Final Report: Development of Sustainable Housing Finance Market in Armenia

“Development of a Sustainable Housing Finance Market (Phase I)” in Armenia KfW Project Reference: BMZ ID 2005 70 135. A+F 2005 340 and BMZ ID 2003 70 171

Final Report June 26, 2006 – June 25, 2009

Mher Yedigaryan Pamela Hedstrom Eugen Doce

Frankfurt School of Finance & Management Sonnemannstrasse 9-11 60314 Frankfurt a.M. Tel. +49-69-154008-696 Fax +49-69-154008-670 international@frankfurt-school.de http://www.frankfurt-school.de

Table of Contents 1 1.1 1.2

Introduction ....................................................................................................1 Brief overview of the Armenian mortgage market (2005 – 2009).................................. 1 Summary of the Housing Finance Refinancing Window Program ................................... 2

2 2.1 2.1.1 2.1.2 2.1.3 2.1.4 2.1.5 2.2 2.2.1 2.2.2 2.2.3 2.2.4

Progress on Individual Measures of the Program ...........................................4 Accompanying Measures – Tasks Accomplished and Next Steps ................................... 4 Development of Training Courses ................................................................................. 4 Assistance to the Project Management Unit.................................................................. 5 Identification of Software Packages............................................................................ 11 Contractual Savings Schemes for Housing (CSSH) ....................................................... 12 Minimum Quality Standards (MQS)............................................................................. 13 Training Measures – Activities Conducted and Results Achieved ................................. 14 Instructor Training...................................................................................................... 14 Conducting the Training Courses................................................................................ 15 Stipends .................................................................................................................... 15 Putting into Practice................................................................................................... 16

3

Conclusions and Recommendations ..............................................................18

List of Annexes Annex 1. GAF-HF Program Partner Financial Institutions Annex 2. GAF-HF Program Success Indicators Annex 3. GAF-HF Program Loan Portfolio Statistics

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Abbreviations AMD

Armenian Drams

CBA

Central Bank of Armenia

CSSH

Contractual Savings Scheme for Housing

EMG

Emerging Markets Group

FBCF

Financial Banking College Foundation

FS

Frankfurt School of Finance & Management

GAF-HF

GAF Housing Finance Program

GAF-PMU or PMU

Project Management Unit of German-Armenian Fund Institution

GAF SC

Supervisory Council of German-Armenian Fund

HFTC

Housing Finance Training Course

HIL

Home Improvement Loan

IT

Information Technology

IUE

Institute of Urban Economics

KfW

A government owned financial institution of the Federal Republic of Germany

LDA

Loan Disbursement Agreement

LMS

Loan Monitoring System

LTS

Loan Tracking System

LTV

Loan-to-Value Ratio

ML

Mortgage Loan or Qualifying Mortgage Loan

MLA

Master Loan Agreement

MLRG

Mortgage Loan Refinancing Guide

MMPAA

Mortgage Market Participants Association of Armenia

MOF

Ministry of Finance

MQS

Minimum Quality Standards

NMC

National Mortgage Company

OPIC

Overseas Private Investment Corporation

OTI

Overall Debt-to-Income Ratio

PFI

Partner Financial Institution

PTI

Payment-to-Income Ratio

RLD

Request for Loan Disbursement

TOT

Training of Trainers

UFSD

Urban Foundation for Sustainable Development

UI

The Urban Institute

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1

Introduction

The report is aimed at reviewing and summarizing the entire consultancy period (06/2006 - 06/2009) as well as making appropriate recommendations using the structure of sections of the GAF-HF Program Quarterly Progress Reports. It describes and assesses the overall development of the Armenian housing finance market and the Program’s respective contributions. Progress with regard to the Program’s success indicators and achievements under the Accompanying and Training Measures are presented. On 8 June 2009, Frankfurt School organized in Yerevan a closing event with the participation of all stakeholders involved in the Program. The event was part of phasing-out activities under the Program and aimed at presenting the achievements of this initiative.

1.1 Brief overview of the Armenian mortgage market (2005 – 2009) The development of the Armenian mortgage market should be analyzed in two distinct periods: prior to the global credit crisis (November 2008) and the current environment. Legal reforms initiated by the Central Bank of Armenia (CBA) and the Government in 2004 – 2005, stable macroeconomic conditions and the increase in the population’s disposable income resulted in rapid growth of the mortgage market as observed through an increase in the number and volume of mortgage loans originated. Graph 1 below shows the mortgage market dynamic during the noted period.

Graph 1. The Armenian Mortgage Market Dynamic

Source: CBA Monthly Bulletins Another indicator of Armenian market development was increased competition in the mortgage sector.

Compared with 2005, the number of mortgage lenders has increased from 10 to more then 20. Prior to the end of 2008, almost all lenders (except specialized credit organizations) offered mortgage products to their clients. In line with the increase in competition, lenders improved mortgage loan terms and conditions, which increased affordability and widened the base of potential clients. In particular, loan maturity extended to 15 years; the required down payment declined to 30 percent; and interest rates decreased to 12 percent.

Improving economic conditions and the stable macroeconomic situation resulted in increased activity in the Armenian housing market; not only in Yerevan but in nearly all regions as well. During the observed period the monthly volume of total purchases in the housing market fluctuated within the range of 3,000 to 5,000 (depending on seasonality) and the prices rose by 80 – 300 percent (depending on location – the percentage Development of a Sustainable Housing Finance Market (Phase I) in the Republic of Armenia Final Report

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changes were higher in the regions)1. This, in turn motivated lenders to broaden their geographic reach beyond Yerevan and grant mortgage loans in nearly all regions2.

The situation in both the mortgage and housing markets started worsening in November 2008 when the impact of the global financial/economic crisis reached Armenia. The slow down in economic activity (especially in the mining sector) and the decline in remittances from abroad led to a reduction in demand for mortgage loans and a decrease in transactions and prices in the housing market. The worsening economic situation increased the riskiness of all types of banking activities (including mortgage lending), which resulted in lenders tightening mortgage loan supply and lending conditions. In particular, the interest rate charged increased by 300 - 500 basis points and the required down payment increased to 50 percent. The other factor that affected the supply side was the absence of long term resources. As a result, outstanding balance of mortgage loans declined slightly by the end of 2008.

However, as mortgage lending is one of the primary means for the majority of the population to finance their home improvement needs, demand for mortgages remained high and exceeded supply. This is illustrated in that despite more restrictive lending conditions by the end of April 2009, the volume of mortgage loans expanded by around 4 billion AMD compared with the end of 2008, an increase of around 4.5 percent. It is anticipated that by the end of 2009 the growth of the mortgage market will stabilize as the economy revives. From this point the existence of various programs/projects directed at providing resources and appropriate lending techniques may be crucial for encouraging the mortgage market recovery. It should be noted that the Central Bank of Armenia established in June 2009 the National Mortgage Company (NMC), a universal credit organization. The new company, fully owned by CBA, will provide liquidity to mortgage lenders through refinancing of long-term mortgage loans. It is planned that in future the company will take the role of a secondary operator in the market by attracting log-term resources through issuance of securities backed by mortgage loans.

1.2 Summary of the Housing Finance Refinancing Window Program The “Development of a Sustainable Market for Housing Finance (Phase I) in the Republic of Armenia� Program sponsored by KfW commenced in June 2006. The main objective of the Program was to increase access for private households to mortgage loans through the expansion of the use of Armenian Drams (AMD) in mortgage lending and the extension of the maturity of mortgage loans to at least 10 years. Further policy goals included strict adherence to Armenian Minimum Quality Standards (MQS), expansion of housing credit outside Yerevan, targeting relatively moderate-income households and laying the foundations for the development of a secondary market.

