Philippines - Housing Finance Technical Assistance Loan Project

Report No. PID6762 Project name Philippines-Housing Finance Technical (@) Assistance Loan Region East Asia and Pacific Sector Finance (Housing) Project ID PHPE50596 Borrower(s) Republic of the Philippines Implementing agencies Housing and Urban Development Coordinating Council (HUDCC) Secretariat Contact: HFTA Project Implementation Unit Attn: Imelda 0. Parilla 6th Floor Atrium Building, Makati Avenue, Makati City Metro Manila, Philippines Telephone: (632) 811-4220 Fax: (632) 811-4158 Environment Category C Date this PID Prepared February 2000 Projected Appraisal Date August 1999 Projected Board Date July 2000 Country and Sector Background 1. In spite of a sharp decline in the value of the Peso since July 1997 (from P26 to P40.4 per US dollar), the Philippine economy weathered the regional crisis fairly well. GDP growth rebounded to 3.2w in 1999 from a negative 0.69 rate for 1998, while inflation returned to single digits, averaging 6.6w for 1999. However, there is still considerable excess capacity, non-performing loans in the banking sector have risen to almost 15w, and credit to the private sector has remained sluggish. In addition, a large share of Philippine households were affected by job losses or reductions in real wages, leading to a partial reversal of earlier successes in poverty reduction. 2. These pressures have also been felt in the housing finance sector. Real estate values have declined and both homeowners' and developers' capacity to service loans has been adversely affected. This has compounded fundamental concerns that have emerged in the housing over some time, largely due to the Government's direct interventions in the sector in the form of subsidized housing development, mortgage and construction lending, and the provision of insurance and guarantees accompanied by generous tax breaks. At the institutional level, a housing crisis has emerged as the National Home Mortgage Finance Corporation (NHMFC)-the Government's largest housing lender-has become insolvent and is unable to honor its commitments. The use of the key social security agencies and a specialized housing fund (the Home Development Mutual Fund, or Pag-IBIG) to resolve the funding crisis within the housing sector, could begin to undermine their financial standing. At the  same time, there is still considerable unmet demand for housing. 3. Addressing housing needs has long been an important element of the Philippine Government's Social Reform Agenda. Beginning in 1996, GOP embarked on a strategy that was increasingly oriented towards market-based rates of interest for housing loans, and proposals were developed to address affordability concerns for targeted beneficiaries through transparently budgeted subsidies. Government programs have also been moving in recent years toward greater involvement of private lenders in originating and servicing mortgages. In addition, GOP decided last year to study and catalyse the establishment of a mixed-ownership, privately managed, secondary mortgage corporation to replace the insolvent NHMFC. 4. Nevertheless, in October 1999, there was a change in key policy-making officials in two of the principal housing agencies, a new Presidential Commission on Mass Housing was created and vested with responsibility to make recommendations on housing policy to the President, and an ambitious new housing loan program was announced, whose ramifications with regard to subsidy costs and burdens remain to be clarified. In light of these developments, further technical discussions have been proposed as a precursor to the approval and implementation of the Housing Finance TA project. Project Objectives 5. The overall goal of the HFTA project would be to assist in developing an integrated, efficient and self-sustaining housing finance system by redefining the Government's role, responsibilities and risks in promoting shelter solutions for Philippine households. This would be achieved by pursuing the following development objectives: 1. Assisting in the development of the primary and secondary mortgage markets; 2. Assisting in the rationalization of public housing finance institutions; 3. Assisting with the development of a transparent and cost-effective housing assistance program, and strengthening GOP's policy formulation and analytical capability on housing sector issues, so as to enable Government to reorient its role in housing towards creating a conducive environment for the private housing market. Project Description 6. The proposed project would have the following three components: Developing the Primary and Secondary Mortgage Market: This component has two distinct sub-components. The first is a Legal and Regulatory Framework component to develop explicit proposals for rationalizing the legal, regulatory, and supervisory framework (including changes in tax treatment) for mortgage loan origination, the creation and enforcement of security interests, other devices for consumer protection, and the treatment of Asset-Backed Securities (ABS). The component would also assess options for establishing ancillary finance services to improve primary market operations. The second is an SMI component to carry out a feasibility study for the establishment of a privately managed secondary market institution (SMI), undertake strategic business planning and action planning for the SMI, and implement the same. The feasibility study would likewise include options for the recovery of the technical assistance costs of the component, e.g. to be capitalized as government equity in the SMI. Rationalization of Government Housing Finance Institutions. This component - 2 -  has three sub-components: (a) for NHMFC, to assess options for the appropriate disposition of the functions, (e.g. under the CMP and Abot-Kaya Pabahay Fund), and the assets and liabilities of the Corporation. (b) for HIGC, to develop a plan for restructuring and improving the actuarial soundness of its credit enhancement operations. Such a plan would introduce risk-based pricing strategies for guarantees, guide capital adequacy and reserve policies, and refocus guarantees towards lower-denomination loans in ways that are actuarially sound, and consistent with the establishment of the proposed privately managed SMI and overall socialized housing objectives. Finally, (c) for PAG-IBIG, to develop an asset-liability management model to enhance its ability to evaluate the new, more complex financial transactions being undertaken as part of the effort to meet savings withdrawals in 2001 and beyond, as well as the financial/fiscal implications of converting the PAG- IBIG fund into a retirement provident fund. Reforming Subsidies and Strengthening Policy Formulation. This