In a seemingly new phenomenon, the International Finance Corp. has begun to reorganize the primary mortgage market in several countries which sources say will have an array of benefits, including a more liquid secondary market.
First Argentina, then Korea, and now Colombia - and the IFC says we haven't seen the last of it. What's next? Rumor has it may be Mexico or Brazil.
The recent transaction of the sort was the approval for the IFC to invest $140 million in the newly created Colombian Home Mortgage Corp. (CHMC), the first domestic company to acquire and securitize residential mortgage loans in Columbia. In conjunction with the IFC, three of the countries leading mortgage originators, Colmena, Conavi and Davivienda will sponsor the establishment of CHMC.
The IFC has also allocated $100 million to enhance the mortgage lending process and stimulate mortgage lending in Korea. The money was invested into the country's first specialized secondary mortgage company, Korean Mortgage Company (KoMoCo), which was established in September 1999 with the assistance of the IFC. The Korean Ministry of Construction and Transportation, Kookmin Bank, Housing and Commercial Bank, Korea Exchange Bank and Samsung Life Insurance are the domestic sponsors.
The IFC has a 10% stake in the company and Merrill Lynch will also have a 10% equity stake in the company. So far, KoMoCo has issued $850 million in mortgage-backed securities.
Prior to Colombia and Korea, the IFC took its first major step into this market with the $150 million investment into Argentina's first major secondary mortgage company, Banco de Credito y Securitization. The IFC also provided $50 million to the Banco Hipotecario (BH), formerly a state-owned mortgage bank, to help fund primary mortgages for the eventual sale to the secondary mortgage market. BH was the main sponsor in the transaction.
"It is a multi-faceted investment that has a nice range of benefits," said Michael Bookstaber, investment officer of the IFC. Bookstaber also noted that creating a unified set of lending standards makes the mortgage lending system more efficient and increases affordability. "Hooking up the primary mortgage market with the capital market substitutes consumer savings with institutional contractual savings, which provides long-term funding. The glue in all of this is securitization."
According to Jean-Marie Masse, principal investment officer of the IFC, one of the missions of the IFC is to alleviate poverty in Korea. "We found that in emerging markets, low and middle-income people have difficulties accessing long-term loans to become owners of their home," Masse said. "So these people have to save a lot of money to pay cash for a house or, they borrow a little amount relative to the value of the house at very high interest rates and short term. Therefore developing housing finance in emerging markets was a good target, given the IFC mission."
During the fiscal year ending June 2000, the IFC was approved to invest $5.8 billion annually for its own account and syndication, out of which 46% went to the development of financial institutions, some of which include banks, insurance companies, investment banks and leasing companies.
"As you can see, IFC has the capacity to do much more. We are looking constantly," said Masse. Sources say the IFC is looking at opportunities to establish secondary mortgage market entities in other emerging markets. However Bookstaber added, "We carefully pick our targets there."