dr. eric klopfer march 12, 2003

Dr. Eric KlopferMarch 12, 2003

Housing Finance In Emerging Markets:

A Private Sector Perspective On Credit Insurance And Guarantee Programs

GE Insuranceg

g GE Mortgage Insurance

2

Why is Private Mortgage Insurance Worth Discussing? Why is Private Mortgage Insurance Worth Discussing?

Potential Value Of Private Mortgage Insurance

Mortgage Insurance Encourages Development Of A Data-Driven And Risk-Sensitive Housing Market

Mortgage Insurance Encourages Development Of A Data-Driven And Risk-Sensitive Housing Market

“The Wealth Gap”. Once Macroeconomic Stability Is Achieved, Declining Interest Rates Can Be Expected. With Declining Interest Rates, Downpayment Size Matters More Than Debt Service As a Barrier to Homeownership

Housing As A Political Issue. Consistent Access To Low-Cost Mortgage Finance Allows Individual Wealth Accumulation, Strengthens Communities, And Reinforces Popular Support For Private Property Rights

Funding And Regulatory System Still Developing. With Limited Resources, Lenders And Regulators Need To Work Toward “Global” Standards To Access Investment Capital And Ensure Financial Stability

Improves Risk Selection And Reduces Non-Price Credit Rationing, By Encouraging Data Collection/use And Applying Risk-Decisioning Technologies

Improves Mortgage Process Management, By Putting Private Capital At Risk To Ensure Effective Property Valuation And Credit Information And Delinquency Management Systems

Provides Highly Rated Specialist Risk Protection To Lenders, Through Long-Term Commitment Of Risk Capital As Part Of A Global Mortgage Insurance Franchise

Acts As A Risk Transformer To Normalize Risk For Mortgage Investors, By Serving As The “Investor’s Eyes” And Providing A Source Of Credit Enhancement For MBS And Mortgage Bonds.

Housing Market Issues Value Of Private Mortgage Insurance


3

MI Claims Payments

Homeowner Acquires MI If Down Payment < 20-30%

Premium

Insurance Premium

Mortgage Lending Institutions

GE Mortgage Insurance


g

MI Is A Tool To Encourage Lenders To Fulfill Housing Policy … Without Increasing Risk In Financial System

MI Is A Tool To Encourage Lenders To Fulfill Housing Policy … Without Increasing Risk In Financial System

Investors

Funding

Payments

Mortgage Insurance Works At Multiple Levels In The Mortgage Value Chain Mortgage Insurance Works At Multiple Levels In The Mortgage Value Chain

Benefits:• Serve Mortgage Market Without Increased Risk Or Capital Burden• Improved RAROC Or Secondary Market Execution

Benefits:• Access To High LTV Mortgage• Lower Interest Rate

Benefits:• Improved Confidence In MBS/

Mortgage Bond Quality And Performance

Ca

pita

l R

eq

uire

me

nts

Secondary Market Transactions

Private MI Model

Home Buyer


4

Loss Assumptions Historic Portfolio Performance Economic Cycles Geographic Dispersion Lending Criteria Lender & Legal Process Depth Of Coverage LTV

Years

De

fau

lt

Loss Curve

Claims by Year

MI Provides

Price / LOI

MI Analyses Data

Lender Provides Loan By Loan

Data

MI Premiums Generally Are Expressed In Terms Of Basis Points

The Base Rate Is Determined By The LTV Ratio, Supplemented By Other Factors Like ...

Where The Base Rate Is Multiplied By The Original Principal Amount Of The Loan

Lender Specific Price

MI Is Priced To Reflect Lender Specific Mortgage Performance HistoryMI Is Priced To Reflect Lender Specific Mortgage Performance History

Pricing

Less Risk More RiskMortgage Type Fixed-Rate Adjustable

Occupancy Status Owner-Occupied Investor

Employment Status Employee Self-Employed

Mortgage Size Average Size Jumbo

Property Type Single-Family Detached Condominium

Mortgage Documentation Standard Limited

Credit Scoring High Score Low Score

Loan Purpose Purchase “Cash Out Refi”

Private Mortgage Insurance Uses An Actuarial Approach Drawn Heavily From Rating Agency Methodologies

Private Mortgage Insurance Uses An Actuarial Approach Drawn Heavily From Rating Agency Methodologies


5

APPLICATION PROCESS FOLLOW UP FORECLOSURE PROCESS

ANALYSIS & APPROVAL

FORMALI- SATION OF OPERATION

LOAN APPLICATION

MI Application Commitment Certificate Premium Payment At Drawdown Date

MORTGAGE ENFORCEM.