Under this Program, KfW assisted in the establishment of the Housing Finance Refinancing Facility funded by a loan of 12 million euro. The Program Management Unit of the German-Armenian Fund (GAF-PMU or PMU) is administering the disbursement of these funds through a Refinancing Window to qualified lenders that are banks and non-bank credit organizations (the list of Partner Financial Institutions is presented in Annex 1). The first Refinancing Window was opened at the end of 2006 with the first disbursement made in February 2007. In total, during the period from February 2007 until June 2009, 928 mortgage loans totalling 5,568.0 million AMD were refinanced through the Refinancing Window.

Graph 2 below presents the dynamic of the Program funds utilization for each quarter.

1

Source: the Cadastre Committee official monthly publications.

There are no official publications concerning mortgage lending geographic distribution statistics. However, according to the team’s estimations around 20 - 25 percent of the Armenian mortgage portfolio was originated outside Yerevan.

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Graph 2. Number and Volume of Mortgage Loans Refinanced per Quarter

Source: GAF-HF Program statistics In addition to providing long term resources to the partner financial institutions (PFI), the Program used other tools to achieve its objectives. These included (but were not limited to) introducing and implementing mortgage loan quality standards, initiating a methodology for borrower underwriting, organizing trainings for financial institution staff, and setting requirements for mortgage loans, etc. The broad range of activities implemented has had a positive effect not only on the Program’s success but also on the entire mortgage market. In particular, the establishment of mortgage lending standards and the implementation of the loan refinancing scheme introduced new concepts in the Armenian mortgage market and provided an impetus for moving mortgage market development to a new level. The other benefits of the Program included the extension of mortgage loan maturities, increased competition among lenders in the mortgage market, expanded mortgage lending volume outside Yerevan, and improved professionalism of financial institution staff. The Program Success Indicators are presented in Annex 2.

The Frankfurt School of Finance and Management (FS) team provided technical support to the GAF-PMU during the implementation of the Housing Finance Refinancing Facility project. The consulting services under the Program commenced on 26 June 2006 and covered all aspects of the Program, starting with assistance to the PMU in establishing the Refinancing Window and its operational procedures, setting up structures and systems for running and monitoring the Program, selecting partner financial institutions, developing and conducting training courses for PFIs (including trainings outside Yerevan), periodically refining the training materials, and providing consultancy to PFIs in implementing the Program requirements, etc.

In general, when assessing the Program achievements and results, it can be stated that the combination of long term funding and technical assistance provided a platform for the further development of the Armenian mortgage market.

The next section of the report presents the Program objectives under the individual activities and a brief description of tasks accomplished by the team under each. These are followed by brief narratives discussing key points and the team’s further recommendations.

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2

Progress on Individual Measures of the Program

2.1 Accompanying Measures – Tasks Accomplished and Next Steps 2.1.1 Development of Training Courses The objective of this activity was to develop a modular training course for loan officers modelled along the Armenian MQS. This was done in cooperation with the Institute of Urban Economics (IUE) and the Financial Banking College Foundation (FBCF).

The development of the Housing Finance Training Course (HFTC) for loan officers started immediately after the launch of the Program. The course objective was to build the capacity of financial institutions to undertake mortgage lending using standardized, transparent procedures for both borrowers and lenders. The experts of the Institute of Urban Economics designed the course on the basis of the Certified Mortgage Lender (CML) course that they had implemented in Moscow and other countries. The team worked closely with the international experts to adapt the course to the Armenian MQS and local market conditions.

The HFTC course consisted of three main modules: Basics of Mortgage Lending, Origination and Servicing of Mortgage Loans using the MQS, and Risk Management and Funding Practices for Mortgage Loans. The curriculum covered the methodological, economic and legal aspects of residential mortgage lending, evaluation and management of lender risks as well as pricing issues. Special attention was given to loan origination technology, borrower underwriting, and payment calculations. The course included case studies, computer skillbuilding sessions and practical simulations of real lending situations. The course was concluded with a final exam that covered all material taught.

Based on the HFTC for loan officers, a course for bank management was developed. The HFTC for management was more compact and targeted those professionals with close links to the mortgage loan business – members of the asset-liability management or credit committees, the treasury or risk management departments, as well as senior management with overall responsibility for consumer lending.

After conducting the first sessions, refinement of the course materials to changes in the local environment and participant needs was one of the team’s main tasks under this activity. Based on feedback received from participants and their own observations the team revised the initial materials to bring them closer to lender needs and included additional materials/sessions beneficial to loan officers. The revised course was offered by the FBCF in November 2007. The mortgage training expert from Institute of Urban Economics participated in the course and viewed it positively. The team made a final review of the course materials during the First Quarter 2009 to reflect some of the lessons learnt from the subprime crisis and to stress the importance of good lending practices. The team handed over the latest version of the materials to the FBCF so that the latter can independently organize the HFTC on an ongoing basis after the Program is over.

Within the scope of the Program objective – to assist mortgage lending development outside Yerevan – the team adapted the HFTC materials to organize courses for loan officers outside Yerevan in 2008 (in Gumri and Vanadzor). Subsequently, the number of applications and the number of mortgage loans granted in the regions increased (details about lending in the regions are presented in the next section).

In addition to the housing finance courses, a risk management course was developed and conducted under the Program. To meet the requirements and expectations of the financial institutions, the course materials were developed after needs assessment was conducted by the FS experts. During the needs assessment, the experts met with the CBA, GAF-PMU, all the PFIs, other financial institutions, auditors, banking software vendors and other related entities. The course, which was offered in June 2008, covered all aspects of risks relevant to the Armenian financial system, including Liquidity Risk Management, Interest Rate Risk Management, Foreign Development of a Sustainable Housing Finance Market (Phase I) in the Republic of Armenia Final Report

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Exchange Risk Management, and Risk-based Product Pricing. Later on, in October 2008, a joint course was offered in cooperation with the USAID-sponsored Financial Sector Deepening (FSD) Program. In addition to the aspects covered in the first course, the new curriculum included the topics of Credit Risk Management and Basel II (including scoring and IRB approach)3.

Statistics on courses held and the number of participants are presented under the Activity “Conducting the Training Courses” (Section 2.2.2). All courses offered by the team together with the FBCF were evaluated by the participants. The importance of organizing these courses was assessed at around 9 points on average (on a 10 point scale) and the aggregated feedback received indicated that both the housing finance and risk management courses were very important for improving financial institution efficiency.

Recommendations: Based on the experience gained while offering the courses the team’s main recommendation is that the course materials should be revised on a periodic basis. The revision of the materials should be directed to meeting potential participant needs, as well as to adapting the materials to changes in the lending environment. Feedback received from participants is of crucial importance and it is recommended that the FBCU and PMU obtain comments directly from HFTC participants. This can be done through analysing participant evaluations; it is advisable that the PMU has its own assessment form for interviewing the course participants independently from the FBCF, at least for courses sponsored by them during meetings with PFIs. Also, it is recommended that the PMU conducts some evaluations 1 - 2 years after the training to gauge how effective/useful the training was in participants’ jobs.

2.1.2 Assistance to the Project Management Unit The objective for this activity was to assist the GAF-PMU in setting up structures and systems for running and monitoring the Program, so that the GAF-PMU is able to operate the Program on its own after the consultancy services are over.

