Review of policy options
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Table of ContentsTable of Contents 5 Foreword 6 Acknowledgements 6 1Summary 7 1Introduction 10 2Broad Policy Recommendations 15 2.1Framework 15 2.2Roadmap 16 3ECA Mortgage Market Overview 18 3.1Mortgage Delinquencies 20 3.2Mortgage Portfolio Dynamics 23 3.3Mortgage Funding 25 4Policy Options 31 4.1Real Estate Market Observatory 34 4.2Systemic Risk and Macro Prudential Supervision 37 4.3Dynamic Provisioning 42 4.4Consumer Protection and Education 44 4.5Prudent Loan Level Lending Framework and Practices 46 4.6Special Servicing and Portfolio Management 52 4.7Asset Management Companies (AMC) 57 4.8RMBS Label and Restarting Private Mortgage Securitization 61 4.9Regional Funding Arrangements 68 5 Annex 1 - Country Cases 72 5.1United States 72 5.2United Kingdom 73 5.3Australia 74 5.4South Korea 75 5.5Russia 75 5.6Serbia 78 5.7Ukraine 80 Annex 2 - Select Global Experience with Real Estate Market Overheating 83 References and Bibliography 88 ForewordThis Paper is prepared by the World Bank for the regulators and other mortgage market stakeholders in the countries of the Eastern Europe and Central Asia region (ECA) as a means to inform the reader of the common available policy options to address the negative effects of the current financial crisis on the housing finance markets. The presented alternatives are intended to mitigate the crisis aftershocks as well as prepare the markets for the inevitable next cyclical events. As stressed in the Paper, a robust system of real estate and housing finance market information gathering and analysis is the first priority for many countries and should be the necessary precondition for any further policy or regulatory action. The policy options that the reader will find inside are effectively a combination of the best traditional mortgage practices and the current policy dialogue which was significantly influenced by the acute crisis events of 2007-2008. Furthermore, a prudent regulator or policy setter will undoubtedly require appropriate adaptation of such universal practices to the legal, regulatory and marketplace specifics of her jurisdiction. The Paper is intended to spur the thought and dialogue, as well as catalyze practical actions by the regional and national stakeholders. The World Bank, as always, stands ready to support such endeavors. Financial and Private Sector Vice Presidency The World Bank March 2013, Washington
Review and guidance by John Pollner was provided in line with the strategic interests and client dialogue in the sector in the Europe and Central Asia Region. All errors, omissions and other inaccuracies are the authors’. .
This Paper offers a number of mortgage crisis prevention and management policy options for the financial sector authorities in ECA countries. These options are presented in the context of the ongoing financial and economic volatility in many European jurisdictions and the impact it has on the housing finance industry and households. In view of the current global economic and financial uncertainties, the interconnectedness of the mortgage market stability and development has become apparent and increasingly important. In part the increased visibility of this sector, which has always enjoyed public and policy attention, is related to the dual nature of the challenges - deteriorating economic conditions of the borrowers are coupled with the institutional and systemic challenges of the marketplace. ECA market stakeholders have attempted to mitigate the effects of the acute phase of the crisis in 2008 to preserve the quality of loan portfolios, maintain institutional stability and continue to provide households with mortgage finance solutions. Notable developments have occurred in virtually all aspects of housing finance market operations. Although key ECA markets seem to have substantially recovered from the initial phase of the current economic crisis in lending volumes and have also adjusted ALM practices, material threats to institutional and systemic stability remain. Regulators and policy makers have a number of options to counter the existing challenges as well as to strengthen the fundamentals of the mortgage markets. In particular, the ECA authorities are encouraged to adopt a proactive forward looking approach in their policy measure deliberations. This Paper provides a toolkit of such measures that, in addition to being potential instruments in managing the aftereffects of the negative effects of the early phase of the crisis (elevated NPLs and high leverage of some banks) are mostly geared towards increasing markets’ resiliency and stability through robust developmental agenda. As a high priority recommendation, in every ECA jurisdiction mortgage sector stakeholders would benefit from enhanced awareness of the housing market evolutions by either improving existing real estate indices and market surveillance mechanisms, or establishing them. This