Foreclosure starts

ARREARS

NORMAL RISK FOLLOW UP

Insured To Give Notice Of Default To Insurer Delinquency Management Loss Mitigation Effort

Claim filing Claim

settlement

Doubtful Default

Loan Loans

LENDER

MI

INSURER

MASTER POLICY

AGREEMENT

CONTRACT

NORMAL FOLLOW

UP

Risk Monitoring Benchmarking

Analysis Delinquency

Reporting

Foreclosure ends

INDEMNITY

Mortgage Loan Process

Mortgage Insurance Is Integrated Into Existing Loan Processes …

Overall Strengthening Of Risk Management

Mortgage Insurance Is Integrated Into Existing Loan Processes …

Overall Strengthening Of Risk Management

Improved, Streamlined Process … Loans Are Covered IndividuallyImproved, Streamlined Process … Loans Are Covered Individually


6

Although Mortgage Insurance Can Provide 100% Protection To Lenders, Generally It Covers Only The “Top-Slice” Portion Most Vulnerable To Loss,

Replacing A Large Portion Of The Borrower’s Down Payment …

Although Mortgage Insurance Can Provide 100% Protection To Lenders, Generally It Covers Only The “Top-Slice” Portion Most Vulnerable To Loss,

Replacing A Large Portion Of The Borrower’s Down Payment …

Mortgage InsuranceLender

80%

W/O MI

20%

Bank Financed

Customer Financed

80%

5%

15%

Bank Financed

Customer Financed Underwrites Loans Shares Credit Risk Markets Program Manages Customer

Relationships

Underwrites Referrals/Audits Underwriting

Takes Insurance Credit Risk Administers Program Risk Monitoring / Benchmarking

Analyses

W/ MI

€ 100 K

€ 95 K€ 5K

€ 95 K Loan(€ 15 K Insured)

Borrower

Loan

Proposed

Property Valuation € 100 KAgreed Loan € 95 K Borrower Equity € 5 K

Balance of Mortgage € 80,0 K € 80,0 K € 80,0 K € 80,0 K Property Sold/Valued 60,0 K 65,0 K 75,0 K 90,0 KGross Gain (Loss) (20,0 K) (15,0 K) (5.0 K) 1,7 KPayment by GE 15,0 K 15,0 K 5,0 K No Insurance ClaimNet Gain (Loss) To Bank € (5,0 K) € 0,0 €0,0 €10.0 K

* Irrespective Of The Reason For The Inability To Pay

Four Scenarios In Case Of Inability Of The Borrower To Pay* (For Example After 5 Years)

Coverage Levels Can Be Adjusted To Eliminate Any Bank Losses, Simplifying Provisioning

Coverage Levels Can Be Adjusted To Eliminate Any Bank Losses, Simplifying Provisioning

Product Structure And Example


7

Favorable Risk Weighting

Standardization

Risk Appetite AndExpertise

Innovation And Efficiency

Public Sector Strengths

Private Sector Strengths

Emerging Market Countries Are Using Interest Subsidies, Tax Incentives, And Even MI To Advance Housing Policy

A Government Guarantee Allows Banks To Carry 0% Risk Weighted Assets For Regulatory Capital Purposes

The Government Can Specify Standards And Ensure Uniformity, Which Creates Necessary Preconditions For Easier Loan Origination/Sale And Greater Liquidity

Mortgage Credit Risk Specialists Like GE Want To Offer Their Services Developed In Other Markets On A Long-Term Basis

Customers Expect New Products And Services, And Shareholders Expect Increasing Returns, So Companies Like GE Are Under Constant Pressure To Improve

Partnering With Rated Private Mortgage Insurers Offers Powerful Possibilities For Homeownership While Limiting Additional RisksAn Approach To Managing Credit Risk That Combines The Best Attributes Of The Public And Private Sectors

But…

Public/Private Partnership (“PPP”)

PPP Could Be Used To Encourage Low Down Payment Mortgage Lending On A Cost-Effective Basis

PPP Could Be Used To Encourage Low Down Payment Mortgage Lending On A Cost-Effective Basis


8

PGC

PurchasesInsurance

Insures Mortgage

PPP Could Work Either As An Insurance Or Securitization Program, With Flexibility And Benefits To All Participants

PPP Could Work Either As An Insurance Or Securitization Program, With Flexibility And Benefits To All Participants

Private Mortgage Insurers Assume Non-Catastrophic Credit Risk & Administer Credit Risk Program

Consumers, Lenders And Investors Benefit From Reduced Credit Risk Because Of Sovereign Guarantee … But Government Benefits By Having Most Of The Credit Risk Re-Assumed By Private Risk Capital

Lenders

AA Re-Insurers AA Re-Insurers AA Re-Insurers

Provides Liquidity/Assumes Interest-Rate Risk

Buy PGC-Guaranteed Mortgages

Investors

PPP – How It Might Work

Lower Credit Cost For Consumers, Capital Relief And Liquidity For Banks, Economic Growth And Risk Transfer For Government, And

Deeper, More Liquid Asset Pool For Investors

Lower Credit Cost For Consumers, Capital Relief And Liquidity For Banks, Economic Growth And Risk Transfer For Government, And

Deeper, More Liquid Asset Pool For Investors

Home BuyersProvides Lower Cost Financing Generated By PGC Structure

Borrows To Purchase Or Refinance


9

Up To 90%

50-55%

Private Sector Exposure To First Loss Position On Each Loan And For Substantially All Expected Losses Ensures That Underwriting Discipline/Risk-Based Pricing Is Maintained

