HOUSING FINANCE IN
EMERGING MARKETS
Policy and Regulatory Challenges
Sponsored by World Bank
March 10-13, 2003
Case Study of Korea
by:
Pamela Lamoreaux – Manager Housing Finance Group –
Global Financial Markets - IFC
REGULATORY FRAMEWORK
PRE-1997
•Heavily regulated by government
•Interest rates regulated
•Control of residential price of housing – trying to avoid
speculation and increase affordability
•Uniform price ceiling in 1977 (regardless of size of
property), revised in 1985 to reflect size of property
•1989 price was indexed to cost of production – to
stimulate production
•No foreign ownership of property – relaxed in 1998
2
REGULATORY FRAMEWORK
POST-1997
•Interest rates deregulated
•Privatization of Korea Housing Bank to Housing and Commercial Bank
(merged with Kookmin in 2001 to create Kookmin Bank)
•ABS and MBS Laws 1999 – support all asset-backed securitization
•MBS Company Act 1999 – establishment of special purpose corporations
to issue MBS
•MBS Tax Reduction Plan – MOF is planning to deduct portion of the tax
rate for small-sum purchasers of MBS to encourage retail buyers
•Non-construction Zone Deregulation – government plans to loosen
restrictions placed on non-construction zones to support increased
construction and real estate business
•Housing Plan – Ministry of Construction and Transportation has
announced plans to finance new construction of 500,000 to 600,000
houses for 3-years to assist low-income buyers and renters
3
IMPACT OF DEREGULATION
Increase in mortgage originations
Stabilization of housing prices
Steady production of new housing
Creation of non-banking lending institutions (mortgage
banks)
 Creation of KAMCO to address NPL problem
 Creation of KoMoCo – secondary market institution
 Most active securitization program in region – including
participation of foreign investors in MBS




