Polish Bank Association Boleslaw Meluch Expert Real Estate Finance Committee Vice President, European Property Institute „The Role of Data Base in Mortgage Market Development, Polish Experiences” 2 nd Hypothecary Forum March 1 -2, 2007 Sankt Petersburg 1
Polish Bank Association Agenda 1. Why data bases are to be built ? 2. Standardization in Risk Management Process 3. Mortgage Loans Processes Standardization 4. Mortgage Loans Portfolio Risk Management 5. Regulatory Requirements in Mortgage Portfol Management in Poland 6. Our achievements 7. Future (development plans) 2
Polish Bank Association Standardization in Risk Management Process 1. Product standardization 2. Documentation standardization 3. Business practices standardization 4. Data and information access standardization 5. Property Appraisal Standardization 3
Polish Bank Association Mortgage Loans Processes Standardization 1. Origination 2. Underwriting 3. Servicing 4. Funding 4
Polish Bank Association Mortgage Loans Processes Standardization 1. Origination • Pricing • Advertising and Marketing • Consumer Education • Closing of the mortgage • Consumer credit reporting • Settlement cost o title insurance, o survey, o appraisals, o credit checks, o loan origination and documentation o fees, o commitment and processing fees, o hazard and mortgage insurance 5 o interest prepayments.
Polish Bank Association Mortgage Loans Processes Standardization 2. Underwriting • Collateral o Appraised value of the home o Down payment • Credit reputation o Credit history • Capacity o Income Verification o Debt ratio o Cash reserves (Verification of assets) o Taxes • Standard scoring methods across lenders 6
Polish Bank Association Mortgage Loans Processes Standardization 3. Servicing • Payment Processing • Collections • Customer Service • Loss Mitigation • Reporting to Credit Bureau 7
Polish Bank Association Mortgage Loans Processes Standardization 4. Funding • Source of funding • Cost of funding • Margin Determination • Secondary Mortgage Market Conduit Requirements 8
Polish Bank Association Mortgage Loans Processes Standardization In mortgage process a bank is required to analyze: • • Mortgage loan application – borrower income is a fundamental source of mortgage payments Collateral valuation In proper designed mortgage loans process the final approval should be based equally on borrower and collateral analyses In Polish practice borrower analyses is more important 9
Polish Bank Association Mortgage Loans Portfolio Risk Management Credit Risk of Mortgage Portfolio Identification Measurement Borrower Income • • • Credit history Client’s ability to repay Client’s credibility Modeling • • • Probability of Default Prepaymen t Models Debt Service Ratio Net Disposable Income Payment to Income Ratio Instruments Internal data base: • Scoring cards Application score • Automated underwritin g • Automated credibility assessment External data base: • Credit Informatio n Bureau 10 • Tax office
Polish Bank Association Mortgage Loans Portfolio Risk Management Credit Risk of Mortgage Portfolio Identification Measurement Collateral Property Valuation Loan to Value (LTV) Modeling Instruments • Standardized Appraisals Techniques • Statistical methods • Loss Given Default (LGD) • Standardized LTV evaluation • Property rating system • Effective foreclosure system • Cadastre data 11
Polish Bank Association Mortgage Loans Portfolio Risk Management Credit Risk of Mortgage Portfolio Identification Measurement Modeling Instruments Enhancement Elementary risk table: Credit Application Borrower Credit target Credit collateral Borrower’s credibility Current and future creditworthines s Credit purpose Possibility of recovering the invested capital in the event of foreclosure Formal and legal conditions of the transaction and framework. Scoring bank’s procedures Scoring bank’s monitoring system Mortgage gap insurance Unemployme nt insurance Mortgage guarantee insurance Life insurance 12
Polish Bank Association Mortgage Loans Portfolio Risk Management Credit Risk of Mortgage Portfolio Economic Environment Identification Measurement Modeling Instruments • Sociodemographic information • Inflation • Income changes • Cost of living changes • Interest rates • Probability of Default • Prepayment model • Property registration system • Title register system • Housing Price Index • Macroeconomi c data 13