PPP Reduces Risk Exposure To The Government To AAA Levels, With Private Sector Capital Incented To Manage Loans Rigorously

PPP Stimulates The Flow Of Funds Into Low Down Payment Mortgage Lending At A Minimal Cost To The Government With More Flexibility Than Other Alternatives

PGC Risk Exposure

Private Sector Risk Exposure

Borrower Equity

Illustrative Loan90% LTV

PGC Will Receive Premiums Sufficient To Cover Actuarially Calculated Losses, Which Will Make The Program Self-Funded

PPP – Credit Risk Allocation

Private Sector Risk Exposure

Private Capital Reinsures The Government Risk Down To 50-55% LTV, Which Includes All Loans Short Of Economic Catastrophe

PGC Risk Exposure

Property Values Must Fall 45-50%, “AAA” Stress Levels, Before Any Government Loss Is Incurred


10

Basel II Is Data-Driven

Basel II Uses Probability Of Default (“PD”) As A Means Of Establishing Capital Levels

Basel II Uses Loss Given Default (“LGD”) As A Means Of Establishing Capital Levels

Basel II Encourages Banking Supervisors To Value Sound Risk Management Principles

Basel II Requires Timely And Meaningful Disclosures To Be Made About Bank Operations

Basel II Rewards Efficient Operations With Lower Capital Charges

Mortgage Insurance Can Help Emerging Market Banks Close The Gap On Basel II

Mortgage Insurance Encourages Generation Of Loan-Level Data

The Additional Underwriting, Servicing And Loss Mitigation Rigor Of Private Mortgage Insurance Can Reduce PDs

Third-Party Mortgage Insurance Minimizes LGD And Reduces Capital Requirements

Mortgage Insurance Has Facilitated Product Innovation And The Orderly Transfer Of Billions Of Dollars Of Credit Risk Exposures Outside The Banking System

Mortgage Insurance Provides Transparent Credit Risk Mitigation Well Understood By Regulators And Investors

Mortgage Insurance Streamlines Processes And Generates Better Delinquency Monitoring And Loss Mitigation

According To A Leading Authority*, “Asian Banks Currently Lack The Critical Data To Build Basel II – Compliant Internal Ratings – Based Systems,” Since …

• 80% Of Asian Banks Have <3 Years Of Probability Of Default Data• 100% Of Asian Banks Have <3 Years Of Loss Given Default Data• Operational Risk Data Are Lacking

* Standard & Poor’s (8/26/02)

Which Is Important Because IRB Banks Will Enjoy A Capital Advantage Even In Emerging Markets

Basel II Implications

How Can Mortgage Insurance Help?Why Is This Important?


11

In Summary, We Would Like To Restate The Potential Benefits Of Private Mortgage Insurance In Emerging Markets

In Summary, We Would Like To Restate The Potential Benefits Of Private Mortgage Insurance In Emerging Markets

Potential Benefits

These Benefits Could Be Accelerated By Thoughtful Official ActionThese Benefits Could Be Accelerated By Thoughtful Official Action

Deconcentration Of Credit Risk – Several Transition Economies Already Have Embraced Mortgage Insurance As An Instrument, But Within Small Open Economies Characterized By Highly Concentrated Banking, Insurance And Asset Management Sectors. Credit Risk Transfer Outside The Financial System To Better Diversified Credit Risk Counterparties Reduces Systemic Risk.

Risk Management – In The Absence Of Meaningful Time Series Data, The Effectiveness Of Lenders’ Underwriting Criteria And Their Ability To Service Loans In A Sour Market Remains Unproved. Mortgage Insurers Can Facilitate Movement Toward Advanced Risk Management Techniques From The Perspective Of 40+ Years Of Managing Mortgage Credit Risk.

Credit Enhancement – Banks Need Additional Capital To Fund Loan Growth, And Flexibility In Balance Sheet Management. Mortgage Insurers Can Help With Capital Markets Solutions.

Supplemental Supervisory Resources – Since Mortgage Insurers Bear Risk Of First Loss, They Are Motivated To Demand Better Quality Credit Information, Robust Property Valuations, Rigorous Underwriting Standards, And Active Delinquency Management. Mortgage Insurers Are Consultants That Back Their Advice With Their Own Capital.

Homeownership Opportunity – Reducing Down Payment Restrictions Remains Critically Important, Especially To Leverage The Benefits Of Declining Interest Rates. Mortgage Insurers Can Suggest How A Public/Private Partnership Might Create A Prudent And Long-Term Alternative To Interest Rate Subsidy Programs.


12

How To Contact Us

For Further Information


Eric KlopferVice President, Global Regulatory Affairs6601 Six Forks RoadRaleigh, NC 27615919-846-4153E-mail: [email protected]

Sacha PolveriniHead Of European Regulatory Affairs2-4 Rond Point SchumanBrussels 1040Belgium+32-2-235-6967E-Mail: [email protected]

dr. eric klopfer march 12, 2003

Documents