Presentation on theme: "MORTGAGE MARKET AND CAPITAL MARKET DEVELOPMENT IN MONGOLIA"— Presentation transcript:
1 MORTGAGE MARKET AND CAPITAL MARKET DEVELOPMENT IN MONGOLIA Presented by Mr. D.BoldbaatarDirector GeneralMonetary Policy and Research DepartmentThe Bank of Mongolia
2 Mortgage Market Development OutlineMortgage Market DevelopmentThe Role of the Bank of Mongolia in Mortgage Market DevelopmentCapital Market DevelopmentSecuritization of Residential Mortgages
3 Mortgage Market Development As of April 2011 the total mortgage loan portfolio reached MNT bn.The weighted average rate on mortgage loans is continuing to decrease. It reached 14.9% by April 2011.Compared to other countries the mortgage loan maturity is considerably short, averaging to 9.5 years.
4 Mortgage Market Development Until 2003 the issuance of mortgage loans were very limitedThe 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.
6 Mortgage Market Development The y-o-y growth of new residential building rose by 56.2 per cent at the end of 2010.Mortgage loans perform better than other loans in banks asset, perhaps, due to standardization requirement of origination.
7 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.
8 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 CollateralThe Law on Asset Backed Securities
9 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.
10 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.
11 Impediments to housing finance development Legislative incompletenessBrand new hypothec (mortgage) lawLaw on Securities Collateralized by AssetOrigination standard for hypothec contractOther regulations for securitization processCultural barrierPolitics of housing financeAbsence or inefficiency of capital marketIlliquid marketIncomplete regulatory structureAbsence of infrastructure
12 Capital Market Development Following 3 instruments are mainly traded in the primarymarkets in the MSE.StocksGovernment bondCorporate bondThe secondary market operations for Government bond andcorporate bond are almost non-existing and the marketdevelopment is stagnant. Some reasons are:Main investors of these bonds are only banksLack of institutional investors and absence of rating agenciesAbsence of market based yield curveNo constant issuance of Government bond
13 Capital Market Development Trading statistics of past 5 years shows that the capital market is dominated by stock trading…
14 Capital Market Development Market capitalization is growing…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.
15 Capital Market Development MSE Top-20 Index has reached its highest point in history or 32,955 units…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.
16 Capital Market Development 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.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.
17 Capital Market Development Government bond market is expected to expand in the next years…
18 Capital Market Development Mortgage backed security as MIK bondIn 2009 MIK was approved to issue MNT 25 billion bondBetween 2009 and 2010 MNT 6.3 billion bond was soldThe MIK bond could not be wide spread instrument in the capital marketHowever, the MIK bond is potentially attractive instrument for mid-termAssuming inverted yield curveMore liquid (included in the central bank collateral list)
19 Capital Market Development Prerequisites of developing bond market:Macroeconomic factorsFiscal policyMonetary conditionExchange rate regimeFinancial sector stability and innovationInformation infrastructureMonitoring and supervisionMarket based flexible interest rateCompetition
20 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 operationsto 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
21 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 investorsto develop financial market and to maintain financial sector stability through banking sector stability
22 Securitization of Mortgage Loans Rationales for introducing Mortgage SecuritiesNew funds for housingIncreasing liquidity of mortgagesIncreasing competition in the primary marketIncreasing efficiency in the housing finance systemLengthening maturity of loansSmoothing housing cycles
23 Securitization of Mortgage Loans Prerequisites for Issuing Mortgage SecuritiesMarket need for funding by the capital marketCapital constrainLiquidity constrainedRisk management needsInvestor demand for mortgage-related securitiesInstitutional investors are potential investorsAttractive risk-adjusted returnsCapacity for mortgage-related securitiesFeasibility to invest in mortgage-related securities
24 Securitization of Mortgage Loans Infrastructure requirementsLegal, tax and accounting framework for securitizationFacilities for lien registrationAbility to enforce lienAbility to transfer security interestProtection of investors against bankruptcy of originatorsPrimary market prerequisitesStandardization of documents and underwriting practicesHigh quality servicing and collectionProfessional standards of property appraisal
25 Securitization of Mortgage Loans Government Role in Developing Mortgage SecuritiesCreation and maintenance of a strong legal systemCreating new public institutionsGuaranteesMarket liquidity supportProviding incentives to investors
26 Current risks to housing finance structure Government over -subsidized housing financeReal estate development plan ( houses)Delay in building infrastructureDominance of Government financing (HFC)Interest rate subsidyHigher LTV ratioInvolvement in housing construction