The overall strategy of the technical assistance provided by the team to the GAF-PMU was guided by the principle that the required support on each particular task was delivered in a manner assuring that in the future the GAF-PMU will be able to: 1. Do similar tasks on their own, or 2. Use the results of the team’s work for a long period without making any essential changes.

In performing the strategy, the team worked closely with the GAF-PMU; all tasks undertaken by the team were discussed with the GAF-PMU in detail during the implementation process. In areas that were new for the GAFPMU, the team’s assistance included training the staff. It was very important for the team to be certain that the methodologies for all of the consultancy’s outputs were acceptable and understood by the GAF-PMU staff.

In fulfilling its responsibilities under this activity the team provided assistance to the PMU under the following three areas: 1. Program start-up, 2. Establishment and operation of the Refinancing Window, and 3. Assistance on Program adjustments and development during the entire duration of the consultancy.

3

The joint course was held at the beginning of October 2008, where part of the course was taught by the FS local experts and the other part by the EMG international expert.

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The first area included assistance in developing the Program’s operation scheme including definition of eligible mortgage loans, preparation of refinancing program presentation materials for lenders, determination of criteria for partner financial institution eligibility, and organization and implementation of the tender.

Based on the results of the tender held in 2006, eight financial institutions were recommended as Partner Financial Institutions. It is notable, that some of the selected financial institutions did not have any experience in mortgage lending and started their activity in this market under the Program. The team started working with the chosen PFIs immediately after their selection (more details are presented under the Activity “Putting into Practice” in Section 2.2.4).

Three more organizations were shortlisted and it was suggested that these institutions join the Program at a later stage after proving their ability to meet the Program objectives. These lenders were re-evaluated during the First Quarter 2007 with a particular emphasis on their ability to originate mortgage loans that would be in compliance with the MQS and the Program’s target market – low to moderate income households in Yerevan and the marzes (regions)4.

The second area included assistance in preparation of the Master Loan Agreement, establishment of the Program’s operation scheme, development of the Loan Tracking System, training of the PMU staff, preparation of the Fund Allocation and the Program Interest Rate strategies, secondary underwriting of submitted loans, auditing of refinanced mortgage loans, preparation of liquidity forecasts, and preparation of analyses as requested by the Supervisory Council and/or needed for supporting recommendations made by the team (mortgage loan structure of the banking system, real estate market recent developments, etc.).

For the smooth operation of the Program the team developed the Mortgage Loan Refinancing Guide (MLRG), which contained eligibility criteria for mortgage loans, detailed procedures for the allocation of funds, methodology for underwriting in accordance with the MQS, secondary underwriting procedures of mortgage loans submitted to the PMU to ensure that they meet the Program standards, refinancing loan parameters, mortgage loan servicing procedures including arrears management, monitoring and reporting requirements including definition of data and formats to be provided to the PMU based on loan-level data from the PFIs, audit guidelines for use by PMU auditors when reviewing PFI loan servicing operations, and the Minimum Quality Standards (MQS). In addition, the Guide contained numerous examples of calculations and various underwriting situations.

To standardize the Program interest rate setting process, the team developed a methodology for making recommendations on the rate level. The methodology is based on analyses of the major market rates (deposit, lending, Government securities yields, CBA policy rates, etc.) and sets upper and lower benchmarks within which the Program rate has to be set.

To assure the quality of refinanced loans the PMU started auditing PFIs under the Program. The first audit was done in May 2009 with the team providing assistance to the PMU’s auditors. Results of the audit showed that the loans are of high quality and in compliance with the Program requirements.

To monitor the PMU’s cash flows, the team developed the Program’s cash flow forecasting model, which has been used in making recommendations to the Supervisory Council on setting the quarterly allocations as well as for projecting the PMU’s budget.

The third area of the assistance included the Program’s further development and meeting changing conditions in the existing environment. In particular, tasks undertaken included amending the Mortgage Loan Refinancing Guide (improvements in the MQS and revision of mortgage loan eligibility criteria), preparing recommendations for the improvement and development of the Loan Tracking System functionality (details are presented under the Activity “Identification of Software Requirements” in Section 2.1.3), developing the new allocation mechanism, 4

These institutions were included in the Program during 2007 after due diligence was conducted by the team together with the PMU staff.

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drafting the concept of granting the CBA’s consent to PFIs for alienating a material part of their assets, and preparing recommendations on the inclusion of new financial institutions in the Program, etc.

A new allocation mechanism was introduced during the Third Quarter 2008 with the objective to encourage proactive PFIs and impose penalty measures on dormant PFIs. The other objective of the new mechanism was to make the Program’s cash flows more predictable. Under the new allocation mechanism the PMU issues commitments for each PFI (based on the PFI’s requests) and PFIs are obliged to pay a commitment fee if their allocations are not used within the quarter. As was the case previously, the unused quarterly allocations will be available to those PFIs that exceed their allocations. PFIs have the right to accept or reject the commitment.

Rejection of a quarterly commitment may not affect the PFI’s right to submit subsequent requests under the Program.

In addition to providing assistance on specific issues and the Program’s daily operations the team paid attention to the PMU staff training. In particular, the PMU staff participated in the HFTCs as well as in the training of trainers course organized for local trainers. A special workshop on cash flow projections was organized during May 2009 specifically for the PMU staff to enhance their capabilities in general cash-flow modelling, budgeting, inflow/outflow matching, sensitivity analysis, as well as improving the existing module in the IT system.

Suggestions for improving the existing module included drafting of a guide for documenting current model assumptions and the base of calculations as well as addressing the balloon payment characteristic of the loan agreements with the PFIs. Additionally, the team closely followed the Program’s lending activities to assure that the funds utilization was in accordance with accepted principles as well as to assess the achievement of Program objectives. The following sections present the Program funds utilization and each PFI’s activity under the Program during the period from February 2007 (the month of first disbursement) until June 2009.

Description of the Program’s Lending Activities Utilization of the Program Funds. As was noted earlier, the first Refinancing Window was open in December 2006 and the first disbursement of the funds was made in February 2007. The start of the Program was mixed. Although the team was working closely with PFIs in bringing their internal procedures in compliance with the Program requirements as well as training PFI staff (prior to opening the window three HFTCs for loan officers were organized) PFIs needed some time to develop origination processes for mortgage loans in accordance with the Program requirements (particularly related to borrower underwriting and collecting required documents). The other factor that affected the start of the Program was seasonality – historical experience shows that both the financial and real estate market activity slows during January/February. In total during the First Quarter 2007 six PFIs submitted 49 loans totalling 302 million AMD thus utilizing only 55 percent of the quarterly allocation (551 million AMD).

Participation of PFIs in the Program accelerated during the Second Quarter 2007 with the utilization of the Program funds exhibiting an upward trend which mirrored the situation in the economy. Compared with First Quarter 2007 the total volume of loans refinanced increased by more than 200 percent and comprised 634.7 million AMD. In total, 343 loans totalling 2,040.8 billion AMD were refinanced during 2007. During 2008 the utilization of the Program funds increased by more than 20 percent and totalled 2,464.7 billion AMD (432 loans). The graph below represents the number and volume of loans originated under the Program on a monthly basis since the first disbursement.

