Markets

Need for a “push” strategy

Lenders need to be convinced proactively

Providing information/training is key

Potential borrowers (looking to get access to a mortgage loan or looking for a larger loan) are willing to pay
more than what lenders perceive

Regulation

An absolute prerequisite

A difficult and lengthy process

What comes first: the regulator or the operator

Is it possible to implement a new set of regulation over time? By regions?

Need to regulate who can provide mortgage insurance/guarantee

Need to regulate the reduced risk for the lender
of an insured loan

Product

Need to be specifically design to
meet each specific circumstances

Crucial to share the risk
(partial coverage) initially

Creativity is required (gradual risk sharing,
capon portfolio, etc…)

Impact

To early to measure the impact

New companies are viable in the
very short term

Investors could be mobilized for
MI companies in the most difficult
environment (Mali, Palestine)

Need a full economic cycle
to draw more definitive
conclusions

OPPORTUNITIES

A clear priority in all countries
where we are working.

Clear recognition that the housing sector could be
an engine of economic growth & a factor of
social stability (India)

Huge housing needs (India, China, countries in transition)

Macro-economic conditions improving
(Inflation under control, rate of interest declining)

Strong lenders (India, Baltic States)

Better understanding of the need for a strong
primary market to develop a secondary market

Transition to market economy (Baltic States, Serbia)

Reduce need for government direct support

Need for standardization is well understood

CHALLENGES

Legal/Regulatory framework sub-optimal

Foreclosure: an issue everywhere. Cultural sensitivity to the concept.

Title registration: complex, lengthy, costly or ineffective.

Lenders: No experienced lenders or just a few, limited appetite.

Long term resources: unavailable or very limited

Historic data: very limited or unavailable

Professional services for transaction: Credit Bureau,
Real Estate professionals, market analysis:
very limited everywhere.

Possible Objectives for Mortgage Insurance in Emerging Economies

Increase access to housing finance
- Reduce down payment required
- Reach out the underserved borrower

Encourage lenders to lend

Increase level of home ownership

Standardize legal and lending practices

Deepen financial system – different types of lenders; broader access to
capital market

Impacts growth in : job creation; building materials; taxes;
personal wealth; financial & professional services

Develop new and resale housing markets

CMHC INTERNATIONAL INVOLVEMENT SO FAR

Lithuania
2001-2002
Training program on Mortgage
Insurance Market Analysis

Latvia
2002
Training program on Ml. Market
research on mortgage products

China
2001-on going
Feasibility study on the introduction
Ml

Serbia
2002-on going
Business plan for a National
Housing Agency

Mortgage Insurance

The Canadian Housing finance system is performing well.

An effective balance between private and public involvement.
Lending is done by private sector. Competition on a level
playing field between private and public sector for mortgage
insurance.

Mortgage Insurance played a key role in the development of
Housing Finance.

Mortgage insurance: an instrument of public policy.

MORTGAGE SYSTEM - US

1. Regional lending

2. 20,000 lenders – Banks, S&Ls,
mortgage banks

3. Segmented lending process

4. Amortization typically 15 & 30 years

5. Interest rate fixed for life of mortgage
or variable

6. Interest deductibility

7. Capital gains taxable

8. MBS major source of funds

9. FHA targets low income and avoids
competition

10. FHA covers 10% of new
residential mortgage loan

MORTGAGE SYSTEM

CANADA

1. National & Regional Lenders
2.200Lenders
3. Womb to tomb lending process
4. Variable Amortization – 5, 10, 15,
20, 25 years
5. Fixed interest rate term – 6 months to
5 years
6. No interest rate deductibility
7. Capital Gains not taxable
8. Funds primarily from deposit base,
9. CMHC competes with private
insurance
10. CMHC has a significant market share

MORTGAGE INSURANCE IN CANADA - Impact

Increased supply of funds by making mortgage lending
attractive

Increased mortgage market competition and reduced rates

Allowed government to withdraw from direct lending, interest
rate subsidies and Federal loan-loss guarantee

Zero capital required by lenders instead of 4% for non
insured loans

Standardized mortgage terms and conditions

MORTGAGE INSURANCE IN CANADA - Product

Single up-front premium (between 0.5% and 3.75%
according to LTV). Typically added to the loan.