4
SIZE OF MARKETS
Housing Price and Chonsei Deposit of Korean Homes
(Thousand won per 3.3 sq. meters)
Nov.
1996
Oct.
97
1,803
2,009
1,618
1,758
930
970
648
876
1,318
1,718
1,436
1,636
New towns, Chonsei Deposit
682
748
488
821
Exchange Rate (won/$)
829
965
1,234
1,185
Seoul, Purchase Price
Seoul, Chonsei Deposit
New towns, Purchase Price
Nov. 98
Source: Bu-dong-san Bank (thousand won per 3.3 sq. meters)
Aug.99
5
SIZE OF MARKETS
Trends of Monthly Real Estate Prices Increase Rate
2000
1999
Housing
cities)
”
(all
(Apartment of Seoul)
Housing
cities)
”
prices
rents
(all
(Apartment of Seoul)
2001
year
Q1
Q2
Q3
Q4
year
Q1
3.4
1.2
-0.3
0.4
-0.8
0.4
0.6
12.5
3.6
-0.1
2.1
-1.4
4.2
0.9
16.8
6.5
1.2
3.5
-0.4
11.1
2.4
32.5
8.7
1.5
4.7
-3.0
12.1
2.5
Note: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and
annual figures are computed in comparison to the last month of the previous period.
Source: Urban Housing Price Trends, the Housing and Commercial Bank
6
SIZE OF MARKETS
Trends of Monthly Real Estate Prices Increase Rate
2000
1999
Housing
cities)
”
(all
(Apartment of Seoul)
Housing
cities)
”
prices
rents
(all
(Apartment of Seoul)
2001
year
Q1
Q2
Q3
Q4
year
Q1
3.4
1.2
-0.3
0.4
-0.8
0.4
0.6
12.5
3.6
-0.1
2.1
-1.4
4.2
0.9
16.8
6.5
1.2
3.5
-0.4
11.1
2.4
32.5
8.7
1.5
4.7
-3.0
12.1
2.5
Note: Monthly figures are computed in comparison to the previous month’s figures. Quarterly and
annual figures are computed in comparison to the last month of the previous period.
Source: Urban Housing Price Trends, the Housing and Commercial Bank
7
SIZE OF MARKETS
Outstanding Mortgage to GDP Ratio of Korea, US, UK, and Japan
8
SIZE OF MARKETS
Size of the Primary Mortgage Market (Unit: Trillion Korean Won)
1997
1998
1999
2000
Outstanding Balance of Mortgage Loans
53.0
55.5
61.3
67.6
72.9
New Origination of Mortgage Loans
13.4
12.1
17.1
21.4
29.7
453.3
444.4
482.7
522.0
545.0
A/C
11.7%
12.5%
12.7%
13.0%
13.4
%
B/C
3.0%
2.7%
Gross Domestic Product (GDP)
3.5%
4.1%
2001
5.4%
Source: Bank of Korea; Kookmin Bank
Note: 1) For 2000, life insurances are not included. For 2001, life insurance companies and
installment finance companies are not included.
9
SIZE OF MARKET
TREND IN SHARE OF MORTGAGE MARKET BY SECTOR AND LENDER GROUP
(Based on Outstanding Balance as of End of the Year)
ITEM
PUBLIC SECTOR
NHF
ACF (1)
PRIVATE SECTOR
BANKS
NON-BANKS (2)
MARKETSHARE OF
KOOKMIN BANK
TOTAL
PRIVATE SECTOR
BANKS
(1)
(2)
1986
1996
1997
1998
1999
2000
2001
50%
50%
48%
53%
56%
56%
55%
7%
4%
4%
4%
4%
3%
3%
41%
41%
39%
37%
36%
39%
42%
2%
5%
10%
6%
5%
1%
N/a
41%
38%
35%
34%
32%
35%
36%
96%
82%
72%
79%
79%
86%
85%
100%
92%
92%
92%
90%
88%
85%
Agricultural Cooperative Federation
Life insurance companies and installment finance companies. Y2000 life insurance not included
Source: Kookmin Bank
10
Overview of KoMoCo
Ownership
Structure
Ministry of Construction &
Transportation
28.64%
Housing and Construction. Bank
14.27%
Kookmin Bank
14.27%
KEB
14.27%
Samsung Life Ins. Co.
9.51%
IFC
9.51%
KML Holdings (Merrill Lynch affiliate) 9.51%
Date of
Incorporation
September 1999
Paid-in Capital
(as of 12/31/00)
KRW 105 billion
(USD 82 million)
Incorporated as a financial institution and regulated by
FSS under the MBS Act enacted in December 1999
11
KOMOCO
ROLE OF THE GOVERNMENT
CREATION/
OWNERSHIP
 In January 1999
enactment of Mortgage
Corporation Company
Act
MoCT actively
participated on
Foundation Planning
Committee
MoCT owns 29% of
company
CORPORATE
GOVERNANCE
Participates on Board
and several committees
FSS as regulator and
sets capital adequacy
guidelines
FINANCIAL/
BUSINESS
 Most MBS issued to date
have been backed by public
sector loans of the National
Housing Fund
MoCT purchased
subordinated tranches of
several MBS deals done to
date
Considering legislative
changes that will incent
private sector to do MBS
CAPITAL
MARKETS
 Guarantee limit
increased to 30X
shareholders equity
2002
Working with
government to allow
KoMoCo to buy
mortgages and hold
in own portfolio
12
Strengthening of KoMoCo
 Foreign Technical Partners (Countrywide Holding
International (Operations/Business Development,
Fannie Mae (IT), Merrill Lynch (Capital Markets)
 Senior Resident Advisor – in place from Y2000 to
Y2002
 Active participation/guidance by Shareholders/Board
Members (particularly foreign shareholders and MoCT)
on all key aspects of the corporation
13
ISSUANCE OF MBS –
AS OF APRIL 2002
Number
of
Issues
Amount
of
Issuance
SENIOR
MBS
SUB
MBS
MARKET
SHARE
LAW
BASED
KOMOCO
7
2,549.8
KW
2,453.5
(96.2%)
96.3
(3.8%)
92.9%
MBS
COMPANY
ACT
SPCs ESTABLISHED BY
NEWSTATE CAPITAL
8
154.2
KW
111.7
(72.4%)
42.5
(27.6%)
5.6%
ABS ACT
1
41.0
KW
33.0
(80.5%)
8.0
(19.5%
1.5%
ABS ACT
16
2,745.0
KW
2,598.2
(94.7%)
146.8
(5.3%
100%
SPCs ESTABLISHED BY
WOOF CAPITAL
TOTAL
14
Successes and Challenges






Regulators want sound and prudent
environment which is transparent and will
help develop capital markets
Ability to securitize fairly large amount of
public sector loans (NHF)
Developed strong appetite by domestic
investors for MBS and pushed out
maturities with more frequent issues
First foreign investors in MBS (IFC)
including foreign exchange swap
Some growth (albeit it small) of nonbanks and private sector lenders to
provide housing finance









Private sector banks and non-banks have to increase
level of mortgage lending
Consolidation of banking sector
Continue to develop new products
Develop risk-based pricing regime for mortgage
origination
Continue to support development of new entrants to
encourage competition and funding
Encourage private sector banks to securitize more of
their portfolio
Standardization of mortgage loan documentation (may
allow that borrowers would not need to be notified of
transfer)
Rapid growth of consumer lending points out need for
enhanced underwriting systems, risk management and
IT
Ability of KoMoCo to buy mortgages and retain in
portfolio
Develop secondary market for ABS/MBS
15