Polish Bank Association Origination, Underwriting and Servicing Procedures Information on Origination of Loans Information on Underwriting & Appraisals of Loans Servicing and Collections – – Reporting structure of underwriting department – Loan approval procedure • Approval limits/authority • Conditions tracking and funding authority • Use of credit scoring or other indicators • Any exceptions to underwriting procedure – Documentation – Fraud protection procedures • Experience of fraud – Turn-around time from origination to approval/rejection – Turn-around time from origination to receipt of loan by borrower – Percentage of approvals/rejections – Reasons for rejection – Extension/rewrite policies • Procedures • Reasons – Appraisal procedures • Appraiser requirements/approval process • In-house/external • Training/qualifications • Monitoring and quality control Servicing Portfolio – Current loan portfolio stratified by type and geographic distribution – Average cost to collect a loan – Number of loans serviced per fully dedicated employee – Sub-servicing agreements • Listing of companies, servicing volume, and loan type • Procedures for monitoring and quality control of sub-servicers Customer Service – Call volume/staffing – Automation/technology – Customer file maintenance/storage Collections – Experience of staff members – Training – Collections enhancement tools • Call and notice cycles • Incentive programs • Approval limits/authority • Re-instatement of recovery record (outside foreclosure) – Prepayments – Prepayment procedures – Reasons for prepayments – Prepayment penalties • – • • • – • – Product types and product development Changes in Portfolio size and product type over last three years and brief explanation as to the reasons for change Origination volume/source (like direct lending, branch network/dealer network, direct mail, brokers, portfolio acquisition, others) Application process centralised/decentralised No. of applications received per day/per week (if available) No. of applications handled per day/per week (if available) Procedures for approval and monitoring of outside origination sources Any single source which provides more than 5% of total originations Rejection volume Procedures for suspension or rejection of a broker Key characteristics of franchising contracts Copy of standard contract, if available in English Required Hedging strategy 14
Polish Bank Association Rating Agency Portfolio Data Requirements Data Fields Requested by Rating Agencies Portfolio Data – Portfolio Cut Off Date • Information on the Borrower and Property – Borrower Name – Borrower Identification Number – Borrower Legal Form and Employment Type – Property Region and Address – Property Type/Description – Owner Occupancy – Net Rental and Total Income of Borrower – Rating (internal and external) of Debtor – Details of Court Judgments • Information on the Loan – Origination and Drawing Date – Loan Purpose – Currency – Loan Amount Requested – Original Loan Size – Current Loan Balance – Existing Charge Balance – Limit loan amount (for undrawn amounts) – Subsidised flag (yes/no, if yes subsidised amount and entity) – Legal Final Maturity – Weighted Average Life – Original Terms (months) – Remaining terms (months) – Payment Date, First Amortisation Date – Amortization Profile (bullet; amortisation rate) • – – – – – – – Interest Rate Type (fixed/ floating / mixed) Current Interest Rate Conversion Option (if any Conversion Date and post Conversion interest rate) Index Name/ Value Marchgin Interest Rate Cap/ Floor (if any) Payment Date Payment Frequency (Monthly/ Quarterly/ Semi-Annual / Other) Interest Day Count Interest Rate Reset Frequency Security Type of Security Valuation of Security Amount Valuation of Security Date Lien Position/ Lien Value (for Mortgage Loan) Other Guarantees on Loans/ Insurance Performance Status Arrears Balance, Total Arrears Bankruptcy Current Principal Due, Current Interest Due Number of days/periods the loan is in arrears Arrears Multiple Amount of arrears repaid without losses Arrears gone into possession 15
Polish Bank Association Legal framework requirements • • • 20 July 2000, General Inspectorate of Banking Supervision - Recommendation J creation by banks database about real estate market 10 December 2001 (amended on 10 of December 2003) Minister of Finance Ordinance about principles of creating reserves on risk with activity of bank New Capital Accord – Basel II March 2006 - Recommendation S 2006 - Banking Supervision Committee’s Resolution on loans currency exposure 16 draft
Polish Bank Association Realities in banking sector • Fragmentary databases • Differentiated range of information • Traditional form 17
Polish Bank Association Purposes of System AMRON • Implementation by banks of supervisory regulations’ requirements , • Effective management risk, • Depending on current market rate value estate prediction • Rationalization of bank activity cost, • Cutting costs incurred by clients. 18
