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MORTGAGE MARKET AND CAPITAL
MARKET DEVELOPMENT IN MONGOLIA
Presented by Mr. D.Boldbaatar
Director General
Monetary Policy and Research Department
The Bank of Mongolia
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Outline
• Mortgage Market Development
• The Role of the Bank of Mongolia in Mortgage
Market Development
• Capital Market Development
• Securitization of Residential Mortgages
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Mortgage Market Development
 As of April 2011 the total
mortgage loan portfolio
reached MNT 408.2 bn.
billion ₮
percent
450
20
Mortgage loan outstandings
Mortgage rate
400
 The weighted average
rate on mortgage loans is
continuing to decrease. It
reached 14.9% by April
2011.
350
16
300
14
250
12
200
10
Apr-11
Mar-11
Feb-11
Jan-11
Dec-10
Nov-10
Oct-10
Sep-10
Aug-10
Jul-10
Jun-10
May-10
Apr-10
Mar-10
Feb-10
Jan-10
Dec-09
 Compared to other
countries the mortgage
loan maturity is
considerably short,
averaging to 9.5 years.
18
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Mortgage Market Development
• Until 2003 the issuance of mortgage loans were very limited
• The mortgage market in Mongolia was initiated by ADB
Housing Finance Project in 2003.
• Nowadays almost all banks are originate mortgage loans and
prevailing the mortgage market.
• In 2010 and 2011 the mortgage market experienced a strong
growth following after fall in previous year and increased by
almost 80 per cent from the end of 2009.
• Despite the rapidly increasing mortgage loan outstanding,
there is still high potential for further growth.
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Mortgage Market Development
2.0
1.5
Quarterly Housing Price Index Changes in Ulaanbaatar
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
2009.I
2009.II
2009.III
2009.IV
2010.I
2010.II
2010.III
2010.IV
2011.I
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Mortgage Market Development
• The y-o-y growth of
new residential
building rose by 56.2
per cent at the end of
2010.
12000
Residential building, number of apartment
10000
9 899
8000
6 338
5 416
6000
4 579
4000
2000
3536
3 165
2004
2005
3 725
1478
0
2003
2007
2008
2009
2010
100
NPL Ratios
80
Agriculture
Mining
60
Manufacturing
40
Wholesale &
Retail trade
20
Mortgage
Loans
0
Feb-11
Dec-10
Oct-10
Aug-10
Jun-10
Apr-10
Feb-10
Dec-09
Oct-09
Aug-09
Jun-09
Apr-09
Feb-09
Dec-08
• Mortgage loans
perform better than
other loans in banks
asset, perhaps, due to
standardization
requirement of
origination.
2006
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The Role of the Bank of Mongolia
The Bank of Mongolia played a major role in establishing the
structure of housing finance.
Followings are these
contributions:
• Establishment of “Mongolian Mortgage Corporation” (MIK): For the
purpose of developing secondary market for asset backed securities in
2006 the Bank of Mongolia and other 10 banks established MIK. The
main objective of MIK is to develop primary and secondary mortgage
markets by issuing and selling MBS on foreign and domestic markets,
providing save and long term funds to Housing Finance Sector.
• Cooperation with National Statistic Committee (NSC) to develop a
methodology of computing Housing price index: In 2007 the Bank of
Mongolia participated in the working group to develop a methodology
for computing Housing Price Index. Since 2008 Housing Price Index has
been regularly disseminated on quarterly basis.
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The Role of the Bank of Mongolia
• MIK bond was included in the Central bank collateral list: to stimulate
secondary mortgage market and to enhance MIK’s financial capacity,
MIK bond has been included in the list of eligible collaterals for Central
bank repo operations. Hence, MIK bonds are qualified equal to
Government bonds.
• Adoption of the “Regulation on mortgage loan operations”: in 2008
the Bank of Mongolia approved “Regulation on mortgage loan
operations”. The standardization on primary mortgage market simplified
the origination process, lowering risk and origination costs.
• Improvement of legal environment: the Bank of Mongolia actively
collaborated with other related institutions to improve legal
environment in developing of primary and secondary mortgage markets.
• The Law on Real Estate Collateral
• The Law on Asset Backed Securities
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The Role of the Bank of Mongolia
• Agreement to implement KfW project on promoting housing finance:
according to Agreement between KfW and Government of Mongolia
credit line of EUR 4.8 million and grant of EUR 0.5 million will be
channeled through Bank of Mongolia to MMC for the purpose to deepen
market based and effective housing financing system.
• Financing loans to civil servants: in the scope of financing “Project on
Housing 4000 Households” the Bank of Mongolia purchased
Government bond in amount of MNT 30 billion. This project is intended
to resolve some difficulties faced by construction sector and provide
affordable loans to civil servants.
• Refinancing loans to construction sector: the Bank of Mongolia injected
the liquidity to the construction sector through banks when it
experienced some liquidity problems in 2008.
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The Role of the Bank of Mongolia
• Compiling and distributing mortgage loan report: since 2007 the Bank
of Mongolia has been consolidating the Mortgage Loan Report, which is
nowadays disseminated to the public on monthly basis.
• Cooperation with International organizations: the Bank of Mongolia has
actively cooperated with International Organizations such as IFC, KfW
and EBRD providing technical assistance and consulting to MIK on issuing
liquid mortgage securities.
• Participation in organizing trainings and seminars: the Bank of
Mongolia provided numerous trainings, courses and round table
meetings aiming to improve legal environment and facilitate the
development of the mortgage market.