Universal access everywhere in Canada for same kind of
terms and conditions, for any kind of housing. Different for
private competitor.

More than 95% underwritten by EMILI

Mortgage Insurance Fund: operated on commercial and
actuarial basis, no cost to government. In line with risk
exposure and General Insurance Regulations

200 approved lenders: 6 dominant lenders

TYPICAL MORTGAGE PRODUCT IN CANADA

Roll over mortgage

Equal payment

Loan amortized up to 25 years

Interest rate fixed for term ranging from 6 months to 5 years

Mortgage insurance key pillar of system:

- Maximum loan without MI: 75% LTV

- Maximum loan with MI: 95%

Regulatory requirement for all loans above 75% LTV

Between 15% and 20% of units insured have an LTV<75%

Introduced in 1954 to encourage banks to lend and reduce
initial down payment

Protects lenders against all losses incurred as a result of
borrower default

100% coverage of losses (whole mortgage
outstanding balance + eligible expenses) for life
of mortgage

US Government Resources for Companies Interested in Developing Housing Finance Programs in Africa

Overseas Private Investment Corporation (OPIC)

- Political risk insurance
- Currency convertibility insurance
- Project finance

USAID

- USAID programs through local missions
- Technical Assistance
- Development Credit Authority (DCA)

How the Public and Private Sectors Can Help Jump-Start Mortgage Lending

Credit Risk

- Introduction of loss-limit insurance programs with tiered risk
sharing; FHA (USA), SHF (Mexico)

Funding

- Second floor bank; FHLB (USA), FOVI (Mexico)
- Whole loan sale (Mali, possibly Uganda)
- For countries with developed primary market introduce bond
guaranty program; Ginnie Mae (USA)

Developing Countries Have Unique Housing Finance Needs

Mortgage design

Loan programs: Finished housing vs. incremental/rehab
housing (Mortgages vs. Micro-lending)

Managing credit risk

- Underwriting for informal sector applicants
- Comprehensive loan servicing
- Loss mitigation program

Funding

- Securitization not appropriate but deposits not adequate
- Loan sales
- Second floor banks

Components of a Housing Finance System (con’t)

Credit risk management

- Underwriting
- Servicing
- Insurance
- Loss mitigation programs

Funding

- Deposits
- Loan sales
- Second floor banks
- Corporate debt, mortgage securities

Components of a Housing Finance System

The Basics

- Stable economy
- Enforceable property rights
- Legal system that allows efficient foreclosure and eviction

Retail operations

- Loan origination programs
- Loan products
- Branch network

Why Housing Finance?

Gives households access to proper housing

Provides households with a means to acquire wealth

Significant component of an economy: 25%+ GDP in the
USA

Contributes to the development of retail banking

Provides source of long-term investments

United States – Africa Mortgage Market Initiative Guiding Principles

Engage the public and private sectors for market oriented solutions to
housing finance

Encourage limited government participation in the market.
Government should enable the private sector to lend, not compete
against it

Recognize that housing finance models from developed countries are
not completely transferable to developing countries

United States – Africa Mortgage Market Initiative

Announced by President Bush in July 2003

Goal: Help African countries develop sustainable primary, and if
possible secondary, mortgage systems

How is the USA helping?

- Refocus development policy toward housing finance

- Fund housing finance programs (USAID, OPIC)

- Technical assistance (Treasury, Ginnie Mae, Housing & USAID)

Engage the public and private sectors for market oriented solutions to
housing finance

Accomplishments to-date:

- 20 projects in nine countries.