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Graph 3. Number and Volume of Mortgage Loans Refinanced

The ascending tendency of the Program funds utilization continued until November/December 2008 when the influence of the global crisis reached Armenia. Although the volume of loans submitted in December 2008 was high the origination of these loans started in October/November 2008. Slowing economic activity, depreciation of real estate and uncertainty about future developments resulted in almost all PFIs reviewing their strategy in the housing market and correspondingly their activity under the Program. Some PFIs entirely terminated mortgage lending while others limited their activity in this market by providing only a few loans under the Program. At the same time, all PFIs tightened their mortgage lending conditions which in turn negatively affected the demand for mortgages. As can be seen in Graph 3 above the volume of loans submitted in January 2009 declined sharply compared with December 2008.

During the First Quarter 2009 only two financial institutions (Armbusinessbank and First Mortgage Company) continued their active performance under the Program (details on individual PFI participation in the Program are presented in the next section). Moreover, absence of internal resources and the market-wide decrease in mortgage loan supply resulted in these PFIs accelerating their participation under the Program to a higher level than before the crisis.

The Second Quarter 2009 showed some signs of recovery in the overall mortgage market and particularly in Program funds utilization. During April/May 2009 nine PFIs utilized around 66 percent (475.5 million of 717.0 million) of the total quarter allocation. The team expects that by the end of the quarter PFIs will be very close to full utilization of the quarterly allocation.

Since the implementation of the Program PFIs originated 928 mortgage loans utilizing 5,568.2 million AMD. Table 1 below summarizes key characteristics and structure of the Program loan portfolio. Further details on the Program loan portfolio are shown in Annex 3.

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Table 1: Characteristics and Structure of the GAF-PMU Program Mortgage Loan Portfolio

Combined Portfolio Submitted to PMU, mln AMD

Purchase Loans

Renovation Loans

5,568.2

2,878.4

2,689.8

Number of Loans

928

389

539

Weighted Maturity

130

132

128

Weighted Interest

13.7%

13.2%

14.1%

Average LTV

39.0%

57.3%

29.1%

6.0

7.5

5.0

Average Loan Size, mln AMD Total Allocation, mln AMD % of allocation usage

6,593.1* 84.5%

*this number is higher because of the recycling of funds – all PFI repayments (both principal and interest) are accumulated in a revolving fund and the PMU uses this funds for refinancing mortgage loans.

Individual PFI Participation in the Program. With respect to the utilization of the Program funds the most active PFIs were Armbusinessbank, Ararat Bank, Inecobank and First Mortgage Company. These four PFIs utilized around 58 percent of total Program funds. Although Armbusinessbank joined the Program during the Second Quarter 2007, within a short period it became a leader in funds utilization. This was in line with the bank’s overall strategy directed at widening its share in all banking markets. It is notable, that during the crisis the bank did not slow but rather accelerated its participation in the Program. Thus, during the last three quarters (the Fourth Quarter 2008 and First and Second Quarters 2009) the bank utilized around 35 percent of total Program allocations made for that period. The other notable characteristic of the bank was that its lending activities were not only concentrated in Yerevan but also in the regions. Around 39 percent (by volume) of all loans originated under the Program outside Yerevan were granted by Armbusinessbank (details are presented in the next section). Compared with Armbusinessbank, the other three leaders (Ararat Bank, Inecobank and First Mortgage Company) showed different behaviour. Ararat Bank had an aggressive start in the Program and within a short period acquired the leader’s position in funds utilization. But along with increased activity in other product segments the bank slowed its participation in the Program. Inecobank’s and First Mortgage Company’s participation in the Program funds utilization fluctuated – there was strong activity in some quarters alternated with inactive periods. In the team’s opinion this was a result of the level of availability of internal funds (Inecobank) and involvement in other projects (First Mortgage Company).

In general the strategies of Anelik Bank, Areximbank, Armeconombank and Washington Capital were similar.

These PFIs maintained their participation in the Program at a stable level. The total share of these PFIs in the Program was around 32 percent and ranged between 7.1 percent (Armeconombank) and 8.6 percent (Washington Capital).

The other two PFIs, Ardshininvestbank and Byblos Bank Armenia (formerly ITB), together utilized only around 10.6 percent (accordingly 4.0 and 6.6 percent). A common feature of these PFIs was that their participation in the Program during the last three quarters sharply declined almost to zero. Due to the continued decline in real estate prices Ardshininvestbank decided to temporarily interrupt its activity in the housing market, while Byblos Bank Armenia explained its inactivity by the absence of qualified borrowers. Graph 4 below summarizes PFI shares in the Program funds utilization during the entire lifetime of the Program.

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Graph 4: PFI Share in Program Funds Utilization (February 2007 – June 2009)

Lending in Regions. Though the majority of loans are originated in Yerevan and surrounding areas, lending outside Yerevan experienced a substantial increase after the HFTC was conducted in the regions in 2008 (Vanadzor and Gumri). By the end of the Program, 26 percent of loans in terms of numbers and 21 percent in terms of volume were originated outside Yerevan. The upward trend of lending outside Yerevan is presented in Graph 5 below.

Graph 5: Dynamic of Loans Granted under the Program Outside Yerevan (February 2007 – June 2009)

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As can be seen in Graph 6 below Armbusinessbank was the most active PFI in regions. The bank’s share in this segment is around 39 percent (465.3 million AMD). It is also notable that loans granted outside Yerevan constituted more than 41 percent of the bank’s total mortgages refinanced by the Program. This is particularly noteworthy as Armbusinessbank was active in all regions although it does not have a large branch network.

Graph 6 also exhibits that the shares of two PFIs (Ararat Bank and Washington Capital) in loans granted outside Yerevan was substantially lower (1.2 and 2.6 percent, respectively). The performance of other institutions in regions was comparable and their shares fluctuated between 6.0 and 9.6 percent. Real estate markets in the regions are considered underdeveloped when compared to Yerevan and are characterized by low levels of income when compared to the capital.

Graph 6: PFI Shares in Mortgage Loan Origination outside Yerevan (by volume)

2.1.3 Identification of Software Packages The objective of this activity was to identify software requirements to record, track and report housing loans. The work done under this activity was split into two tasks – one was to cover the IT requirements of the PFIs; the other was to make recommendations to the PMU to set up the necessary IT infrastructure to process the mortgage loans refinanced for the PFIs. The team prepared IT requirements for PFIs based on the premise that a well thought-out IT architecture for the processing of mortgage loans leads to substantial added benefits in risk assessment and management, profitability and customer service. For these purposes housing loan software packages should be fully automated and provide support for the entire lifetime of a loan, from application through underwriting, origination, servicing, monitoring, reporting and finally archiving the completed loan case.

The recommendations for the PMU IT system requirements and procedures were developed to support the PMU during the administration of the GAF-HF Program and included the following three subsystems:

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1. Loan Tracking System to support the GAF-PMU during the daily administration of the Program. A properly implemented and utilized LTS is an important element in the control of loan files and services for the PFIs and the CBA. 2. Loan Appraisal System to support the evaluation of all mortgage loans submitted to the Program.

The PMU needs the IT support to display the mortgage loan files received and stored in soft copy /machine-readable formats.

3. Loan Monitoring System to assist the PMU in monitoring the mortgage loans and the PFI Loans on a daily basis. The PFIs submit loan level data, which the PMU uses to generate a number of standard reports.

Requirements for IT functions for both the PFIs and the PMU IT system were used to develop the data field structure. The PFI Report and the data fields were circulated to the PFIs for further discussion. The team held an IT Seminar for the PFIs and other stakeholders in October 2006. Professionals from the two local software providers, ArmSoft and LSOFT, were also in attendance.