Polish Bank Association System’s Functionality • Information about all types of estate • Collecting and providing access to chosen data concerning the property (transactions, offers, in-kind contribution, appraisal, others) • Property attribute thesaurus • Automatic verification of important parameter in introduced record • Sharing analyses that present statistical data and current trends on real estate market • Data export to MS Excel • Possibility of generating individual analysis in relation with micro and macro economical data 19
Polish Bank Association AMRON System Attributes of Housing Prices x 1 – number of months between real estate transaction (valuation) date and 1 January of each year, i. e. the date of conducted analysis x 2 – law pertaining to the considered real property x 3 – city zone x 4 – year of construction completion or recent major repair x 5 – land development x 6 – building plot area [100 m 2] x 7 – facility floor area [m 2] x 8 – access to means of communication x 9 – shape of plot and land topography x 10 – accommodation plan x 11 – attractiveness of location x 12 – location of story in the building x 13 – kind of building x 14 - outfit standard x 15 – administrative and legal restrictions x 16 – degree of unit price objectivity x 17 – additional attribute – expert x 18 – source of price information c – real estate unit price [zł/m 2] 20 d – rent for accommodation area unit [zł/m 2 x year]
Polish Bank Association Analyses and monitoring • Models of scaling of ratios of risks, – In free transactions of sales in different intervals of times – In foreclosure procedures – In future transactions of sales – On base of offered property prices • Property value prediction models, • Discount rate calculation models 21
Polish Bank Association Examples of types of reports • Report A - general, descriptive (property type, area, transaction price etc. , presented in the territorial aspect) • Report B - detailed, describing a particular property (full data on property gathered in the database) • Report C - summary – cross-section of the given real estate market (region, type). • Report D – presenting trends on the real estate market 22 (generated periodically).
Polish Bank Association How system is taken advantage? 250 000 PLN How much this property is worth ? 200 000 PLN Lack of Monitoring the collateral’s (property) value during the crediting term. Value of estate in foreclosure procedures Risk management payments 23
Polish Bank Association Benefits of AMRON • Access to all data on estate market • Increasing risk management in real estate financing market including limiting risk associated with undervalued collateral. • Possibility for a trustworthy verification of property appraisals through comparison of external appraisals with data from system. • Shortening the time of credit decision – fast verification of property value will decrease the time the client waits for the banks decision. • Limiting the possibility of a unfair and negligent valuation of property that might cause an undercolleralization of the loan value. • Possibility of monitoring the collateral’s (property) value during the whole crediting period. 24
Polish Bank Association Benefits of AMRON • Wider access to data gathered by particular participants of the system, giving a better picture of the real estate market. • Possibility of predicting demand for mortgage loans from the territorial perspective. • Creating analyses with statistics and current trends on the real estate market. • Facilitating and developing the mortgage baked liabilities transfer. • Granting loans with high LTV values. • Improving data concerning the propertied legal status. • Decreasing costs resulting from the creation of a private database. • Decreasing costs of credit (Valuator 100$ / statistical methods – 20$) 25
Polish Bank Association AMRON System Development Plans • Invitation for cooperation to insurance companies • Creation interface between credit information, and information about client • Monitoring of estate market and observation of business cycle. • Cooperation with National Bank of Poland on market analysis creation • House Pricing Index 26
Polish Bank Association Boleslaw Meluch Expert Real Estate Finance Committee 8 Kruczkowskiego Str. , 00 -380 Warszawa +48 -22 -48 -68 -137 bmeluch@zbp. pl European Property Institute Vice President mobile 506 -108 -364 boleslaw. meluch@ein-epi. eu 27
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