Liquidity Facilities
in Emerging Economies
Housing Finance in Emerging Economies
Loïc Chiquier
The World Bank
March 10-13, 2003
Liquidity Facilities

Issue Bonds, Refinance Mortgage Lenders

Help to reduce liquidity and interest rate risks
(maturity matching, circumstantial back-stop)


Minimum risk exposure (limited counterpart risk
and market risk, diversified low-risk mortgages as
collateral), credit risk to primary lenders (overcollateral refinance or purchase with recourse)

Issue attractive bonds (low risk, sizeable,
hopefully liquid, and regular issuance)
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Liquidity Facilities (II)

Cheap, robust, simple, secure system to mobilize
private bonds and to insure liquidity access to
more mortgage lenders with economies of scale.

Less demanding than securitization about legal,
regulatory, standards infrastructure, but also more
limited ALM capacities (and more capital needed).

Compatible with multiple lenders (specialized or
not, depositories,etc.) and alternative funding
tools, but not panacea funding solution.
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Liquidity Facilities (III)

Prerequisites
Relatively stable macro economic conditions
 Active and comprehensive homeownership
housing policy (effective legal and regulatory
framework for private markets to operate,
targeted efficient social housing instruments)
 Deregulated financial markets
 Transactions exempted from stamp duties/fees
 Developed bond market infrastructure


Transition role to SMM conduit (HMC
Trinidad) although adaptability challenges.
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Liquidity Facilities (IV)

Catalyst liquidity role rather than direct engine
(limited impact on FRMs, residual market risks)

Tricky corporate governance client/lender/investor

State support both as investor and bond guarantor
(often implicitly): Malaysia , Jordan, Trinidad
Gradual privatization FHLBs by members-users
French CRH: state bond guarantee for three years

Rather regulatory/supervisory tool than object,
although concentrated risks and debt leverage
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JMRC in Jordan


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

Jordan: small and open economy, with a small pre1998 HF system (privileges Housing Bank)
Since 1998: JMRC operations to develop sound,
competitive, and affordable mortgage industry
Mixed public-private capital (18% owned by CBJ)
Refinance participatory eligible banks
Keeps at least 120% over-collateralized mortgages
(LTV< 80%, main residence purpose, fee-exempted
transferred mortgage deeds, replacing collateral if needed)


Issues private bonds (3-5 Y) and short-term notes
Conservative risk management policy
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JMRC (II)

Attractive refinancing and ALM tool for banks
(exempted statutory reserves, better regulatory
treatment of refinanced loans)

Attractive fixed-rate bullet-bond bonds for
investors (social security fund, banks)

Bonds eligible to bank liquidity reserves, 20%
risk-weighted for capital adequacy

Catalyst mortgage growth (8,000 loans, 8 banks)

Smooth re-directed banking strategy of the HB
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JMRC (III)

Improved housing credit affordability (20
years terms, max. LTV 75%, 10%-13% rates)

Budgetary relief (refinance public housing loans)

Mortgage lending regulatory safeguards

Regular issuer of low-risk private securities
(implicit state guarantee)

Prudential lending activities (de facto 153% overcollateral portfolio), effective cost recovery

Key to develop new scheme for low-income
civil servants (5% buy down, social housing)
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JMRC Perspectives (IV)

Needed Islamic housing debt window
(refinance/purchase)

Needed fixed-rate mortgage markets and longerterm bonds (lack of Government benchmarks)

Further gains in credit affordability (credit rates)

Non-recourse purchase of mortgage pools and
issue of MBS (needed effective external MI program)

Possible privatization
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Malaysia Cagamas Berhad (I)

Created in 1987 after liquidity crunch and
recession to provide more liquidity to mortgage
lenders, reduce market risks, assist social housing
finance, sustain construction sector, develop
private fixed-income markets (now 16.6% share)

Cagamas purchases mortgage loans from lenders
with recourse and obligation to repurchase (review
periods: 3,5,7 years).

Cagamas debt amortized independently from
mortgage pools (just collateral)
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Malaysia Cagamas Berhad (II)

Islamic Islamic finance window (purchase
of deferred payments sales and housing
leasing contracts)

Cagamas issues matching term debt
(variable-rate loans, fixed-rate securities)

Cagamas as regular rated-AAA issuer
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Malaysia Cagamas Berhad (III)

Central Bank (BNM) key investor (20%) as policy
tool, capital diversified with 74 fin. institutions,
Board chaired by BNM Deputy Governor.

Incentives to lenders (exempted reserves) exposed
to social housing lending quotas and rate ceiling.

Incentives to bond investors (eligible to bank and
insurance reserves, 10% risk-weighted)

Limited role to renewed short-and medium term
refinancing of variable rate mortgage credits
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Malaysia Cagamas Berhad (IV)

Catalyst of booming mortgage lending (banks and
finance companies)

Outstanding housing through banks: 21.7% GDP

THLD public originator as important initial user

Successful expansion of demand-driven products
after 1992 (fixed/variable rate, maturities, recourse /nonrecourse, Islamic debt, leasing/commercial property, etc.)

Profitable institution, maybe monopolistic GSE ?
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Malaysia Cagamas Berhad (V)

Cagamas successful through its counter-cyclical liquidity
role for the markets (“buffer”), and help lenders meet
housing lending requirements

Cagamas own mortgage market share normally fluctuates
(up to 41% in 1997 as buffer to crisis, now down to 18%)

Less business recently: liquid banks, lower market rates,
possible direct securitization by banks

Recent and gradual shift to conduit model
But some lenders reluctant to securitize secure and
profitable variable-rate mortgage assets, investors want
higher yields for longer term amortizing debt, (plus
adaptation to regulations, standards)
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