Based on the discussions at the IT Seminar the team met with potential local IT vendors to review their products and capabilities. This enabled the team to assist the PMU in drafting the IT Tender for the Mortgage Loan Tracking System. A local IT firm, Ligatech, won the tender. The first version of the loan tracking system was developed during the Second Quarter 2007 and consisted of data entry, document circulation (including reporting component), and PFI loan monitoring modules. The team had access for testing the loan tracking system since its initial installation and made recommendations for its further improvement and widening of its functionality. The current version of the system meets all requirements and allows the PMU to automate processes related to the GAF-HF Program. However, the team’s last recommendation related to developing the Program cash flow projections is not completed yet. In particular, there are some aspects that have to be improved to make projections more accurate. The team informed the IT vendor about the noted issues as well as discussed solutions.

Recommendations: The team expects that noted shortfalls will be addressed in the next version of the system.

The team believes that should the GAF-HF Program undergo further development, the functionality of the system may need to be broadened and recommends that the system capabilities should be checked periodically to meet any new Program changes as well as to keep abreast of market developments.

2.1.4 Contractual Savings Schemes for Housing (CSSH) This activity aimed to identify Armenian needs for introducing contractual saving schemes for housing and provide assistance to those banks who were interested in introducing and designing such products. To accomplish the above tasks the team organized a workshop on CSSH in March 2008.

Around 15 participants from ten institutions attended the workshop. An international expert in this field presented some examples of CSSH products that with some modifications could be introduced in the Armenian market. Discussions following the presentation showed that some banks were interested in introducing CSSH products and regarded them as an additional opportunity to stimulate the domestic savings activity in the country and to widen their customer base. As a primary concern almost all participants noted the national mentality that Armenians are not disposed to making long term savings and the importance of marketing strategy as being crucial for capturing public interest in CSSH products and for their success in the Armenian market. The other issue raised by the workshop participants was the calculation and setting of appropriate interest rates for both the saving and lending parts of the scheme. During the workshop the team assured all participants of its willingness to provide further assistance in developing and introducing CSSH products. The team developed a special session in the HFTC on designing and marketing CSSH products that addressed many of the questions raised by the workshop participants. Along with other training materials the team handed over the new session to the FBCF. Among the factors that hindered the introduction of CSSH in Armenia were the high interest rate environment and increase in housing prices.

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2.1.5 Minimum Quality Standards (MQS) The objective of this activity was to assure conceptual contribution to the successive improvement of the MQS in view of its further development and meeting changing conditions in the existing environment.

The introduction of the MQS pursued two main goals: to assure high quality of refinanced mortgage loans and to start mortgage loan standardization, which is a key element of success of the secondary market.

Implementation of the MQS was set as a requirement in originating mortgages under the Program.

The first version of the MQS was finalized and adopted by the MMPAA in July 2006. As the MQS were developed jointly by the authors of the Feasibility Study with representatives from the Armenian financial sector they received strong support from lenders and key Central Bank of Armenia officials.

As implementation of the MQS was new in the Armenian financial market the team’s primary efforts during the initial stage of the Program were directed at building awareness amongst stakeholders about the importance of the MQS and its specific requirements. The team organized an informational session about the content and implementation of the MQS in July 2006.

The team continued its adopted strategy to make the MQS more understandable for all implementers through holding many discussions with the PFIs, members of the MMPAA and other stakeholders. In October 2006 the team organized a workshop on the MQS that was attended by the PFIs, GAF-PMU and MMPAA. The team prepared a presentation of materials to clarify specific clauses that needed further explanation for the PFIs and discussed case studies with examples of business analysis and risk ratio calculations. After the workshop more points of the MQS were clearer for PFIs. Throughout the Implementation Phase the team worked with loan officers to brief them on the MQS requirements, clarify issues and explain the methodology behind the standards. A separate session on the MQS was developed and included in the HFTC. Also during this period the team revised or developed the necessary documents and forms (loan and pledge agreements, standard application form, etc.) to be in compliance with the MQS requirements. Final versions of the documents were circulated to stakeholders at the end of December 2006.

Starting from December 2006, when the first Refinancing Window was opened, the team provided consultancy on the implementation of the MQS for real loan cases. The team closely followed the implementation of the MQS, its ongoing improvement and its meeting changing conditions in the existing environment. For this task the team continually collected feedback from PFIs as well as made its own observations which later were discussed during discussion forums organized together with the MMPAA. To expand the set of issues intended for discussion the MMPAA also collected feedback, comments and recommendations from its members. In total two discussion forums were organized during the Program.

The first forum was organized in April 2007 with Dr. Friedemann Roy, the principal author of the MQS, leading the discussion. Some changes were made to the MQS based on the discussions including clarifications of the definitions of home improvement loans and life insurance, reduction in the discount of a borrower’s secondary income from 50 to 40 percent, and changing the requirement for the tax statement in the certificate of income from employers for the previous 12 months from “required” to “recommended”. The revised MQS came into force on 1 July 2007 after approval by the MMPAA board.

The next forum was held in October 2008. Issues brought for the discussion included feedback received from PFIs, the team’s own observations and experience from implementation of the MQS. The general concept of the discussion was oriented towards the further development of the MQS and meeting changing economic conditions in a way that enhanced the flexibility of its implementation without increasing mortgage lending risks.

The major changes discussed were related to introducing new insurance requirements for small loans to reduce Development of a Sustainable Housing Finance Market (Phase I) in the Republic of Armenia Final Report

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the cost, clarifying cases when a borrower had to be assessed by the SME methodology and introducing a new mortgage loan repayment schedule (the “Springfield” model which allows a borrower to repay loan principal in equal parts).

For some issues a consensus about the status-quo/amendments was reached, whereas others needed additional follow-up for refining the definitions and methodological and implementation techniques set forth in the MQS. Based on the results of the forum the team prepared amendments to the MQS that were approved by the MMPAA board. The amended version of the MQS came into force in December 2008. The team also made changes in the MLRG to reflect the MQS amendments.

It should be noted that the Armenian National Assembly has passed the laws on Asset-Backed Securities and Covered Bonds which increase the importance of the MQS as a basis for developing the secondary mortgage market.

Recommendations: To assure the successive improvement and ongoing development of the MQS under changing market conditions it is strongly recommended that the PMU continues collecting feedback from PFIs as well as makes its own observations on implementation and periodically organizes discussion forums with all stakeholders.

2.2 Training Measures – Activities Conducted and Results Achieved 2.2.1 Instructor Training The aim of this activity was to select and train future instructors of the HFTC so the FBCF could offer the course in the future on an ongoing basis.

During the initial weeks of the Program, the team interviewed several candidates for positions of HFTC instructors. Five people were selected by FS to attend the initial offering of Module I of the HFTC for Loan Officers which was taught by IUE in Russian as part of the interview process. The FBCF sent three of their staff instructors to the first cycle as well.

Those candidates that passed the exam for Module I were invited for a week of Training of Trainers (TOT) activities as a further means of gauging their capabilities as instructors and consultants. They were educated in both the HFTC content and training methodologies. Only those candidates that proved to have a clear understanding of the HFTC content and the capability to teach its content were selected as future HFTC trainers.

Two were hired by FS and had two responsibilities: trainer for the HFTC and consultant for the PFIs. During the week following each Loan Officer module, the trainers from IUE worked with the four new instructors (two from the FS team and two from the FBCF). The second cycle of Modules I, II and III was taught by the local instructors. The international trainers were there to observe and coach. They provided advice to each local instructor on how to improve their skills through feedback after each class or direct intervention during the session as needed. This activity consolidated and improved the local instructors’ technical and methodological capabilities for successfully conducting the HFTCs. Within the framework of further training of the instructors an FS Bank Training expert came to Yerevan during January 2007 to work with the HFTC instructors on presentation skills and course design.