component is designed to assist the government in developing a new housing assistance strategy for socialized housing, the cornerstone of which would be the development of a Homeownership Assistance Program and a corresponding trust fund that would primarily be devoted to give direct subsidies to low-income households borrowing in the mortgage market. In addition, a restructuring/expansion of the government's low-income housing program portfolio would be explored (e.g. mortgage insurance) together with strategies to develop the private rental market and refocus housing policy instruments towards low-income households without access to the formal rental or homeownership market (e.g. shifting policy to benefit the Community Mortgage Program and other community-based lending programs). Capacity-building for housing policy research, analysis and formulation within the HUDCC Secretariat and key stakeholder agencies would also be undertaken. This would include support for establishing an operational information data base at HUDCC for sectoral monitoring and policy formulation, workshops, internal and external training, and retention of consultants to undertake specific studies on specialized issues. Project Financing 7. The proposed financing for the project is US$4.6 million through an IBRD loan, and US$0.5 million from GOP counterpart funds, for a total project cost of US$5.1 million. The project would support financing of technical assistance activities including: financing of local and international consultants, financing of focused internal and external training for staff of specific housing agencies or regulatory authorities, and possible secondment of specialized staff from foreign housing or other relevant agencies via twinning arrangements. Project Implementation 8. The Secretariat of the Housing and Urban Development Coordinating Council (HUDCC) would be the lead implementing agency, and would have prime responsibility for overall project coordination and execution, in consultation with the Department of Finance (DOF) as the Representative of the Borrower- the Republic of the Philippines. A high-level Housing Finance Reform Steering Committee (HFRSC), chaired by the Chairperson of HUDCC, would provide guidance and oversight on key policy issues. A project implementation unit (PIU) housed in HUDCC would perform the technical coordination functions and oversee - 3 -  day-to-day implementation of the project. Interagency technical working groups (TWGs) for each component would function as component-specific policy advisory groups for the PIU that would propose TORs, liaise closely with consultants, and help to vet, disseminate and build consensus on findings and recommendations emerging from the TA. Finally, the HUDCC Prequalification Evaluation and Awards Committee (PEAC) would be responsible for evaluation of bids for goods and services procured under the project. Project Sustainability 9. The project is expected to have a lasting impact on the housing finance sector in the Philippines, as well as on broader financial and capital markets. By addressing the policy framework in a comprehensive manner and rationalising the role and risks assumed by government, the project is expected to result in a more sustainable housing finance system. A key factor to ensure sustainability is the continued involvement of a diverse group of stakeholders in project implementation and policy formulation. Particularly, commitment to the project by the GOP and key public agencies will be critical. In addition, the following assurances needed prior to Board Approval: (i) the project coordination and implementation process will not be politically interfered with; (ii) the market-oriented approach that is embodied in the Medium Term Philippine Development Plan for Shelter-promulgated in June 1999-and reflected in the design of this proposed Housing Finance TA project, would be fully supported and would continue to guide housing sector policies; and (iii) the incentives, financial and technical resources, and political support are in place to make sure that the implementing agencies are committed to following through on the key policy reforms and are permitted to technically evaluate and decide on options developed. A proposed related World Bank loan for Contractual Savings and Housing Finance Reform would strengthen support for sustainable policy and institutional reforms. Lessons Learned from Past Operations 10. The most important lesson learned from previous experience in lending to this sector relates to the risks of political interference and to the need to ensure that the implementing agencies are committed to following through on key policy reforms and have adequate political backing. During the design phase, this project has benefited from considerable ownership and support by Government. The project has been approved by the Philippine Investment Coordinating Committee and HUDCC has announced a Medium Term Philippine Development Plan for Shelter that proposes a program of reforms which the project would help to implement. Further technical discussions are proposed prior to Board Approval with a view to confirming Government's commitment to the market-oriented reforms envisaged under the project, and a continuing dialogue would be maintained on housing policy issues after approval of the project. Poverty Category 11. The project is expected to assist the poor through expansion of affordable housing via more efficient utilization of budgetary resources, and increased access of low- and middle income families (in about the fourth to seventh deciles) to affordable housing through improved targeting of direct transfers to beneficiaries and increased private mortgage financing. The poorest households (those in the lowest four deciles) would benefit from - 4 -  improvements in the rental and cooperative housing markets. However, the project does not provide targeted poverty interventions. Environmental Aspects 12. The project is in Environmental Category C. The project would focus on reforms in housing finance, and provides no funding for construction which may result in disruptions of income or housing of existing populations. Program Objective Categories Major Sector: Housing Finance (1009) Poverty (10%) Human Resource Development (20%) Economic Management (10%) Environment (0%) Financial Institutions (10%) Women in Development (0%) Debt Adjustment (09) Natural Resources (0%) Sector Reform (50%) Contact Points: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Task Manager McDonald Benjamine The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1674 Fax: (202) 522-3454 Note: This is information on an involving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending Fabruary 18, 2000. - 5 -