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Impediments to housing finance development
 Legislative incompleteness
 Brand new hypothec (mortgage) law
 Law on Securities Collateralized by Asset
 Origination standard for hypothec contract
 Other regulations for securitization process
 Cultural barrier
 Politics of housing finance
 Absence or inefficiency of capital market
 Illiquid market
 Incomplete regulatory structure
 Absence of infrastructure
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Capital Market Development
 Following 3 instruments are mainly traded in the primary
markets in the MSE.
 Stocks
 Government bond
 Corporate bond
 The secondary market operations for Government bond and
corporate bond are almost non-existing and the market
development is stagnant. Some reasons are:
 Main investors of these bonds are only banks
 Lack of institutional investors and absence of rating agencies
 Absence of market based yield curve
 No constant issuance of Government bond
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Capital Market Development
Trading statistics of past 5 years shows that the capital market is
dominated by stock trading…
Stocks
Government bond
Corporate bond
70,000
60,000
Million MNT
50,000
40,000
30,000
20,000
10,000
2,776
2,664
961
851
502
-
2004
2005
2006
2007
2008
2009
2010
2011
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Capital Market Development
Market capitalization is growing…
3000
30
Volume of Transaction, RHS
2500
25
2000
20
1500
15
1000
10
500
5
0
0
2005
2006
2007
2008
2009
2010
2011
• In the first 5 months of 2011 market capitalization reached MNT 1,803.8 billion,
increasing 127% from the previous period.
• MSE is still challenged by low trade volume.
• Top 5 companies added more than 80% in the market capitalization in 1Q2011.
in thousand USD
Billion MNT
Market Capitalization
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Capital Market Development
MSE Top-20 Index has reached its highest point in history or 32,955
units…
35000
30000
Top-20 Index
25000
20000
15000
10000
5000
0
2006
2007
2008
2009
2010
2011
• In 2010 MSE was the best performing equity market globally (having gained 138.4%).
• Top-20 index continued its rally to peak 32,955 on February 25. Since then it has seen
correction, falling to 18,748 as of May 31.
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Capital Market Development
45
Market Cap to Total Loan Ratio
40
42.1
Market Cap to GDP Ratio
35
34.9
30
25
23.4
20
15.6
15
19.6
16.6
10.7
10
5
0
9.4
6.5
7.9
3.5
2.2
2005
2006
2007
Market cap to total loan ratio reached 42 per cent .
• It was 6.5 per cent in 2005 and 42.1 per cent in
2010.
• Market cap increasing faster than credit growth.
2008
2009
2010
Market cap to GDP ratio reached 16.6 per cent.
• Compared to well developed capital market
countries the ratio is still modest.
• However, it has increased by almost 14
percentage points since 2005.
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Capital Market Development
Government bond market is expected to expand in the next years…
Government bond
45
39.6
40
36.0
35
30.0
Billion MNT
30
25
20
15
12.5
10
6.8
4.5
5
1.5
0
2004
2005
2006
2007
2008
2009
2010
2011
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Capital Market Development
Mortgage backed security as MIK bond
• In 2009 MIK was approved to issue MNT 25 billion bond
• Between 2009 and 2010 MNT 6.3 billion bond was sold
• The MIK bond could not be wide spread instrument in the
capital market
• However, the MIK bond is potentially attractive instrument
for mid-term
• Assuming inverted yield curve
• More liquid (included in the central bank collateral list)
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Capital Market Development
Prerequisites of developing bond market:
 Macroeconomic factors
 Fiscal policy
 Monetary condition
 Exchange rate regime
 Financial sector stability and innovation
 Information infrastructure
 Monitoring and supervision
 Market based flexible interest rate
 Competition
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Capital Market Development
Further contributions of the Bank of Mongolia into capital
market development:
 In the extent of influence:
• to promote development of the primary and secondary
capital markets by improving money market operations
• to take a measure to have a long-term funding
instrument and to improve liquidity of the bond market
(for example, MIK bond)
• to consult to develop infrastructure of the payment
settlement system
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Capital Market Development
In the extent of main activities:
• to keep inflation at low and stable level, therefore to
maintain macroeconomic stability and to create a
favorable economic condition for investors
• to develop financial market and to maintain financial
sector stability through banking sector stability
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Securitization of Mortgage Loans
Rationales for introducing Mortgage Securities
• New funds for housing
• Increasing liquidity of mortgages
• Increasing competition in the primary market
• Increasing efficiency in the housing finance system
• Lengthening maturity of loans
• Smoothing housing cycles
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Securitization of Mortgage Loans
 Prerequisites for Issuing Mortgage Securities
• Market need for funding by the capital market
• Capital constrain
• Liquidity constrained
• Risk management needs
• Investor demand for mortgage-related securities
• Institutional investors are potential investors
• Attractive risk-adjusted returns
• Capacity for mortgage-related securities
• Feasibility to invest in mortgage-related securities
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Securitization of Mortgage Loans
• Infrastructure requirements
• Legal, tax and accounting framework for securitization
• Facilities for lien registration
• Ability to enforce lien
• Ability to transfer security interest
• Protection of investors against bankruptcy of originators
• Primary market prerequisites
• Standardization of documents and underwriting practices
• High quality servicing and collection
• Professional standards of property appraisal
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Securitization of Mortgage Loans
 Government Role in Developing Mortgage Securities
• Creation and maintenance of a strong legal system
• Creating new public institutions
• Guarantees
• Market liquidity support
• Providing incentives to investors
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Current risks to housing finance structure
• Government over -subsidized housing finance
• Real estate development plan (100000 houses)
• Delay in building infrastructure
• Dominance of Government financing (HFC)
• Interest rate subsidy
• Higher LTV ratio
• Involvement in housing construction
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Thank you for your attention