In June 2007 an FS consultant and an instructor from the Institute of Urban Economics, jointly conducted the first session of the Risk Management Course. The course consisted of Introduction and Overview, Liquidity Risk Management, Interest Rate Risk Management, Foreign Exchange Risk Management and Risk-based Product Pricing. Additional sessions specific to mortgage finance addressed prepayment risk, credit analysis and a case study on asset-liability management at a mortgage bank.

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As was done with the HFTC for Loan Officers, the international experts conducted the first session in Russian.

During the following week they worked with the local instructors to develop their knowledge base and presentation skills. The second session of the course was taught by the local instructors with the experts there observing and coaching as needed.

In April 2008 one of instructors hired by FS left the Program and a new instructor was appointed. The team worked closely with the new instructor on all topics of the HFTC to assure his capability to teach the course.

Later, the new instructor covered some sessions during the courses organized in the regions.

It should be also noted that the PMU staff participated in all courses organized for the instructors.

2.2.2 Conducting the Training Courses The aim of this activity was to support to the instructors when they conducted the HFTC and risk management course and to ensure quality control of the courses.

This activity consolidated and improved the knowledge of the instructors to successfully conduct the courses by focusing on their technical and methodological capabilities. As mentioned, the international trainers attended both the HFTC and Risk Management Course the first time each was taught by the local experts and were able to provide advice to each instructor on improving their skills. The international experts also assessed the professionalism of the local trainers as well as provided feedback immediately after each class. Later in 2008, an international trainer returned to review the courses and provided a quality assessment of the overall development of the HFTCs. The team is proud that all local instructors and the course materials received a high appraisal from the international experts.

For the team it was also very important to obtain the participant evaluations of both the courses and instructors.

As evidenced by the evaluations completed by the participants in both the HFTC and Risk management courses the programs were favourably received. The local instructors also received very favourable marks, which showed their abilities to grasp the concepts and to communicate them effectively.

In general, during the duration of the Program the team together with the FBCF organized ten Housing Finance Training Courses (nine for loan officers and one for management) two of which were organized especially for branch loan officers outside Yerevan (in Vanadzor and Gumri). 103 participants from more than 20 financial institutions passed the final tests and earned a certificate. During the same period three courses on Risk Management were organized in which more than 30 persons participated. The overall experience showed that all courses were of high quality and well organized and taught.

Recommendations: To assure the high quality of the courses it is recommended that the FBCF periodically revises the course materials to keep them updated and appropriate for the changing needs of financial institutions. It is also recommended that the PMU periodically assess the partner financial institution training needs and evaluates each course it sponsors.

2.2.3 Stipends Initially, it was recommended that the stipends should only be allocated to the HFTC for Loan Officers, as the mortgage loan officers are crucial to the overall success of the Program. For PFIs, the following allocation mechanism was designed: the first student pays the full price, the second and third will receive a 50 percent reimbursement while the fourth student will be refunded 100 percent of the course cost. The fifth student pays the full price. To be eligible for a stipend the student must successfully complete the full cycle and must score 60 out of 100 possible points on the exam. The stipends had to be paid directly to the financial institutions that sent the employee to the course.

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The PFIs had preferred access to the stipends. A total of 40 partial stipends were available for PFIs during the first year of the Program. Twenty partial stipends were held back for distribution to new PFIs in the second year of the Program. It was intended to grant the remaining stipends to MMPAA members on a first-come-first-servebasis under the same allocation mechanism as the PFIs. The stipends were to serve as an incentive for non-PFI and other mortgage market participants to adhere to the MQS, thereby enhancing the outreach of the Program.

During the Fourth Quarter 2006 the PMU offered its annual training budget of approximately 2.7 million AMD with the FBCF to sponsor HFTCs for the PFIs. A separate cycle of the HFTC for Loan Officers was held and the PFIs were invited to send one or two participants. Attendance for the PFIs at the Bank Management course was also sponsored by the PMU. Further discussion with PMU revealed that the latter had a separate training budget for sponsoring courses for partner financial institution staff. Once this situation developed the parties worked together to create a unified approach to sponsoring mortgage training programs with the costs shared between the PFIs and the PMU training budget – both for new and existing PFIs. As a result the KfW stipends were not necessary to support participation in the HFTCs and it was decided that the balance of the funds would be used to support other activities in the Program.

2.2.4 Putting into Practice The objective of this activity was to support PFIs in deepening and applying the knowledge obtained during the HFTC within their organization. This technical assistance was a mixture of on-job-training, workshops, discussion rounds, refresher courses and on-site mentoring primarily focusing on the MQS and the HFTC and started in the Fourth Quarter 2006 (Implementation Phase). This activity consisted of the following main steps: 1. Assessment of mortgage lending activities at the PFIs. The PFIs had different levels of experience in mortgage lending as the Program included one of the largest players in the market as well as two that had not launched the product. This required the team to tailor our cooperation to meet their specific needs and objectives. The team members made an introductory visit to each PFI to meet the parties involved from the institution as well as to outline our approach for working together. To better manage communication with the PFIs, each FS bank expert was the primary contact for four/five PFIs. This enabled the team to offer a more customized approach for working with the PFIs and focus on their respective strengths and weaknesses.

The responsible FS bank expert periodically conducted an assessment of their “client” PFI’s strengths and weaknesses and developed a baseline PFI Progress Report for each, which was used to track progress throughout the term of the Program.

2. Advice on internal procedures and regulations. The team reviewed each PFI’s mortgage lending procedures and internal regulations related to the Program. Primarily, the team assisted the PFIs in identifying and addressing discrepancies in their practices to those mandated by the MQS and other Program requirements. The team worked individually with each PFI to rectify these shortcomings. We assisted the PFIs in making organizational and procedural changes where necessary.

3. Application of learning in loan origination, servicing and risk management. During the Fourth Quarter 2006 each PFI had at least two loan officers take and pass the HFTC for Loan Officers. One senior person from each organization attended the HFTC for Bank Management course as well. During that period the team worked individually with each PFI to prepare them for the opening of the Program.

After the Implementation Phase the team continued working with each PFI in loan origination and secondary underwriting on an ongoing basis. Generally, we assisted the PFIs in compiling the loan files prior to submission to the Program.

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4. PFI Development Progress criteria. The team started with the refinement of these criteria during the First Quarter 2007. The PFI Progress Development criteria were closely aligned with the Program Success Indicators to raise the commitment of PFI management and staff to meeting the Program objectives and to better gauge the success of the endeavours on a semi-annual basis. These criteria were communicated to the PFIs in Cooperation Agreements detailing the methodology of the joint work, which were signed between each PFI and Frankfurt School during the Second Quarter 2007.

The activity also contained a coaching component as not all loan officers involved in mortgage lending participated in the HFTC for loan officers. The team members (banking experts/instructors) also trained and coached these loan officers during their visits to the PFIs. The other task implemented by the team under this activity was organizing and implementing on-site mentoring of PFI branches located outside Yerevan. As one of the main objectives of the Program was to encourage mortgage lending outside the capital, the team visited branches in selected locations to work with the PFIs on loan origination, implementing the MQS and other best practices. In total the team visited 25 branches in five regions. Both branch management and loan officers participated in the meetings and discussions of presentations made. In addition to the explanation of the Program operating scheme primary emphasis was placed on the Armenian Minimum Quality Standards (MQS) including:

Necessity, structure, areas covered, etc.

