Residential Real Estate – Value After
the Subprime Crisis
Britt Gwinner, CFA
Principal Financial Specialist
International Finance Corporation
Viña del Mar, 7 May, 2010
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Contents
1. The Basic Picture – housing demand around the world
2. How was mortgage finance linked to the recent crisis?
3. Going forward
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The International Finance Corporation
• Goal: Improve lives and raise living standards through
sustainable private sector development
• Member of the World Bank Group, owned by 179 shareholder
countries, assets USD 51.4 billion, capital USD 16.1 billion
 Global—for more than 50 years has focused on developing countries
 Local—full time presence in more than 80 countries and activities in
many others
• Housing Finance Investment Services:
 Loans for mortgage lending; Collateralized mortgage lines of credit;
Warehouse lines of credit; Credit enhancement for MBS; Structured
finance; Equity investments; Construction finance
• Housing Finance Advisory Services:
 Policy and regulatory infrastructure, mortgage toolkit and training,
capacity building
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Section 1
THE BASIC PICTURE
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Growth and urbanization
• World Bank Data Visualizer
• http://devdata.worldbank.org/DataVisualizer/
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Real estate: a tale of many markets
• Real estate: more than 1/3 of the value of all the underlying
physical capital in the world
• Developed countries: mature residential real estate markets
 Populations are stable or shrinking – demand for financing from turnover,
renovation, aging population, regional growth dynamics
 >90% of housing units in developed countries are of adequate quality
• Emerging markets: large pent-up demand for housing
 As countries develop, they urbanize
 Emerging markets urbanization has been poorly planned - housing and
infrastructure inadequate, housing demand is strong
 Self-built houses on squatted land lack connections to sewage or water, built
of inadequate materials
 44.7% of households in Africa, 25.6% in South Asia lack access to improved
sanitation
 20 to 30 million housing units in Latin America lack a basic amenity such as
running water, or are built of substandard materials
 Inadequate housing compounds the cycle of poverty – health, social
investment, wealth-building
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Mortgages mostly unavailable in emerging markets
But as real incomes rise, so does capacity to make a mortgage payment
Mortgage Debt as Percent of GDP Selected Countries
100%
Developed
countries
40-100%
80%
Emerging
markets
< 20%
Chile
18% in
2009
60%
40%
20%
Russia
Argentina
Peru
Senegal
Guatemala
Indonesia
Ukraine
Kazakhstan
Turkey
Colombia
Poland
Mexico
Lithuania
China
Chile
Morocco
Thailand
Italy
Panama
Korea
Malaysia
Japan
Germany
Spain
United States
Denmark
0%
country
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Housing Finance and Growth
In emerging markets, housing finance is related to
new construction and as a result fixed investment,
and generally with domestic inputs, both labor and
materials
In developed markets, housing finance is more linked
to trading of existing housing and economic cycles
In the U.S., there are 7 million new loans each
year, 6 million of which are for existing housing
In developed markets, real estate and related
services count for between 2% and 4% of PIB
In the U.S., 8 of 10 recessions since 1949 were
proceded by reductions in residential investment
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Mortgages and Fixed Investment
In the initial
phase of
development,
mortgage
finance can add
0.5% of fixed
investment as a
percent of GDP
for each
increment in
the size of the
market
Source: Duebel (2008)
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Real estate as an asset class
• Traditional roles: inflation protection, diversification
 Securities backed by inflation-indexed mortgages are natural inflation
hedges (Chile, Mexico, Colombia)
 Real estate investments can decrease the cost of inflation insurance for
long-horizon investors (Amenc , Martellini, & Ziemann, Journal of
Portfolio Management, 2009)
 IRR of about 11 percent for 60/40 stock/bond portfolio with a varying
investment in real estate over time. (Performance of Real Estate
Portfolios, Fisher and Goetzmann, Journal of Portfolio Management,
2005)
 International real estate can reduce portfolio risk (Chua, Journal of
Real Estate Portfolio Management, 1999)
• A recent comment from Prof. Robert Shiller:
 “After prices fall, the media begins to publish stories of investor
foolishness. Investors, feeling stupid or betrayed, have a “betrayal
aversion” that causes them to react intensely and sell in anticipation of
future price drops.”
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Investment vehicles for residential real estate (1)
• Fixed Income
 Residential Mortgage Backed Securities (RMBS) – True sale to special
purpose vehicle (SPV) that issues bonds
• Long duration, some uncertainty in principal amortization
(prepayments), varying structures, stand-alone credit rating,
almost no replacement of assets, no recourse to loan originator
• In Peru, AAA local scale RMBS provides 32bp over 3y AAA corporate
(when corporates are available, it’s a thin market), 202bp over 3y
sovereign
 Covered bonds – general obligation bonds with contractual and/or legal
backing from a portfolio of mortgages
• Long duration, prepayments may be mitigated, credit profile a
function of issuer’s balance sheet and security portfolio, assets
may be replaced, complete recourse to bond issuer
• Yields comparable to AAA corporates
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Investment vehicles for residential real estate (2)
• Equity
 Rental apartment buildings, property developers, land banks,
private equity
 Residential rental - works best where laws permit a
reasonable balance of tenant and landlord rights and
responsibilities
 Rental reforms recently passed in Brazil, considered in Mexico,
others have stronger market traditions (Uruguay)
• Hybrid
 Real Estate Investment Trusts or Funds – United States, Asia,
increasingly in emerging markets – while tax advantages not
relevant to most pension fund investors, return may be
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Section 2
WHAT HAPPENED WITH THE
CRISIS?
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U.S. subprime boom and bust – finance driven,
excessive leverage, weak credit underwriting
U.S. House Prices and Mortgage Originations
4,500
190
4,000
170
3,500
150
3,000
2,500
130
2,000
110
House Prices
1,500
90
Subprime
70
FHA/VA
50
1,000
500
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Sources: S&P Case-Shiller, Inside Mortgage Finance
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Dollars in Millions
S&P/Case-Shiller National House Price Index
Total Mortgage Originations
(Right Hand Scale)
What have mortgage defaults looked like?
35%
30%
25%
20%
15%
10%
5%
0%
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A largely external crisis
• There are no subprime mortgages in emerging markets

