Private Sector Development
Mortgage Market Development
The Pragma Corporation is a recognized leader in primary and secondary mortgage market development in the former Soviet Union. We have successfully implemented the USAID-funded Financial Sector Initiative in Kazakhstan, which included a mortgage component. That successful model is now being used in Ukraine and Moldova on our USAID-funded Access to Credit Initiative.
Pragma offers the following expertise:
Conducting Certified Mortgage Lender Programs
The Certified Mortgage Lender (CML) Program provides professional training in residential mortgage lending for qualified commercial bank candidates. The CML Program was developed with USAID funding by the Association of Russian Banks, the Urban Institute, Fannie Mae and the IUE. It is taught in Russian. The goal of the CML Program is to build a community of recognized professionals interested in developing a modern system of residential mortgage lending and making mortgage lending a profitable banking product. The Pragma Corporation adapted the original IUE program for use in both Kazakhstan and Ukraine and has more than five years’ experience implementing it.
The CML program consists of a series of three five-day courses: “Basics of Mortgage Lending,” “Mortgage Loan Origination and Servicing,” and “Basics of Pricing and Risk Management in Mortgage Lending.” The program is based on a comprehensive study of all aspects of residential mortgage lending—insurance, housing appraisal, mortgage pricing, and management of mortgage banking risks. Special attention is given to loan origination technology, borrower underwriting, and calculation of loan payments. Participants are introduced to mortgage lending experience in the United States, Germany, and other countries, as well as various models of both primary and secondary mortgage market development.
Assisting Banks in Starting Mortgage Lending
The Pragma Corporation designs various activities to lower the risks and increase the transparency of mortgage lending. These activities include:
Tailoring mortgage loan instruments to various market conditions
Establishing standardized and transparent procedures
Introducing standardized mortgage loan
Introducing a system of contracts for legalizing mortgage transactions
Introducing standardized, software-driven mortgage loan servicing
Introducing procedures for handling problem or bad loans
Developing Mortgage Loan Guarantee Programs
Pragma has extensive experience developing Mortgage Loan Guarantee Programs that provide banks and non-bank financial institutions with insurance against borrower default. In assessing the appropriate institutional aegis several factors are considered: whether the mortgage insurer should be public, private, or public/private partnership; whether an existing institution or company should assume the Mortgage Insurance (MI) functions; whether the mortgage insurer should be monoline (that is, offering only MI); and how the legal framework for corporations or insurers fits the needs of a Mortgage Loan Guarantee Program. Once the feasibility of MI is established, Pragma jointly with the bank or non-bank financial institution develops a Business Plan determining the level of coverage.
Key decisions are the level of coverage; the capital/risk ratio, and treatment of reserves. A Premium Model is used to analyze the types of mortgage insurance products that might be offered, and the premiums that should be charged for each. Three market scenarios—low, high, and moderate risk, which are used in a weighted fashion in setting premiums—are defined for use in the Premium Model and Business Plan. The logic of this approach stems from the long-term nature of the pricing and demand decisions.
Developing Secondary Mortgage Markets
By its very nature, mortgage lending creates a mismatch between a bank’s liabilities (demand deposits, which are short-term) and its assets (mortgages, which are long-term). Maturity mismatch is a serious issue in banks and non-bank financial institutions. To avoid maturity mismatch, banks engaged in mortgage lending should develop funding sources at terms longer than those of their deposit bases. When properly structured with standardized underwriting, mortgages can be bundled into mortgage pools and pledged as security for bonds, either mortgage-backed securities (MBS) or covered bonds, which reduce maturity mismatch. Pragma designed, priced, and helped register and place the first mortgage-backed bonds in the newly independent states. Pragma also helped draft most of the new statutes and amendments to laws that now govern mortgage bond issuance in Kazakhstan, including amendments to bankruptcy statutes of the Civil Code, which now exclude pledges of mortgage pools from bankrupt estates.
Developing Mortgage-Related Life Insurance Products
Life insurance can be used to enhance the creditworthiness of borrowers taking out a mortgage, whether residential or agricultural. Making the lender beneficiary to the borrower’s life insurance policy removes a significant risk from the lender, placing the risk with an institution more capable of actuarially assessing its cost. Mortgages thus insured bear interest rates more closely related to the true credit risks of the transaction. Pragma provides actuarial assistance, cost projections, products, premium estimates, payment options, mandatory versus voluntary coverage analysis, and investigates the legal and regulatory issues related to this type of insurance.
Building the Capacity of Real Estate Appraisal and Brokers’ Associations
Pragma designs a training and capacity building program to bring the associations into compliance with international norms. Pragma also
facilitates these associations’ membership and participation in international appraisal and brokerage federations.
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