The International Finance Corp., the World Bank affiliate that acts as a source of loan and equity financing for private sector projects in the developing world, last week bought a 10% share in South African secondary mortgage and securitization company SA Home Loans.
The investment comes after the organization took a 15% stake in a similar secondary mortgage operation in South Korea, the Korea Mortgage Corp., or Komoco, in November last year (ASRI 11/15/1999 p.1) and heralds IFC plans to establish a dedicated department to advise on secondary mortgage and MBS activities in emerging markets, in particular helping the firms where it has made investments.
The IFC joins Peregrine Holdings and the International Bank of South Africa as a shareholder in SA Home Loans. The company's management and individual private investors hold the remaining stock.
SA Home Loans was established in February 1999 (ASRI 11/16/1998 p.1 and ASRI 2/22/1999 p.1) with the intention of financing and refinancing home mortgages at lower costs than South African retail banks. The company says that it can achieve this by avoiding using banks as intermediaries and an innovative IT system that keeps processing costs low. Currently, the company offers mortgages with interest rates 4% lower than the retail banks.
Arun Sharma, head of the IFC's structured finance team, said that it bought into SA Home Loans to support cheaper housing finance in the country. "Trying to improve access to mortgage funding in the region is a big priority for us," he said. "In South Africa this has been difficult because the main banks have effectively had an oligopoly. We hope our involvement will increase competition in the mortgage market."
Sharma added that the IFC will most likely be involved in securitizations issued by the company and didn't discount making similar investments elsewhere. "We will support SA Home Loan's securitizations if and when we are needed," he said. "As for elsewhere, right now South Africa has the legal framework that doesn't really exist in other countries. That's not to say that markets won't develop in other areas. We'll have to see what happens."
Simon Stockley, chief executive of SA Home Loans, believes that the IFC's involvement will help it attract domestic and global investors for future MBS issues. "The peculiar problem in South Africa is that most of the large fund managers have major investments in the banking industry. This begs the question whether they would support a securitization issue from somebody outside the club," he said. "The rational behind getting the IFC involved is to access their network of local and global players. To get the market off the ground in this country, we need to follow international best practice. This will help us to do that."
The company is currently developing a pool of loans that it intends to securitize at a later date. "We're busy putting together the first tranche of mortgage-backed securities," said Stockley. "The pool is sitting at R350 million ($53.4 million) at the moment and we're discussing with the IFC and other international advisors on the question of size: whether the current pool is big enough or whether we should push the trust out to R500 million or even R1 billion."
It seems that the company still has some work to do on developing its portfolio of mortgages before a viable transaction can be arranged. "The general advice we're getting is that for it to be a meaningful issue it has to be at least R500 million," admitted Stockley. "So, what we are probably going to do is continue to originate, secure additional capacity and put an issue out to market."
Stockley believes that will be possible some time this year and is keen to attract international investors. "We definitely want to target the international MBS market," he said.
The IFC has long been advising similar bodies and governments around the world. It has advised governments and regulators in Morocco, South Africa, India, Korea, China and elsewhere (ASRI 1/17/2000 p. 1). It is expected that the mortgage securitization part of its role will be ceded to the new team of MBS experts.
The IFC has not been alone in advising on secondary mortgage efforts, as the International Housing Financial Services team at U.S. secondary mortgage giant, Fannie Mae, has also been active in consulting efforts throughout the world.