonds; 60bn; 40bn Stability fund - 400bn; now 800bn; Use of LTRO 1trillion Political Challenge 27 Member States; 17 in Eurozone Fiscal treaty; Issue of Eurobonds Eurozone is solvent 11
Looking Ahead ECBC Covered Bond Label Transparency Quality Market Interaction Regulatory discussion Improved measures for liquidity PCS Prime Collateralised Securitisations - Initiative Debt rollover challenge 2012 Spain 130bn; Italy, 118bn New Global Markets Covered Bonds can provide new investors, new funding Long term secured debt instrument Need to maintain standard and quality of asset class 12
Thank you.
Mortgage Banking Association of Nigeria Housing Finance & Exhibition Lagos, Nigeria November 17-18, 2011 Secondary Mortgage Market Models Post Crisis Mortgage Liquidity Facilities Rished Bade Chief Executive Officer Tanzania Mortgage Refinance Co. Bank of Tanzania Middle Building Room 217 P.O Box 7539 Tel +255 22 2235560/61 E-mail: info@tmrc.co.tz www.tmrc.co.tz
A specialized financial institution offering medium to long term refinancing against a pool of mortgages/assets as security Typically refinance for 3-10 years Usually banks use this facility to supplement their own short term deposits Often obtain funds by issuing simple bonds Banks do issue bonds, LF must therefore be able to issue at cheaper and faster rate Act as centralized bond issuer for banks Often state sponsored but not state owned Usually do not carry credit/interest risk hence passing back the benefit via low interest rates
Not a State housing bank Not a risk taker Solely deals with liquidity Not credit nor interest rate risk Not a vehicle for subsidy Does not engaged in mortgage origination Not a securitization conduit Though could transform into one when fully matured
Encourage longer terms for loans Encourage more lending Encourage competition Encourage better assets/liability management Encourage bond market development
Full securitization without recourse Securitization with recourse Covered Bonds Liquidity guarantees
Very few banks provides mortgage products to a limited number of clients This is attributed to the following: Absence of Housing Finance/Banks after THB collapse Unfriendly land laws Absence of Real Estate Developers Lack of long term funding by banks to facilitate the provision of mortgage products Mortgage debt/gdp $ GDP/Head TANZANIA 0.30% 392 NIGERIA 0.50% 944 UGANDA 1.00% 382 SENEGAL 2.00% 941 GHANA 3.90% 749 NAMIBIA 20.00% 3,502 SOUTH AFRICA As a result, Tanzania is one of the countries with the lowest mortgage/gdp ratio 34.00% 6,185
With IDA/WB support, GoT established Housing Finance Project (HFP), which led to; Enactment of Mortgage Finance Act in 2008 Enactment of Condominium Law in 2009 Creation of Tanzania Mortgage Refinance Company (TMRC) in 2010
Tanzania Mortgage Refinance Company Limited (TMRC) is a mortgage liquidity facility (MLF) created as a private sector institution owned by the banks with sole purpose of supporting banks to do mortgage lending by refinancing banks mortgage portfolios
TMRC Loan agreement Cash Partner banks Cash Securities Mortgage loans Collateral Investors Borrower Dwelling
Credit Lines (BOT) Corporate Bond Market TMRC TMRC is 100% owned by member banks Mortgage Lenders
Allows for greater competition in the mortgage market Key ingredient in growing mortgage market in an underserved economy Acts as a force for standardization in the market, pushing Member banks to adhere to best practice Acts as an intermediate step on the path to a full secondary mortgage market Acts to deepen the financial market more generally by providing a long term investment to institutions with long term liabilities Can be a tool for delivering policy objectives such as the promotion of affordable housing or the promotion of local currency lending
Raising sufficient capital Competitiveness Passing the efficiency to member banks Government Sponsorship is key Govt to spearhead creation of conducive laws and regulations Partnership with property developers Conducive Macro Economic Environment Flexibility and Support from Regulators
Capital raised so far USD 6.5m required USD 10m Balancing competitiveness vs sustainability Suitable margin to breakeven (TMRC 75bp) Government Support/Not? Introduction of Value Added Tax (VAT) on sale of properties Lack of legal legislation supporting secondary mortgage market instruments Bureaucracy embedded with Govt/Donor Support Dearth of supply of housing units Private developers avoiding mid-income housing schemes due to lack of mortgage schemes Banks delaying roll out of mortgage products due to lack of housing supply Which one should start first? Volatile Interest Rate Environment Very common in African Markets In the last twelve months, interest rates moved from 5% to 16% (wholesale) In the retail market, rates moved from 16% to 25%
