Seoul, Korea, June 6, 2002—The International
Finance Corporation, the private sector lending arm of the World Bank Group,
will invest in a unique project in Korea’s housing finance sector. The
project will help develop the secondary mortgage market by introducing
standardized primary mortgage contracts and international best practices
to facilitate the issuance of mortgage-backed securities (MBS).
IFC’s financing consists of an equity investment of up to Korean Won (KRW)
13 billion (US$10 million equivalent) in NewState Capital Corporation Limited
(NewState). IFC will also provide a guarantee for up to KRW100
billion ($77 million) under a revolving warehousing vehicle, the first
of its kind in the country. The warehousing vehicle will purchase
pools of mortgages—when a sufficient quantity of mortgages has been accumulated,
the warehousing vehicle will issue MBS to institutional investors.
At present, more than 90 percent of mortgages are originated by large commercial
banks in Korea because non-bank financial institutions are unable to provide
warehousing lines and securitizations.
The recapitalized NewState will
stimulate greater market competition, diversification, and innovation in
a sector that has traditionally been under-developed and quasi-monopolistic.
Although MBS is popular in the United States, its use in Korea is
limited. MBS can be relatively secure and profitable to domestic
investors, particularly to pension funds, as well as other public funds.
NewState is Korea’s only non-bank financial institution specializing in
home mortgage origination that is also independent from a bank or large
conglomerate. The company currently originates, manages, and services
residential mortgage assets, including eight pools of mortgages of approximately
KRW150 billion ($91 million equivalent) that it has securitised since April
2000. NewState has a network of nine sales offices throughout the
IFC has played an important role in supporting Korea’s economic reform
efforts, especially in helping the country recover from the Asian financial
crisis. Although IFC’s current strategy is to wind down its activities
in Korea, a key objective is to ensure that the country’s economic recovery
remains sustainable and to provide support in targeted areas, such
as the housing finance sector.
“The project will promote competition and rapid growth in an area which
has traditionally been heavily regulated and controlled. We hope
it will be replicated by other financial institutions, allowing them to
also participate in the mortgage lending market,” said Mr. Javed Hamid,
IFC Regional Director for East Asia and the Pacific.
This is IFC’s second investment in Korea’s housing finance sector. In
October 2000, IFC invested in Korea Mortgage Corporation (KoMoCo), Korea’s
first and only specialised secondary home mortgage company, which purchased
pools of mortgages from mortgage originators and arranged for the simultaneous
issuance and placement of MBS. From 2000 to the present, KoMoCo
successfully issued a total of seven domestic MBS, amounting to KRW2.2
trillion ($1.7 billion equivalent). In May 2001, IFC became the first
foreign and lead institutional investor in the Korean MBS market—this
MBS was structured and arranged by KoMoCo.
IFC’s mission is to promote sustainable private sector investment in developing
countries, helping to reduce poverty and improve people’s lives. IFC
finances private sector investments in the developing world, mobilizes
capital in the international financial markets, and provides technical
assistance and advice to governments and businesses. Since its founding
in 1956 through the close of the last fiscal year on June 30, 2001, IFC
committed more than $31 billion of its own funds and arranged $20 billion
in syndications for 2,636 companies in 140 developing countries. IFC’s
committed portfolio at the end of FY01 was $14.3 billion.