- Projects include guarantees for the construction of housing, long-term
funding for mortgages and more importantly, technical assistance to
develop the legal framework and institutions needed for strong mortgage
markets

Microfinance in the world today

10,000 MFIs manage a global portfolio of US$30 Billions

In a range from 150 US$ to 7,000 US$, the average loan size is US$ 450

150 Mio micro-credit active clients

300 Mio micro-saving active clients

50 Mio micro-insurance active clients

New trends

Development of MF in industrialized countries (e.g. Israel,
France, USA) thanks to the adaptation of the tools and
methodologies

Commercialization of the stakeholders

Use of new technologies as a new development tool

Microcredit Best practices (4/4): Key success factors

Methodology
Regular follow up
Requirement of good repayment for future access to a bigger loan
Local loan officers familiar with local culture

Adapted products and procedures
Small and short term credits
Repayment capacity assessment
Adapted collaterals / group solidarity guarantee

Business Development Services
Compensation for lack of education of loan beneficiaries

Micro-credit Best practices (3/4 ): Interest Rate

Prejudices
The social mission should consist in a free loan
Interest Rate, perceived as a burden to the client

Reality
Micro-credits allow for the creation or expansion of an income generating activity and the generation of profit
Interest rates are no burden if the business plan is solid and good evaluation has been done

Microcredit Best Practice (2/4 ) Repayment

Microfinance is not philanthropy!
Clients need to pay for the services
Microcredit clients need to repay the loans
Interest rate to cover the costs

Why is repayment important?

Offer new loans and extend the client base
Ensure correct functioning and growth of the institution
Cover office & operational costs
Cover for non-payments when they occur
Avoid financial loss and loss of credibility for the institution

REPAYMENT ON TIME GUARANTEES THE SUSTAINABILITY OF THE PROGRAM

Introduction to Microfinance: History

How did all start?

On the field Prof. Yunus saw that
Even poor people and women need loans
They can have an activity and repay



Set up financial institutions with
a social mission
Listen to the needs and constraints of the
excluded & offer them adapted financial tools to
empower themselves ( solidarity groups)

Spirit: SUSTAINABILITY

Microfinance Definition

Microfinance is the offer of financial & non-financial services to

people excluded from the traditional banking system.

The services are adapted to the needs of the target populations

Microfinance is a tool against poverty by enabling the beneficiaries to :

Create sustainable activities to increase their incomes

Reduce external shocks

Improve the living conditions of entrepreneurs and of their families

Empower people and mainly the women

Micro Finance

MICRO

Micro-entrepreneurs

Self-employed

Low income populations

Excluded populations

FINANCE

Business & educational loans

Savings

Micro-insurances

Remittances

Micro-entrepreneur training

Coaching & workshops on

health, hygiene, etc.

Why are people excluded from certain financial services?

Lack collateral or guarantors

A bad credit history

Gap in the communication / lack of confidence in the Banks

Doubt of the bank of the repayment capacity

Lack of access to financial infrastructure and services in
remoted areas


WHAT IS THE ALTERNATIVE?

MICROFINANCE

NAIC Other Communication

Communication with Other US Regulators:

- Miscellaneous calls and meetings

- NAIC-hosted quarterly conference calls with federal
banking & thrift regulators

Communication with Non-US Ins. Regulators:

- Individual state Memoranda of Understanding

- NAIC Multilateral Memoranda of Understanding

- Ad hoc discussions, e.g., FAWG chair discussion
with EU regulator regarding mortgage guaranty ins.

Much of the concern with sharing information is confidentiality. Having these types of Memoranda agreements helps to relieve some of those concerns and allow more sharing of confidential information.

The NAIC developed a model MOU on information sharing with the EU. To date, agreements based on this Model MOU have been signed between Nebraska-Germany (BaFIN), California-Germany (BaFIN), Iowa-Netherlands; agreements have also been signed between Delaware-UK (FSA) and Delaware-Ireland. Several other states have draft agreements with EU jurisdictions.

Ins. Regulator Communication

State-to-State Communication:

- Sharing of exam/analysis reports & findings

- Ad hoc discussions

NAIC Supported Avenues of Communication:

- FAWG presentation by domiciliary regulator

- NAIC database displays state decisions on change of control
requests (e.g., purchases of insurers)

- NAIC hosts interim meetings and conference calls between
states to discuss solvency or other concerns with individual
entities or groups (FAWG recommends)

FAWG presentation – domiciliary regulator addresses concerns, questions, recommendations of FAWG.