Detailed explanation of borrower underwriting criteria (calculation of income, risk ratios),

Calculation of maximum loan amount based on PTI, OTI and LTV,

Insurance and appraisal requirements, and

Other required documentation.

As a separate task the team also presented the self-employed underwriting methodology that is used under the GAF-HF Program. In cases when branches had mortgage loans originated or in process the team commented on the loans from the perspective of the Program requirements. The team discussed and commented on all open issues raised by branch managers and/or loan officers related to the MQS and Program requirements.

As additional material the team provided the PFIs with:

Statistical data on the Armenian Real Estate Market,

Experience of other countries in implementing MQS,

Legal acts that regulate the Armenian mortgage market,

Glossary of mortgage terminology,

The Program’s Mortgage Lending Refinancing Guide including the MQS,

Case study on bank underwriting of a potential borrower and how it should be done in accordance with the Program requirements, and

A mortgage calculator for determining required income for obtaining a loan for a given PTI, OTI, LTV and loan term or the loan amount based on borrower income.

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3

Conclusions and Recommendations

As was noted in the introduction, the Armenian mortgage market is a growing and important segment of the national economy. Mortgage lending is the primary means for most of the population to meet their housing needs but is still inaccessible to most. Obstacles, such as high interest rates, scarcity of long term financing, lack of knowledge, and low incomes, do not allow utilizing the market’s potential in full. The Program has been instrumental in reducing the obstacles and broadening access to mortgage finance. Although funds provided under the Program could not satisfy the entire market demand, the Program has had a major impact on further mortgage market development through improving the qualitative characteristics of the market. The table below gives a short overview of mortgage loans offered by few Armenian financial institutions before and after the start of the Program: Table 2: Key Features of the Armenian Mortgage Market

BEFORE

AFTER (before crisis)

Maturity

Up to 7 years

Up to 15 years

Interest Rate

14 – 18 percent per annum

11 – 14 percent per annum

Down Payment

At least 50 percent of pledged apartment/house

20 - 30 percent of pledged apartment/house

Currency

Mostly in USD

Mostly in AMD

Location

Primarily in Yerevan

Available in the regions

The Program’s implementation increased competition among the market participants resulting in mortgage loan conditions becoming more favourable. As shown in Table 2 above, along with increasing loan maturities and decreasing interest rates and required down payments, financial institutions enlarged their lending outreach and increased the share of loans denominated in AMD. The other important role of the Program was in introducing mortgage lending minimum quality standards. Implementation of the standards not only allows financial institutions to reduce risks related to mortgage lending but also enables the development of the secondary mortgage market. It is worth noting that the share of delinquent mortgage loans in the Program’s total portfolio never exceeded 2 percent as compared the overall market delinquency rate of around 11 percent after the eruption of the international financial crisis.

As with other transition countries Armenia also suffers from lack of qualified specialists including in housing finance sector. To address this issue Housing Finance Training Courses were organized under the Program. More than 100 people were trained and awarded loan officer certificates since the Program commencement.

Moreover, to assure continuality of the course local instructors were trained so that the FBCF is able to continue offering the HFTC for loan officers.

The importance of the GAF-HF Program’s role in supporting the positive momentum in the Armenian mortgage market increased during the global financial crisis. With the near total absence of funds for mortgage lending the Program was almost the only one that provided liquidity to the housing finance market.

Summarizing the influence of the Program on the Armenian mortgage market it can be stated that the overall Program experience and its combination of long term funding and technical assistance ensured its successful implementation, contributed to the improvement of the current situation in the local markets and supported the further development of the Armenian mortgage market as indicated in the project’s Success Indicators (Annex 2).

Although the Program implementation was instrumental in supporting the development of the mortgage market, further steps are required for assuring sustainability of the housing finance market. Particularly, the future steps should consider the development of long-term funding instruments, the review of the current legislation in regard to its appropriateness to support collateralized long-term refinancing instruments, creation of incentives Development of a Sustainable Housing Finance Market (Phase I) in the Republic of Armenia Final Report

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for supporting saving behaviour of customers, and coordination of activities among different stakeholders (national and international). Furthermore, continued education (practical and theoretical) in the banking sector remains a cornerstone of sustainable development of the financial sector in Armenia.

The team believes that the PMU should be involved in all processes relating to the housing finance market. The experience received during the Program duration is valuable for the whole market and should be considered in designing future market development plans. The PMU should continue organizing trainings for loan officers, monitoring the quality of the course materials and organization of the courses, and providing consultancy to partner financial institutions. The PMU should also play a role in improving the professional level of the market participants through holding periodic meetings with stakeholders, collecting their feedback and following market (both local and international) development trends and experience. These tasks are essential for adapting the Program and the PMU’s operations to a changing environment over time.

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Annex 1 GAF-HF Program Partner Financial Institutions

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The table below lists Partner Financial Institutions (PFIs) and indicates date of being included in the Program.

Table 1. List of Partner Financial Institutions Partner Financial Institution

Year of Inclusion

1

Ararat Bank

2006

2

Areximbank

2006

3

Armeconombank

2006

4

Cascade Bank

5

Inecobank

2006

6

Byblos Bank Armenia (formerly ITB)

2006

7

First Mortgage Company

2006

8

Washington Capital

2006

9

Armbusinessbank

2007

10

Anelik Bank

2007

11

Ardshininvestbank

2007

12

Prometey Bank

2006*)

2009**

*Cascade Bank was removed from the Program in 2009 due to inactivity. **Prometey Bank was accepted into the Program for technical assistance only and had no access to funds.

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Annex 2 GAF-HF Program Success Indicators

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Project Success Indicators SUCCESS INDICATORS

STATUS MARCH 2009

Overall Objective a)

Mortgage Terms of 10 years at a minimum offered by 6 financial institutions by year end 2007

Achieved: Prior to the temporary suspension of mortgage lending operations by most lenders, 10-year or longer loans were offered by 18 banks and credit organizations. At present ten lenders offer mortgages with more than 10 year maturities.

Achieved: Total mortgage portfolio increased by 120% during 2006, by 128% during 2007, by 56% during 2008 and by 3.9% during the First Quarter 2009.

b)

Increase of 40% p.a. in the Armenian housing finance portfolio in 2006-2008

c)

Implementation of MQS for a minimum of 25% (by volume) of new housing loans by year end 2008

Achieved: Ten financial institutions have implemented the MQS.

d)

Foundations for secondary housing finance market by mid-2008

Achieved: The laws on Covered Mortgage Bonds and AssetBacked Securities have been adopted by the National Assembly of RA and are currently in force.

Program Objective e)

Increased competition – from 8 to 12 lenders

Achieved: At least 21 banks and credit organizations offer mortgage loans.

Increased competition – reduction in lending margins from 700-1000 bps to 400-600 bps above 12-month deposits

Achieved: Current mortgage loan margins fluctuate from 500 - 800 bps above 6 - 12-month deposits. The average mortgage loan margin, calculated as the difference between mortgage loans and weighted average 6 – 12 month AMD deposit rates was 5.6 percent.

f)

Increase of Dram loans from 2% to 20% Achieved: As of 31 March 2009, mortgage loans in AMD were around 57.2 billion or 60.7 percent of total loan volume of total mortgage loan volume outstanding.

g)

High loan portfolio quality – delinquencies > 30 days at a maximum of 5%

Achieved: Due to the economic situation the share of classified mortgages in Armenia reached 9.5% as of 31 March 2009. At the same time the Program’s mortgage portfolio continues to be at high quality with a current loan delinquency rate of less than 2%.

