Page 340 - 2019 6th AFIS & ASMMA

builders of affordable housing. Construction work is a great entry point, » Moderator | Henny Sender
and they will also create the demand for that affordable housing. So, in a
world where technology is taking away a lot of the jobs and making the
East Asia economic model increasingly implausible, because when more
and more capital will be doing the jobs, there'll be fewer manufacturing
jobs. Construction is one possible alternative. And your point on the
affordable housing creating jobs, I think is such an important one, which
picks on Matthias' comments about all the economic benefits of housing
and why it should be a priority. Olivier, I'm now going to turn to you.
First, please tell us about your two jobs and what you've learned, and
how what you've learned in France applies to emerging markets, which
may be seemingly counterintuitive.
» Panelist | Olivier Hassler
Chairman, French CRH Board & Housing Finance Adviser, World Bank
I have two hats and one of them is being a non-executive chairman of
the mortgage refinancing facility in France. It was created in 1985. Though
my neighbor forbade us to name it, you would identify its name from its
very poor and bad examples of regulation in the country called "F", which
was a credit restriction. To tame inflation, the government had a policy
to limit the growth of a distribution of credit. So you had commercial
banks and savings banks, which were cash-rich, but couldn't lend all the
cash they had. On the other hand, you had specialized lenders with no
deposits, which wanted to lend and do mortgage lending but didn't have
much cash or easy cash. Precisely such as CRH was created to provide this
specialized institution, with long term resources raised from the capital
market. That's something which impacts many countries. Because you
do have the situation, where often commercial banks are reluctant to
lend, despite the fact that there are a lot of cash. You also see a situation of
resource transformation, where you have institutional investors with long
term liabilities like pension funds, just investing their cash in bank deposits
instead of going to the capital market. So, as Simon mentioned, the exact
goal was to create a tool to capture all the savings from the capital market
for mortgage lending. It's still totally valid in many countries.
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Can you just step back one minute and tell us the way in which the
French mortgage finance is different than that in the US? When Olivier
first started explaining this to me last night at dinner, I was cringing
because the mortgage financing institutions in the US were partly
responsible for the subprime crisis, which then morphed into the global
financial crisis. Sadly, it largely started in my country.
» Panelist | Olivier Hassler
Anecdotally, what triggered the creation of this institution was a Session II
report of the financial ministry of the French Embassy in Washington,
describing the US system with a Fannie Mae, Freddie Mac, and Federal
Home Loan Bank system. The Ministry of Finance wanted the report,
which led to the creation of the institution. But a big difference is that the
French institution is a very simple and very robust institution.
It doesn't take risk. It's a pass-through system, so it issues bonds
and lends on to mortgage lender exactly what it has borrowed on the
market. It is also very safely organized with a natural, of course, pledging
portfolios, quality standards for the pledged mortgage loans, and over-
collateralization which is on average about 140 percent. So, it's very
different. And it's entirely owned by the banks; so when the bank wants
to use this facility, it has to be become a shareholder. And there is no
government intervention. Nothing, no relation with the government. So,
that's one big difference with, for instance, Fannie and Freddie in the US,
where the government-sponsored organizations, are seen as implicitly
guaranteed by the government. So they had an inducement, an incentive,
to issue bonds, because there were very attractive conditions. Instead
of doing their primary jobs, which was guaranteeing their mortgage
portfolios, they tried to make a fat profit of the margin between the cost
of funding and the investment in mortgage portfolios. The French system
doesn't buy portfolio; we just lend on banks. That one big difference. The
Fannie and Freddie in the US were urged in a way by the system to make
a lot of profits and they took the risk.
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