Financial Sector Development in Africa: Opportunities ... - World Bank

Housing Finance 131
markets is the long-term funds provided by pension funds, insurance
companies, and other investors. These institutions are seeking assets to
provide long-term returns for their long-term liabilities in the form of
pensions or insurance contracts. Residential mortgage-backed securities
are able to provide this with a rate pickup over government securities. As
will be discussed later, the financial crisis has highlighted some of the
issues around transfers of risk in this market, but in theory a wellstructured
secondary mortgage market will be an important component
in an efficient financial system. The third prerequisite is a robust institutional,
legal, and regulatory environment. There needs to be an efficient
and cheap way of accessing the capital markets, investor rights need to be
protected, and the markets should be easily traded and liquid. Ideally a
legal framework should give clarity over the ability of an issuer to engage
in a “true sale” of assets, which is the full separation of the issuer from the
assets that are being packaged as securities for investors.
A simpler alternative to securitization can be a mortgage liquidity facility,
which helps lenders to obtain long-term funds but does not carry the
same level of complexity or risk transfer as residential mortgage-backed
securities do. This is a popular model that many of the French-speaking
African countries have adopted in the form of Caisse de Refinancement
Hypothécaire, which is based on the French institution Caisse de
Refinancement de l’Habitat (CRH). Such institutions exist, have existed,
or are planned in Gabon, Rwanda, Tanzania, South Africa, Nigeria, Egypt,
and the West Africa Economic and Monetary Union countries (WAEMU)
(see box 4.4 for an example in Egypt). The basic concept is a simple one:
mortgage lenders are allowed to use their mortgage assets as collateral for
loans from a centralized bond issuer. The bond issuer or liquidity facility
is typically owned by the banks, which use it for refinance purposes. The
facility is therefore a sort of mutual organization providing a service to its
members. Unlike with securitization, the bonds it issues are plain corporate
bonds without any direct risk transfer from the mortgage loans. They
are simple obligations against the balance sheet of the liquidity facility.
The institution gains its strength from a strong capital base and careful
lending that is secured by mortgage assets as collateral.
Lenders can use a mortgage liquidity facility in two ways. It can be
used as a direct source of long-term funds to help overcome the maturity
mismatch, or it can just be used as a backup option in the case of liquidity
problems. Because the facility provides a safety net, a lender is able to
make better use of its short-term deposits: the lender is safe in the knowledge
that any liquidity imbalances can quickly be overcome by presenting