Lending generally to high income borrowers, with low LTVs and full
documentation
• Emerging sovereigns and corporates benefitted from low borrowing
spreads during the boom

But, macro management has broadly been strong, emerging markets come out of
the crisis with relatively low decline in GDP, many cases of growth
• At the worst of the crisis, funding retreated to New York, London,
Madrid, etc.
• Limited development of some capital markets mitigated bad effects –
e.g., Egypt, Guatemala
• Relatively strong economic performance protected others – China,
India, Brazil, Peru
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Section 3
GOING FORWARD
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What haven’t private pension funds
invested more in real estate?
• Constraints




Macroeconomic volatility – inflation, inconsistent policies,
financial crises - Mexico ‘95, Russia ‘98, Argentina ’01
• High real rates + volatility make government debt more
attractive
Lack of long term fixed-income instruments, lack of secondary
market liquidity, yield curves
Investment channeled through personal rather than institutional
means
• Uruguay rental apartment buildings built & owned by
individuals, family firms
Informal markets flourish because of faulty legal and regulatory
structures
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How to boost private pension fund real estate
investments?
• Lower real rates make private fixed income issues more attractive

Recent history in Chile, Mexico, Brazil, Colombia, Indonesia, India, China, etc.
• Promote a range of long term fixed-income instruments, and a range
of credit ratings – move away from incentives to pure triple-A markets



Permit securitization, covered bonds, funds, REITs – issuer chooses best execution
Chile as a model – 1980s reforms created AFPs, letras hipotecarias
Wider range of pension, insurance benchmarks
• Promote secondary bond market liquidity


Benchmark government yield curves – extend maturity, issue to promote liquidity
Strengthen exchanges transparency, efficiency
• Improve legal and regulatory structures of real estate markets

More efficient land use planning, title registration, contract enforcement
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THANK YOU
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Annex - LAC RMBS during the crisis
Reliance on local investors, mostly low mortgage delinquencies,
persistent demand from private pensions and insurers
• Chile – Structured issuances up 6 times in 2009 v. 2008, of this, 9%
was RMBS
• Panama – La Hipotecaria 9 RMBS issues through 2008, securitized
consumer loans 9/08, rolls commercial paper through 3/09, issues
MTNs 4/09 – all to local investors
• Peru – corporate issuances, structured finance for auto, consumer,
leasing, and Titulizadora Peruana issues RMBS 02/10, USD 34.5
million, oversubscribed
• Mexico – Severely affected by the crisis, downgrades in RMBS issues
by failed lenders, but strong performance by RMBS from major banks,
Infonavit, Fovissste
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Annex - LAC RMBS during the crisis (cont.)
Colombia
• USDeq 2.4 billion issued since 2002, trading at average price of 104.6
at end March, 2010
• UVR (inflation-adjusted), increasingly nominal fixed-rate peso
• Prepayment rates have run 10.5% UVR, 14% peso, defaults < 2%
• Structured finance volume 2009 almost twice 2008
• TC placed USDeq 791 million in RMBS 2009, more than half of recent
issues purchased by domestic pension funds
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Contact Info:
W. Britt Gwinner
Principal Financial Specialist
International Finance Corporation
Miguel Dasso 104, Piso 5
San Isidro, Lima 27, Perú
+51 1 611-2573
wgwinner@ifc.org
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