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 country.
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.