Form A database = decisions on change of control

NAIC Hosted Meetings: Other concerns, e.g., market conduct concerns (like AIG)

Coordinated Oversight

Coordination among State Insurance Regulators

- Financial statement disclosure of affiliated activities

(NAIC uniform format and electronic data capture)

Holding Company Organization Chart; material affiliated transactions

Investments in holding company entities

- Coordinated Analysis and Monitoring

Domiciliary states perform holding company analysis and coordinate with
other states as needed

- Coordinated Examination Option

Lead state(s) run the exam; other states rely upon this work
and/or participate

NAIC Exam Tracking Tool posts coordinated exam schedule and staff
and NAIC server hosts the online examination

Independent Function of Financial Analysis Working Group (FAWG):

Entity level analysis for “Nationally Significant Insurers”; advice to states

Group level analysis for large holding company systems

Analysis of events/situations that will materially impact the industry

Financial Statement Disclosure Notes:
Contains the Holding Company Org Chart (Schedule Y, Part 1); captures the material intercompany transactions (Schedule Y, Part 2)
All investment schedules have affiliated investment sections, as do the notes to financial statements;
The NAIC blank includes significant disclosure of affiliated transactions since those have historically been a common cause of solvency stress for regulated insurers.

Coordinated Examination Option:
Say “Option” because it is not a requirement or a given that a coordinated exam will be called.

Independent Function of FAWG:
Stress that this group is a peer review for the states’ analysis work; staffed only by experienced financial analysts
FAWG provides advice and recommendations to the states in performing their solvency oversight
If questioned about the Group Analysis, it is limited by what information we can get from the public disclosures or from other regulators
Example of Events that Materially Impact the Industry: subprime mortgage exposure review by FAWG.

US Supervision of Insurers

Supervision: Entity Level

State regulators’ legal authority and responsibility exist

at the individual entity level

Direct responsibility for the state’s consumers/citizens

Perform domiciliary entity (& holding company system as needed)

analysis quarterly; conduct exams a minimum of once every 5 years

Supervision: Holding Company System

Requires coordinated oversight with:

Other US state insurance regulators

Other US state and federal regulators

- Banking, Thrift, SEC, USDA, FEMA, FBIIC

Non-US insurance regulators

Transition from 1st Point (Entity Level Supervision) to 2nd Point (Holding Co. System):
However, since entities frequently become members of a holding company system, state insurance regulators must look beyond the entity level in performing their due diligence review of the domiciliary legal entity.

(FBIIC = Financial and Banking Information Infrastructure Committee, a group under the President’s Working Group on Financial Markets)

US Group Wide Supervision

Role of the NAIC in US group wide supervision

Overview of US Supervision of Insurers

Coordinated Oversight Among State Insurance
Regulators

Communication Among Insurance Regulators

Communication with Other Regulators

With a Clearer understanding of the overall role of the
NAIC in state regulation, let’s look a little closer at
the NAIC role in US group wide supervision.

SMI Work Plan – 5 Focus Areas

Capital Requirements

International Accounting

Insurance Valuation

Reinsurance

Group Regulation

SMI Work Plan

Analyze other financial supervisory modernization initiatives, to the
extent appropriate. Analysis should include

the Basel II international capital framework for banks and
implementation in the U.S.;

solvency work by the International Association of Insurance
Supervisors (IAIS);

solvency proposals under consideration in other jurisdictions,
including Australia, Canada, Japan and the EU;

accounting standards being developed by the International
Accounting Standards Board (IASB).

As an on-going process, and as details emerge from the EU,
complete the analysis of EU/S2.

Identify areas for U.S. regulators to consider including in the current
NAIC programs.

Evolution of the U.S. Solvency System - NAIC

We have developed a detailed and uniform financial regulatory
system in the U.S.

