effects of the subprime crisis in emerging markets...effects of the subprime crisis in emerging...
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Effects of the Subprime Crisis in
Emerging Markets
Britt Gwinner, CFA
Principal Financial Specialist
International Finance Corporation
Fortaleza, 17 March, 2010
1
2
IFC and Housing
• Construction finance
Brazil – Cyrela, Brookfield
Mexico – Vinte
• Primary mortgage lenders
Mexico, Colombia, India, Russia
• Housing Microfinance
Peru, Afghanistan, Pakistan
• Secondary mortgage markets
Brazil (Cibresec), Colombia, Mexico, India, Russia
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Contents
1. The Basic Picture – Housing Finance in Emerging Markets
2. What Happened in Developed Markets?
3. What Happened in Emerging Markets?
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THE BASIC PICTURE
Section 1
4
5
The crisis did not change the basic picture
• Developed countries resolved housing shortages in the 1950s
and 1960s
Less than 1% of housing units in the wealthy countries of Asia, Europe, or
North America suffer from inadequate conditions
Solutions came from financing schemes, urban planning, and subsidies (of
varying efficiency and efficacy)
• Housing deficits persist in Latin America, Asia, Africa
Self-built houses on squatted land often lack connections to sewage or water, built of inadequate materials, structures inadequate to withstand earthquakes, hurricanes
In Africa, close to half of all households, 44.7%, lack access to improved
sanitation; in South Asia, about a quarter lack sanitation, 25.6%
In Latin America between 20 and 30 million housing units are lacking in
some fundamental aspect, such as running water, sanitation, constructed
from inadequate materials, etc.
Inadequate housing compounds the cycle of poverty – health, social investment, wealth-building
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66
• For past 40 years, in emerging markets, formal sector housing
production has rarely matched the rate of household
formation
In Mexico, production approximated demand for the first time in 2006 (600k mortgages issued), then fell short in 2009 as construction finance slowed
• Rising incomes in past eight years permit more households to
afford mortgages
Real disposable personal income rose ’00-’08 an average 3% per year in Peru, 2.4% in Colombia, 1.6% in Brazil
But incomes fell slightly over same period in Mexico, Argentina
• Lack of long-term funding - most emerging capital markets fail to extend beyond one year maturities with any depth or liquidity
Housing shortages, rising incomes, limited financing
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Mortgages mostly unavailable in emerging markets
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0%
20%
40%
60%
80%
100%
Den
mark
Un
ited
Sta
tes
Sp
ain
Germ
an
y
Jap
an
Mala
ysia
Ko
rea
Pan
am
a
Italy
Th
ailand
Mo
rocco
Ch
ile
Ch
ina
Lith
uan
ia
Mexic
o
Po
lan
d
Co
lom
bia
Turk
ey
country
Mortgage Debt as Percent of GDP Selected Countries
Developed
countries 40-100%
Emerging markets< 20%
Source: World Bank
WHAT HAPPENED IN
DEVELOPED MARKETS?
Section 2
8
U.S. subprime boom and bust – excessive
leverage, weak credit underwriting
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0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
50
70
90
110
130
150
170
190
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Do
llars
in
Mil
lio
ns
S&
P/C
ase-S
hil
ler
Nati
on
al
Ho
use P
rice I
nd
ex
Year
U.S. House Prices and Mortgage Originations
House Prices
Total Mortgage Originations(Right Hand Scale)
Subprime
FHA/VA
Sources: S&P Case-Shiller, Inside Mortgage Finance
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European credit bubbles broke – weak
underwriting, excessive leverage
• Credit bubbles in Portugal, Ireland, Italy, Spain, Greece
included housing finance and other asset classes
• German public banks with offshore highly leveraged investment
funds
• Fitch 2009: rising unemployment and falling house prices lead
to “…asset performance deterioration expected to continue
across the UK and the Euro area...”
• Fitch on German non-conforming mortgages 2009: “High early
stage delinquencies and low recoveries have already led to
negative rating actions, more likely to follow.”
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11
European & U.S. crisis response
• Central banks’ quantitative easing, low interest rates
95% of all securitization issuance in Europe for 2008 was retained for repo
purposes, notably with the ECB and the BoE;
Federal Reserve term liquidity facilities provided USD 1.5 trillion at their
peak, pricing incentivized exit, down to USD 20 billion March, 2010
• Deep haircuts - financial institutions pledged £287 billion face
value in securities to the Bank of England’s Special Liquidity
Scheme in order to borrow £185 billion in funding
• Lending falls – Private sector lending in Europe fell €47 billion
in December from November 2008 as credit standards tightened
and unemployment rose. Lending to households fell by €20
billion in December, for a total drop of €37 billion in Q408.
