USAID Enterprise Funds in Romania
USAID ENTERPRISE FUNDS ARE AT THE FOREFRONT OF CREATING HOME MORTGAGES IN EUROPE AND EURASIA
Romanian-American Enterprise Fund Achieves a 22 to 1 Leverage of USAID Funding
In January, 2003, the Government of Romania approved the formation of
the first financial institution dedicated solely to providing mortgage
financing for individual home ownership. The new institution, The Romanian
Mortgage Loan Company (Ro-Fin), is a joint public-private partnership
created with $1.3 million in funding from USAID Romania. These funds
have leveraged $34.0 million in capital for RO-FIN.
RO-FIN is a partnership between the Romanian American Enterprise Fund
(RAEF) and Shorebank Advisory Services (SAS), an affiliate of Shorebank
Corporation, a U.S based bank holding company. The project will promote
the development of the mortgage finance system in Romania. USAID’s
$1.3 million contribution in initial funding has leveraged over $34 million
in private sector capital from both private banks and international financial
institutions. Of special note was the important role played by USAID’s
Development Credit Authority (DCA) facility arranged by Mission and USAID
Washington Staff, and the RAEF. Because of the leveraged funding, RO-FIN
can now accomplish its two principal objectives, (1) the beginning of
long term lending for the purchase of private residential homes; and,
(2) the eventual creation of new and safer investment products such as
Mortgage Backed Securities and/or Mortgage Bonds. To date, over $1 million
in single family home mortgages have been let by Ro-Fin in Romania.
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| This house is funded by the USAID
Enterprise Funds. |
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| Another view of the house. |
The RAEF is only one of ten USAID Enterprise Funds, many of which have
introduced innovative home mortgage lending in cooperation with USAID
Missions. Included are Albania, the Baltics, Bulgaria, Poland, Romania,
and Russia. The Western NIS Enterprise Fund plans a program in Ukraine
and later, in Moldova. Mortgage loan size throughout average around $20,000
and are mostly linked to the U.S. dollar.
Creating home mortgage lending in Europe and Eurasia are increasingly
a major part of the Enterprise Funds’ investment portfolio. In
almost every case, the program is established through wholly owned banking
or financial subsidiaries of the Funds.
Western-style mortgages were first pioneered by USAID/Bulgaria and the
Bulgarian-American Enterprise Fund (BAEF). They were instrumental in
crafting the language to create home mortgage lending legislation. The
BAEF also cooperated with the Banker’s Association and State Savings
Bank to ensure that this program set the standard for the industry and
could be replicated by other banks.
Equally important in the Enterprise Fund’s program has been the
creation of Mortgage Backed Securities through the bundling of individual
mortgages and their sale to other financial institutions. These securities
are considered a safe investment product that will spur savings and have
a positive demonstration effect for commercial banks. High demand for
these securities/and or Mortgage Bonds is expected from public pension
plans, which have practically no long-term financial products in which
to invest such as Pension Funds.
In February, 2003, the E&E Office of Economic Growth is conducting
a conference, “Developing Secondary Mortgage Markets in Southeast
European Countries”. The conference will be attended by a wide
range of institutions interested in home mortgage lending.
USAID HELPS MORTGAGE MARKETS TAKE OFF IN SOUTHEAST EUROPE
USAID’s programs are at the forefront in helping to create vibrant
financial markets in Southeast Europe.* A strong financial sector is
the cornerstone of a market economy and economic growth because it allows
people and businesses to obtain credit and make investments. Successful
activities promoting private and competitive banking systems have set
the stage for growing lending to businesses and households throughout
this former war-torn region. Much of this new lending is to finance housing.
In Bulgaria, mortgage lending has grown from virtually nothing in 1999
to around $100 million in 2002. In Croatia, outstanding mortgages now
total about $1.5 billion, about 5 percent of GDP, on par with Poland,
Hungary and the Czech Republic.
Accelerating these positive trends in housing finance was the subject
of a regional workshop on February 4-5th, in Sofia, Bulgaria organized
by the Office of Economic Growth of the E&E Bureau with the help
of The Urban Institute. The workshop’s theme was the development
of primary and secondary mortgage markets in Southeast Europe. Over 200
bankers, lawyers, ministry officials, Central Bankers, and housing specialists,
along with representatives from American and European financial institutions
participated.
The workshop sparked interest in several areas where participants thought
that a regional approach could help improve the environment for mortgage
lending. These areas included; credit information systems, mortgage insurance,
mortgage bond laws, and special purpose vehicle legislation. The conference
web site is http:www.ceemortgagefinance.com.
To meet the expanding demand for mortgages, mortgage lenders (primarily
commercial banks) are looking to find new sources of long-term money.
Bankers are beginning to explore issuing bonds with the mortgages as
collateral in case of default. Another more innovative technique, is
for banks to pool together the mortgages, creating a new security again
with the mortgages as collateral to sell to investors. That type of operation
greatly reduces banks’ risk because the banks no longer carry the
mortgage loans on their banks. This frees up the banks’ capital
to make more loans to prospective homebuyers. This is the process that
creates a ‘secondary’ mortgage market, not dissimilar from
that in the United States.
Experience in most parts of the world has demonstrated that creating
the basic building blocks for these so-called ‘secondary mortgage
markets’ early can promote better functioning primary mortgage
markets. A more efficient primary market results in lower interest rates
and longer maturities making mortgage affordable for more households.
But, in order to put a secondary market in place, countries must adopt
better mortgage-related laws, improve foreclosure procedures, standardize
mortgage policies, procedures and documentation and generate reliable
databases on borrowers. These critical components for beginning secondary
mortgage markets will also catalyze faster growth of primary mortgage
markets.
The good news is that there is already a large demand in the region
for these new mortgage securities. Successful pension reform in several
countries in Southeast Europe (again with USAID’s assistance) has
created large pools of funds in the region that need to be invested prudently---after
all, people’s pensions that need to be safe but also must provide
a reasonable return. In Southeastern Europe, as elsewhere in the developing
world, pension fund managers have few low-risk opportunities available
(other than government securities) in which to invest the pension money
entrusted to them. Mortgage-backed instruments, like securities and bonds,
provide a reliable investment where safe and reasonable returns can be
achieved.
USAID has not only played a leading role in technical assistance to
the financial sector, but USAID-funded Enterprise Funds in Albania, Romania
and Bulgaria have been instrumental in getting “western style” mortgages
off the ground. In Romania, for example, a partnership between the Enterprise
Fund and Shorebank Advisory Services created The Romanian Mortgage Loan
Company, the first financial institution in Romania dedicated solely
to providing mortgage finance for individual homeowners. It has already
attracted $34 million in additional funds. Another key example of USAID’s
role is the The Bulgarian American Credit Bank (BACB), a wholly owned
subsidiary of the Bulgarian American Enterprise Fund. The BACB successfully
issued the first mortgages bonds in Bulgaria.
There has been real progress in developing mortgage finance in the region.
The next stage of the process is establishing mortgage finance systems
that are harmonized and consistent with international standards. Standardization
is particularly important because of the comparatively small size of
most of the countries in the region. The SEE countries, as they begin
the development of mortgage markets, have the opportunity to move immediately
to learn from the mistakes of others, standardized their approaches and
increase the attractiveness of the region to investors, foreign and domestic
alike. USAID is working hard to support these efforts, speeding the region’s
integration into the European Union and the international financial system.
* Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Macedonia, Romania, Serbia
and Montenegro and Slovenia
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