strongly advised policy action should be indeed the first to be considered in a given country – without having robust monitoring and evaluation capability it is risky, ineffective and inefficient to plan, implement and evaluate policy or regulatory interventions. Armed with such market knowledge, the ECA regulators are advised to consider establishing a robust mortgage specific macro prudential framework as one of the most important forward-looking mechanisms for improving the resiliency of the mortgage systems. The ongoing policy dialogue as well as the experience of certain countries provides ample evidence of the better practices in this area, including dynamic provisioning, asset price cyclicality management, etc. Another area of the suggested immediate attention from the ECA mortgage industry stakeholders is the current stock of legacy mortgages. As one of the most visible effects of the ongoing financial crisis, many ECA countries have large portfolios of highly risky mortgage loans; even if the headline NPL figures in some countries remain relatively subdued – below 5% - the material institutional and systemic dangers of this stock of loans merit aggressive proactive consideration by the policymakers and the industry. The pre-crisis exuberant mortgage lending amply demonstrated significant deficiencies in fundamental risk management practices in mortgage origination, servicing and special servicing. Global legal and regulatory developments provide rich examples of the better practices and the ECA regulators, together with the industry are encouraged to adopt such with appropriate localization. As the crisis laid bare significant challenges in having sustainable access to long term funding for mortgage finance, the question of local currency liquidity is critical. The measures to restart private RMBS markets, as well as to enhance and modernize national or regional liquidity mechanisms merit serious attention. Securitization in particular can be an appropriate mechanism for such funding, as well as for banking sector deleveraging, subject to certain best practices and regulatory attention. The current macroeconomic situation in ECA places significant financial stress on the borrowers – with flat incomes, high unemployment and uncertain prospects; the options available to the policymaker in regards to responsible lending, consumer protection and fair (yet efficient) loan servicing are important in maintaining institutional and systemic stability. This aspect of anti-crisis policy response should be aimed at both new and existing borrowers; although the macro scale of the housing finance sector in ECA is small compared to many OECD countries, the household-level impact of the inefficiencies of the mortgage industry or of the mortgage delinquency is dramatic. The rest of the Paper is structured as follows. After an overview of ECA mortgage market characteristics, key elements of the post-2008 performance are discussed in details – NPL and funding mechanisms evolution. After that, a number of policy options that can be utilized in a crisis management and counter-cyclical context are suggested. Specifically, the following measures are presented broadly in the order of suggested implementation:
Several country-specific examples of policy measures are provided at the end and cover Australia, South Korea, Russia, and Serbia, Ukraine, UK and US. Annexes contain detailed information of certain aspects of housing finance market operations- Mortgage Covered Bonds, RMBS, liquidity facilities, and global policy examples of dealing with real estate bubble. The World Bank Group has ample recent experience in all of the above topics; since the beginning of the crisis our experts have been engaged in work with the topics listed above in Argentina, Armenia, the Baltics, Belarus, Brazil, Egypt, India, Jordan, Kazakhstan, Mexico, Mongolia, Morocco, Nigeria, Poland, Romania, Russia, Saudi Arabia, Spain, Serbia, Tanzania, and WAEMU, to name a few examples. The World Bank Group stands ready to consult with the ECA mortgage market stakeholders on the appropriate country-specific course of action. Directory: curated curated -> Concept stage curated -> Concept stage curated -> Republic of Côte d'Ivoire Urbanization Review curated -> Report No: aus11011 Central America curated -> Report No. 94474-pk fiscal Disaster Risk Assessment Options for Consideration curated -> Environmental and Social Management Framework for the Costa Rica Telecommunications Sector Modernization Project curated -> Environment Impact Assessment For Jiangxi Shangrao Sanqingshan Airport Beijing Guohuantiandi Environmental Technology Development Center. Ltd. Oct. 2012 Content curated -> Growth through Innovation An Industrial Strategy for Shanghai By Shahid Yusuf Kaoru Nabeshima April 22nd, 2009 curated -> Report No: 70178. People's Republic of China Download 400.71 Kb. Share with your friends:
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