In the 1990s we created risk-based capital requirements and
have continued to improve the formula over time, including
adding stochastic modeling and trend tests.

SAP was codified in 2001 into a comprehensive guide and has
continued to be updated & improved since.

We are placing greater emphasis on Governance through a
Model Audit Rule.

We are proposing to modernize Reinsurance & Principles-
Based Reserving

What is clear is that we have been continuously
improving U.S. insurance regulation for many
years.

What we have on our plates now is an investigation
of new ideas and an opportunity to create the
Gold Standard of Solvency Systems through the
Solvency Modernization Initiative (SMI)!

Long-term work plan – continuous evolution

The work we will do will not only be a
Gold Standard for our system, but will determine
how we respond to U.S. International Activities.
We will be looking inward, but also dialoguing outward.

Accreditation Program

Financial Regulation Standards & Accreditation Program

Ensures baseline financial regulatory processes and practices in
each accredited state

Generates savings to the states and industry, through regulatory
reliance placed on accredited states

Reduces duplication of financial regulatory processes by setting
baseline expectations

Without the program, financial solvency regulatory processes and
costs would increase exponentially

States might not rely on each other to regulate licensed companies
domiciled in other states

Would result in millions of dollars in examination costs to the industry

Outside of the NAIC

State legislatures and state insurance
departments create and implement state laws
and regulations.

State insurance departments are charged with
the insurance regulatory functions.

Deviations from NAIC

NAIC Provides.....

Provide state insurance departments services and
support in the areas of:

- financial, actuarial, legal, technology, research,
market conduct and economic expertise.

NAIC maintains a Technology Center that houses ten
years of history for over 5,200 insurance companies,
and 4,000,000 insurance agents accessible by over
13,000 state insurance regulators via the internet or a
high speed, dedicated frame relay network.

Also provide information via the internet to consumers,
insurance industry and federal regulators.

The NAIC at Work

Committee Structure

Financial Solvency Initiatives

Model Laws and Regulation Development

Regulator and Consumer Education

State Accreditation Program

Regulatory Insurance Databases & Computer
Systems

IT Systems (data filing, licensing, rate/form
filings, & more)

NAIC

Created in 1871 by state insurance regulators to
address the need to coordinate regulation of multi-state
insurers.

NAIC members are the state insurance commissioners.

NAIC members have regulatory authority, but the NAIC
organization does not. NAIC staff provide immense
support to the U.S. insurance regulators who execute
state-based insurance regulation.

The NAIC provides a forum for the development of
uniform policy, including model laws and regulations,
financial reporting and RBC requirements.

Stock Tips for 2009

If you want to be make big bucks in
the last half of 2009, you may want
to be aware of the mergers that are
being predicted.

Polygram Records, Warner
Brothers, and Zesta Crackers will
join forces and become:

Polly Warner Cracker
3M will merge with with Goodyear
and will be known as:

MMMGood

Zippo Manufacturing, Audi Motors,
Dofaco, and Dakota Mining will
merge and become:

ZipAudiDoDa

FedEx is expected to join its major
competitor, UPS, and become:

Fed Up

Grey Poupon and Docker Pants are
expected to become:

Poupon Pants

Fairchild Electronics and Honey Well
is scheduled to become:

Fairwell Honeychild

529 Saving for College

Parents and
grandparents can
save large amounts -
- $250,000 per
beneficiary.

Allowed to grow and
compound tax free.

Funds are considered
to be a student asset -
- helps for financial
aid.

Use for qualified
educational expenses
such as
Tuition
Fees
Room and board

Saver’s Credit

The credit is available to
you if you:

are 18 or older, and

are not a full-time
student, and

are not claimed as a
dependent on
someone else's return,
and

Limited to $1,000 per
person

Available for contributions
to

401(k)
403(b)
Other qualified
accounts

401(k) and 403 (b) Plans

Salary reduction plan
- - pay no state or
federal income tax on
the amount deferred.

The employer deducts
2% to 10% percent of
your salary according to
your wishes.