About TMRC Established in 2010 with the following shareholding structure: - Authorized Capital TZS 30 bn (Equivalent to USD 18.75m) Paid Up Capital as of 15 May 2012 TZS 10.45bn (USD 6.5m) 100% owned by 11 commercial Banks Became fully operational November 2011 with 9 staff compliments Disbursed 1 st loan Mid November 2011 Disbursed 2 nd loan May 2, 2012 Total Disbursement USD 2.7m equivalent Member banks started launching mortgage products Member banks signed MoU with property developers such as National Housing Corporations TMRC refinances loan portfolio with minimum of TZS 1bn (USD 0.6m) with at least 10 loans in a portfolio. Refinancing is with full recourse to the borrower (who must be bank or financial institutions licensed by Bank of Tanzania and has invested a minimum of TZS 500mn (USD 0.3m) in TMRC)
Examples of Other MLFs Jordan Mortgage Refinance Company Established in 1986. The shareholders of JMRC are Government Institutions Central Bank of Jordan 18% Social Security Corporation (SSC) 10% Housing & Urban Development Corporation (HUDC) 10% Private Sector Institutions 62% comprising 12 banks and 1 finance company Egyptian Mortgage Refinance Company Established in 2006 The shareholders of EMRC are Government Institutions Central Bank of Egypt 16.6% National Finance Guarantee and Subsidy Fund 1.66% National Bank of Egypt 8.3% International Finance Company (IFC) 7.92% Other lending institutions 65.52% JMRC refinances mortgage portfolios with recourse, over collateralization 120% EMRC refinances mortgage portfolios with recourse, over collateralization 125%
Examples of Other MLFs Malaysia: CAGAMAS Established in 1987 with the following shareholding structure: - Central Bank of Malaysia (Bank Negara Malaysia) 20% Lending Institutions 80% France: Caisse de Refinancement Hypothecaire (CRH) CAGAMAS purchases mortgage portfolios with/without recourse, over collateralization 125% Established by French Government in 1985 and later taken over by borrowing institutions through subscription of capital during borrowing. CRH refinances mortgage bonds with recourse, over collateralization 125%+ guarantee
Development of mortgage lending in Russia
Development of Russian mortgage market: 2007-2012 Mortgage origination, bln. (RUB/$) Mortgage share of residential market turnover 1000 900 800 700 600 500 400 300 200 100 0 800-1000 ($30) 657 ($26) 713 ($24) 557($22) 380 ($13) 153 ($5) 2007 2008 2009 2010 2011 2012 20.0% 15.0% 10.0% 5.0% 0.0% 15.6% 16.9% 17,6% 19,0% 14.6% 11.9% 2,528 2,518 2,161 3,082 3,867 3,400 2007 2008 2009 2010 2011 2012 Number of real estate transactions, thousands Share of mortgage deals in number of real estate transactions,% 5000 4000 3000 2000 1000 0 15% Representative mortgage rates (in rubles) 5.0% Households using mortgage for real estate purchase, cumulated % of total 4.6% 14% 13% 12% 12,6% 12,9% 14,3% 13,1% 11,9% 12,5% 4.0% 3.0% 2.0% 1.0% 1.1% 1.7% 2.0% 2.5% 3.4% 11% 2007 2008 2009 2010 2011 2012 0.0% 2007 2008 2009 2010 2011 2012 Sources: Central Bank of Russian Federation, Russian State Registrar, AHML forecasts 2
Quality of Russian mortgage market Market portfolio 4.6 1.1 1.6 4.8 0.7 0.4 1.4 3.3 01.04.2011 (%) 01.04.2012 (%) 88.0 94.2 no delay 1-30 days 31-90 days 91-180 days more than 180 days no delay 1-30 days 31-90 days 91-180 days more than 180 days Domestic MBS Weighted average NPL share in mortgage collateral 1.0% 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% 01/04/07 01/06/07 01/08/07 01/10/07 01/12/07 01/02/08 01/04/08 01/06/08 01/08/08 01/10/08 01/12/08 01/02/09 01/04/09 01/06/09 01/08/09 01/10/09 01/12/09 01/02/10 01/04/10 01/06/10 01/08/10 01/10/10 01/12/10 01/02/11 01/04/11 01/06/11 01/08/11 01/10/11 01/12/11 01/02/12 01/04/12 Sources: Central Bank of Russian Federation, AHML 3
Agency for Housing Mortgage Lending (AHML) AHML was established in 1997 by Decree of the Russian Government as a national institute for the development of the mortgage lending market 100% owned by the Russian Government Included in the list of strategically important enterprises of the Russian Federation Operates through a wide network of mortgage originators across Russia Government support Government guarantees for AHML internal bonds issues Special purpose credit line for construction support Capital injections Assets structure, RUB bln ($, bln) 16.27 ($0.55) 11.55 ($0.39) 268.93 ($9.15) 84.29 ($2.87) Liabilities structure, RUB bln ($, bln) 0.9 ($0,03) 35.52 ($1.21) 4.33 ($0.15) 154.96 ($5.27) 156.82 ($5.34) 114.21 ($3.89) 4 Cash and cash due from credit institutions Mortgages Loans issued Other assets Bonds issued Other borrowed funds Loans from banks Other liabilities 4
