Contractual Savings Schemes for Housing, Minimum Quality Standards in Mortgage Lending, Training for mortgage lenders

Dr. Friedemann Roy

AIPR Workshop in Tsakhkadzor, 29 May 2005

04/08/23 . 2

Bank

Bank

Bank

Borrowers

Origination, Servicing, Risk Management and Funding

Insurers

Secondary Market Operator

Funding andRisk mitigation

Loantake-up

Development of fully integrated primary and secondary markets

Objective of Government of Republic of Armenia

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Contractual savings schemes for housing (CSSH)

Banking operations for mortgage lending process

Minimum quality standards in mortgage lending

Legislative infrastructure

Institutional set-up of secondary mortgage operations

Improvement through suitable training

Important elements of a primary mortgage market

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Establishment of CSSH in Armenia

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Allocation pool

tLifetime of contract

Inflow of funds Outflow of funds

Savings

Redemption payments Deposits

Loans

Mechanics of CSSH systems

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Risks of CSSH

Economic view: volatile inflation rates may deter customers from saving

Banking view: trust of people in banks for longer-term commitments Risk management view:

– liquidity risk: how do we ensure a constant inflow of new savings into the scheme?

– interest rate risk: how do we anticipate future market developments?

Government view: subsidisation is likely to distort housing finance market (e.g. crowding-out of other saving products)

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Benefits of CSSH

Economic view: CSSH may assist in inducing higher savings

activities

Banking view: CSSH is applicable to modest loans for home

improvement

Risk management view: savings period serves as pre-screening

instrument indicating future reliable borrowers

Government view: CSSH may improve access of low and middle

income groups to mortgage finance

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Minimum quality standards in mortgage lending

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Definition of minimum quality standards (MQS)

Origination:• Counselling• Customer application• Credit assessment• Property valuation• Loan offer and completion

Servicing:• File set up• Payment processing• Quality control• Document control • Customer service

Funding and Risk Management:• Management information, IT, account management• Arrears management• Funding of mortgage loans

• Deposits• Bonds• Liquidity facilities

MQS set standards in all areas of the mortgage lending process

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Benefits of MQS

Standards in underwriting, documentation, administration and data

collection facilitate long-term funding in the primary and secondary

market

Improve transparency for customers and advances interest into this

type of loan product

Increase competition, thus lowering prices for mortgage loans and

expanding access to mortgage loans

Facilitate supervision, thus reducing overall risk in the economy

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Prerequisites for MQS

Successful implementation requires a broad acceptance within

financial community

Good co-ordination between supervisory bodies and banks facilitate

introduction

MQS may necessitate further amendments in legislation

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Training programmes in mortgage lending

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Prerequisites:

Training should focus on practical experiences, case studies and interactive teaching

Training should adapt to changing needs of financial community

Training programmes will assist financial institutions in providing better service to their customers and improving the risk management of their mortgage portfolios

Objective of training

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Possible outline of training programme

Introduction to mortgage lending: Housing market dynamics Legislative and regulatory

framework Loan underwriting and origination

procedures Servicing and ensuring their

repayment (including arrears management)

Monitoring procedures of mortgage loans

Loan instruments

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Possible outline of training programme

Introduction to mortgage lending: Housing market dynamics Legislative and regulatory

framework Loan underwriting and origination

procedures Servicing and ensuring their

repayment (including arrears management)

Monitoring procedures of mortgage loans

Loan instruments

Pricing and risk management issues: Risk management in relation to

home mortgages Pricing of mortgages Refinancing of home mortgages Issuance and circulation of

mortgage securities Formation and functioning of

secondary mortgage market

Dr. Friedemann RoyBankakademie e.V.Sonnemannstraße 9-11D-60314 Frankfurt am MainT +49-69 154008-622F +49-69 154008-670E-Mail: roy@bankakademie.de