• Rescue efforts: e.g., Bank of England’s Homeowner Mortgage
Support Scheme, Spain’s Financial Asset Acquisition Fund
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12
Risk prices rise and investors differentiate
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Spread on
Spanish issues
rises to 680bp
Netherlands
suffers least
Source: AFME
01/07, every
AAA issue is
about 20bp
0
50
100
150
200
250
300
350
2007:Q1 2007:Q2 2007:Q3 2007:Q4 2008:Q1 2008:Q2 2008:Q3 2008:Q4 2009:Q1 2009:Q2 2009:Q3
USD
bill
ion
s
U.S. Structured Finance Issues 1Q07-3Q09
ABS CDO Agency MBS Non-Agency RMBS
Government -backed RMBS
ABS - credit cards, autos, short term
Private-IssueRMBS
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U.S. structured finance goes public (sector)
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Source: AFME
In 2008 & 2009, the
Fed bought most
new issuances by
Fannie and Freddie
WHAT HAPPENED IN EMERGING
MARKETS?
Section 3
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15
What have actual defaults looked like?
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0%
5%
10%
15%
20%
25%
30%
35%
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A largely external crisis
• There are no subprime mortgages in emerging markets
But some signs of loosened underwriting in Mexico, some others in 2007, 2008
• Emerging sovereigns benefitted from low borrowing spreads during
the boom
But, macro management has broadly been strong, emerging markets come out of
the crisis with relatively low decline in GDP, many cases of growth
• At the worst of the crisis, funding retreated to New York, London,
Madrid, etc.
• Limited development of some capital markets mitigated bad effects –
e.g., Egypt, Guatemala
• Relatively strong economic performance protected others – China,
Brazil, Peru
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LAC RMBS during the crisisReliance on local investors, mostly low mortgage delinquencies,
persistent demand from private pensions and insurers
• Colombia – Structured finance issuances 2009 almost twice 2008, TC
placed USDeq 791 million in RMBS 2009, mortgage delinquencies 4.5%
2009, expected stable 2010, more than half of recent issues
purchased by domestic pension funds
• Chile – Structured issuances up 6 times in 2009 v. 2008, of this, 9%
was RMBS
• Panama – La Hipotecaria securitized consumer loans 9/08, rolls
commercial paper through end 2009, issues MTNs 04/09 – all to local
investors
• Peru – corporate issuances continue, structured finance for auto,
consumer, leasing, and Titulizadora Peruana issues RMBS 02/10
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Outlook for Mexican Mortgages and RMBS
• 2008 – Flight from mortgages by local and international investors
• 2009 – Return of bank issuance (BBVA Bancomer), also Infonavit,
Fovissste
• Sofols/Sofoms remain sector non grata
Metrofinanciera cash diversion; Crédito y Casa collections problems
Cessation of long- and short-term wholesale funding to sofols/sofoms
Rising delinquencies from U.S. crisis, swine flu, local unemployment
Return of SHF funding, limits to SHF balance sheet
Government push to get banking licenses and recapitalize
• Rescue of sofols/sofoms by bond investors is unlikely until their
charters change or they are recapitalized
• Housing demand is strong, inflation is low, house prices are stable
Banks and state institutions are actively lending
Construction finance is restricted – project pipeline fell 40% 2009
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19
NBFIs in emerging markets
Non-bank financial institutions have led innovation for the
underserved in emerging markets
Housing, microfinance, and leasing in Mexico, Colombia, Peru, India, etc.
Lower entry costs, less stringent regulations, lower minimum capital,
lower overhead compared to banks
Mortgage NBFIs face specific funding issues because of longer
maturities
Mortgage banks have thrived in the U.S. via securitization by
government-sponsored entities
In Mexico, SHF is supporting Sofoles through the crisis, but eventual
transition to banks is expected
In Chile, administradores hipotecarias have succeeded with contracts to
insurers
The crisis highlights the importance of local institutional investors
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Going forward
• Demand for housing by moderate and lower income households
persists
• Rising incomes create increased capacity to pay for mortgages
• Growing institutional investors want long term paper
• Many of the obstacles to development of capital markets for
mortgages are long-standing but can be overcome
• The hardest problem for long-maturity finance is inflation
• Lessons learned from NBFI problems and investor flight in Mexico –
grow lending carefully, focus on educating and developing the local
investor base, add international sales as a supplement
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THANK YOU!
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