AHML role in steady market development AHML group bases its strategy on mortgage market development cycles and changes its priorities according to the stage of the cycle to smooth it s fluctuations. I. Growth stage II. Maturity (stable) stage III. Declining (crisis) stage Development of the secondary mortgage market Risk assumption Mortgage market infrastructure development 5
Net liquidity level of Russian banking sector and AHML influence on mortgage market recovery 3000 35.00% 2000 30.00% 1000 25.00% 20.00% 0-1000 01/02/2008 01/04/2008 01/06/2008 01/08/2008 01/10/2008 01/12/2008 01/02/2009 01/04/2009 01/06/2009 01/08/2009 01/10/2009 01/12/2009 01/02/2010 01/04/2010 01/06/2010 01/08/2010 01/10/2010 01/12/2010 01/02/2011 01/04/2011 01/06/2011 01/08/2011 01/10/2011 01/12/2011 01/02/2012 15.00% 10.00% -2000 5.00% -3000 Net liquidity, bln rub Share 33 per. of Mov. AHML Avg. refinancing (Share of in AHML the mortgage refinancing origination in the mortgage volume, % oregination volume, %) 0.00% Sources: Central Bank of Russian Federation, AHML estimation 6
Mortgage market financing through securitization Since 2006 16 domestic RMBS deals for total 122 bln RUB ($4,3 bln) and 13 cross-border RMBS deals for more than 61 bln RUB ($2,1 bln) were originated. Mortgage backed securities, bln RUB 50 47 46 45 40 35 31 32 30 25 20 15 13 14 10 5 0 2006 2007 2008 2009 2010 2011 Cross-border RMBS deals 10 26 25 0 0 0 Domestic covered bonds 0 2 0 15 0 15 Domestic RMBS deals 3 3 22 17 14 31 AHML share in domestic issues is 50% Sources:Сbonds, AHML 7
Russian legislation requirements: Measures to maintain mortgage asset quality Special regulation for mortgage market and RMBS; All issuers of MBS (RMBS and covered bonds) are required to publish the Mortgage collateral registry as part of the emission documentation and then on a monthly basis, which contains detailed information on each mortgage loan included in the mortgage collateral (outstanding debt, interest rate, term, market value, region and type of mortgage collateral, delinquency, insurance, etc); Mortgage loans with LTV higher than 80% are not allowed to be securitized; Property insurance amount should match mortgage loan amount; An independent licensed organization (specialized depository) keeps mortgage certificates and monitors mortgage collateral to comply with all legislation and emission documents; The original par value of MBS can not exceed principal amount of loans included in the mortgage collateral; Mortgage loans included in the mortgage collateral can not be replaced except in a closed list of instances (the most common is default); Defaulted mortgage loans are not included in the amount of mortgage collateral; Investors have the right to claim prepayment in case of issuer`s violation of legal requirements and/or terms of emission documents. Requirements of AHML RMBS programs: AHML can purchase a senior tranche of RMBS or provide a guarantee for senior tranche of RMBS if the equity is not less than 10% of the issue and is kept on the originator s balance; For loans with LTV higher than 70% mortgage insurance is recommended. 8
AHML RMBS programs Programs for refinancing of RMBS have been launched for the following purposes: Development of Russian RMBS Liquidity supply for lenders Interest rate risk hedging Bridge financing to accumulate pool or complete the transaction (not more than 70% of senior tranche volume) RMBS Programs Term Beginning End Volume Program 1 30.09.2010 31.12.2012 20 bln RUB. ($0,67 bln.) Program 2 29.09.2011 27.12.2013 20 bln RUB. ($0,67 bln) Program 3 13.04.2012 27.12.2013 20 bln. RUB. ($0,67 bln) 9
The main characteristics of AHML s senior note purchase program The maximum transaction size per originator should be up to 5 bln RUB ($170 mln), minimum 1 bln RUB ($30 mln) Issued notes must comply with the requirements of the federal law on MBS Issued notes must be denominated in RUB Junior tranche notes must represent at least 10% of the total asset balance The junior tranches should be retained by the originator The notes security must represent a senior claim in the waterfall The notes must be either Rated by at least one of the rating agencies (Fitch, Moody s and S&P) at a minimum rating of BBB- (Fitch or S&P) and Baa3 (Moody s). Unrated by rating agencies where AHML provides a guarantee and makes its own analysis, sets the haircuts and required subordination levels for the notes. 2 10
Russian Pension Fund investments in RMBS State Corporation The Bank for Development and Foreign Economic Affairs (VEB) is the managing company of Russian Pension Fund VEB RMBS Program - 150 bln RUB. ($5.1 bln) VEB provides buyout guarantees for senior domestic RMBS tranches with collateral conforming the following: Maximum loan amount 8 mln RUB. ($270,000) for Moscow and St. Petersburg, and 3 mln RUB ($100,000) for the rest of Russia Interest rate for mortgage loans not higher then 11% Primary residential market only (new construction) 11