May invest in:
Stock funds
Bond funds
Index funds

Pay taxes when you
make withdrawals at
retirement.

Pays out in a
Lump sum or
Monthly withdrawal
Penalty for early withdrawal.

Ask your human
resources office for
information.

Investment situations

1. You have $5,000 to invest. No other
information is available.

2. You have $4,000 that you’ll need six
months from now.

3. You inherited $10,000 from your great-aunt
who had suggested that you save it for your
old age.

4. You want to save for a 15-year-old’s future
college education.

5. You are just starting a career and can save
$50 per month for retirement.

The Savings Game

Your have $5,000 to invest. What is the
best choice for you?

Alternatives

Mattress

Savings Account

Certificate of Deposit

U.S. Government Savings Bonds

Money Market Mutual fund

Stocks

Stock Market Mutual fund

Forms of saving and investing

Savings accounts: provide a small but
steady return

Certificates of deposit: very safe, but
instant access carries a penalty.

Bonds: lending money to a corporation or
government, with higher return than bank
savings and CDs.

Stocks: part ownership in a company,
with higher risks and returns.

Real estate: the risks and benefits of
being a landlord.

Rules for Improving Your Financial Life

Rule 1 Get a good
education

Rule 2 Live below
your means

Rule 3 Save early

Rule 4 Buy and
hold common
stocks for the long
term

Rule 5 Diversify

Other Tips


Learn money-
management skills

Get married and
stay married

Mutual Funds

Mutual funds pool investors’
savings.

In effect, you own small amounts of
many different assets.

This is an example of diversifying.

Diversify

That means to take on many
small risks rather than one
large risk.

Any one stock or other asset
can easily lose money!

But holding a variety of assets
protects you against the risk
that any one asset would lose
money.

Characteristics of Millionaires

They live below their means.

Live in modest homes.

Drive used cars.

Shop at stores that offer good value.

They invest heavily in their
children’s education - - and not more than that.

They spend time on financial planning.

Investing In Stocks

If you want to be a millionaire, should you avoid the risky stock market ?

False.

Nearly 95% of millionaires own stocks.

Since 1926, stocks have increased 10%
at a compounded, annual rate of return.

10% return exceeds any other type of
investment.

Investing is stocks, however, does involve risk.

The Magic of Compounding

When you save, you get interest.

When you take the interest out and
spend it, it stops growing.

But if you leave the interest in so it
can grow you start to earn interest
on the interest you earned.

Interest on interest is money you
didn’t work for – your money made
it for you!

Small Savings Can Make A Difference

At age 18, you decide not buy a latte and a muffin each day.
You invest this $5.00 a day at 8% annual interest until you are 65.
At age 65, your savings from not smoking is over $900,000.

True.

$931,735

Because of the power of compound
interest, small savings can make a
difference.

8% is the annual return of a mutual
fund.

It pays to resist temptation and live
below your means.

Do The Most millionaires work in glamorous jobs, such as sports, entertainment, or high tech?

False.

Most millionaires work in ordinary
jobs.

Types of businesses include:

welding contractors

owners of mobile-home parks

paving contractors

Do more millionaires drive Cadillacs than Fords ?

False.

Ford is preferred by 9.4% of
millionaires.

Cadillac is preferred by 8.8%.

Lincoln is preferred by 7.8%.

Only 23% of millionaires drive a
current year (new) car.

Most millionaires are college graduates

True.

4 of 5 millionaires are college
graduates.

18% of millionaires have Master’s
Degrees.

8% have law degrees.

6% have medical degrees.

6% have Ph.Ds.

Wealth is measured by comparing assets and liabilities

People think an individual with assets valuing a million dollars or more is considered
to be a millionaire.

Is This True?

False.

Wealth is measured by comparing assets and
liabilities.

Assets are the values of what an individual
owns: home, car, savings, cash value of life
insurance, and so forth.

Liabilities are the money an individual owes:
mortgage, car loan, credit card debt and so
forth.

The difference between an individual’s assets
and liabilities is called net worth.