Accompanying Measures h)

100 participants have successfully attended the training courses by end of 2008

Achieved: To date, 103 students have attended the HFTC for Loan Officers and have successfully passed the final exam and have been certified.

i)

GAF-PMU able to operate Program on its own

The Program was operational from mid-December 2007.

The team prepared and implemented the Action Plan for the consultancy’s final year which was directed at setting up structures and systems for running and monitoring the GAFHF Program so that the GAF-PMU is able to operate the Program on its own after the consultancy services finish in June 2009.

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Overall Objective j)

HFTC are self sustaining by end of 2008 The FBCF will organize the next HFTC according to its schedule, with the next HFTC to be held in autumn 2009. All the updated and newly developed materials were transferred to the FBCF. Twelve financial institutions have attended courses and utilized the stipends

24 financial institutions have attended the HFTCs and Risk Management Course. The GAF-PMU has provided financial assistance to all 11 PFIs.

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Annex 3 GAF-HF Program Loan Portfolio Statistics

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Summary Statistics for Entire Period, per PFI5

PFI

Armbusinessbank Armeconombank Anelik Bank Ararat Bank Areximbank Ardshininvestbank Cascade Bank First Mortgage Company Inecobank Byblos Bank Armenia Washington Capital Total

5

Total Original Loan Balance, (million AMD)

Total Value of Refinanced Loans, (million AMD)

201 76 74 134 66 33 2

1,143.6 400.4 446.6 829.9 465.3 173.8 21.9

1,136.9 395.2 444.7 826.0 461.8 172.9 21.9

2,860.3 1,086.7 1,091.4 2,248.5 1,207.5 424.3 57.4

131.5 132.3 119.8 126.9 119.9 125.6 119.9

13.1 13.8 14.4 12.8 13.8 14.6 12.9

40.0 36.8 40.9 36.9 38.5 41.0 38.2

Average Loan Amount, (million AMD) 5.7 5.3 6.0 6.2 7.0 5.3 11.0

87

649.6

648.0

2,060.9

132.5

13.4

31.5

7.5

90 86 79 928

614.0 371.1 481.1 5,597.3

610.4 370.4 479.8 5,568.0

1,624.2 1,147.2 1,566.0 15,374.3

120.7 172.1 127.7 130.1

14.3 13.8 14.6 13.7

37.8 32.3 30.7 36.4

6.8 4.3 6.1 6.0

Number of Loans

Value of Pledged Apartment, (million AMD)

Weighted Maturity, months

Weighted Interest Rate, per Annum

Average LTV, %

Including loans submitted in December 2008.

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Portfolio Geographic Distribution, per Month Yerevan

Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Total

Number of Loans Monthly Cumulative Share % 12 12 100.0 10 22 100.0 25 47 92.6 24 71 80.0 20 91 90.9 32 123 100.0 23 146 82.1 32 178 88.9 37 215 92.5 25 240 80.6 20 260 71.4 41 301 87.2 15 316 65.2 20 336 74.1 19 355 76.0 33 388 78.6 20 408 76.9 16 424 66.7 23 447 82.1 35 482 61.4 32 514 65.3 24 538 55.8 19 557 70.4 35 592 58.3 9 601 81.8 14 615 66.7 32 647 66.7 12 659 57.1 30 689 56.6 689 74.2

Regions Volume of Loans Monthly Cumulative Share % 64.3 64.3 100.0 64.1 128.4 100.0 166.1 294.4 93.6 181.2 475.6 87.6 120.1 595.7 86.3 162.0 757.7 100.0 121.3 879.0 83.3 198.2 1,077.2 90.2 221.0 1,298.2 95.6 157.0 1,455.2 85.2 121.9 1,577.1 78.1 271.2 1,848.3 91.8 89.9 1,938.2 72.9 117.5 2,055.7 73.3 124.9 2,180.6 83.6 233.5 2,414.1 81.7 152.3 2,566.4 83.0 91.3 2,657.7 72.3 159.2 2,816.9 89.4 200.5 3,017.4 64.1 190.5 3,207.9 72.0 157.5 3,365.4 61.9 129.5 3,494.8 77.0 224.4 3,719.3 64.5 68.4 3,787.7 85.6 90.7 3,878.4 75.8 225.8 4,104.1 70.7 92.1 4,196.2 66.4 213.8 4,410.0 63.2 4,410.0 78.8

Number of Loans Monthly Cumulative Jan-07 0 0 Feb-07 0 0 Mar-07 2 2 Apr-07 6 8 May-07 2 10 Jun-07 0 10 Jul-07 5 15 Aug-07 4 19 Sep-07 3 22 Oct-07 6 28 Nov-07 8 36 Dec-07 6 42 Jan-08 8 50 Feb-08 7 57 Mar-08 6 63 Apr-08 9 72 May-08 6 78 Jun-08 8 86 Jul-08 5 91 Aug-08 22 113 Sep-08 17 130 Oct-08 19 149 Nov-08 8 157 Dec-08 25 182 Jan-09 2 184 Feb-09 7 191 Mar-09 16 207 Apr-09 9 216 May-09 23 239 239

Development of a Sustainable Housing Finance Market (Phase I) in the Republic of Armenia Final Report

Share % 0.0 0.0 7.4 20.0 9.1 0.0 17.9 11.1 7.5 19.4 28.6 12.8 34.8 25.9 24.0 21.4 23.1 33.3 17.9 38.6 34.7 44.2 29.6 41.7 18.2 33.3 33.3 42.9 43.4 25.8

Total Volume of Loans Monthly Cumulative Share % 0.0 0.0 0.0 0.0 0.0 0.0 11.3 11.3 6.4 25.6 36.9 12.4 19.0 55.9 13.7 0.0 55.9 0.0 24.3 80.2 16.7 21.5 101.7 9.8 10.2 111.9 4.4 27.2 139.1 14.8 34.3 173.3 21.9 24.3 197.6 8.2 33.5 231.1 27.1 42.7 273.8 26.7 24.6 298.4 16.4 52.5 350.8 18.3 31.3 382.1 17.0 35.0 417.0 27.7 18.9 435.9 10.6 112.4 548.3 35.9 74.2 622.6 28.0 96.9 719.5 38.1 38.8 758.2 23.0 123.6 881.8 35.5 11.6 893.4 14.4 29.0 922.4 24.2 93.8 1,016.1 29.3 46.6 1,062.7 33.6 124.6 1,187.3 36.8 1,187.3 21.2

Number of Loans Monthly Jan-07 12 Feb-07 10 Mar-07 27 Apr-07 30 May-07 22 Jun-07 32 Jul-07 28 Aug-07 36 Sep-07 40 Oct-07 31 Nov-07 28 Dec-07 47 Jan-08 23 Feb-08 27 Mar-08 25 Apr-08 42 May-08 26 Jun-08 24 Jul-08 28 Aug-08 57 Sep-08 49 Oct-08 43 Nov-08 27 Dec-08 60 Jan-09 11 Feb-09 21 Mar-09 48 Apr-09 21 May-09 53 928

Volume of Loans Cumulative Monthly 12 64.3 22 64.1 49 177.4 79 206.7 101 139.1 133 162.0 161 145.5 197 219.7 237 231.2 268 184.2 296 156.2 343 295.5 366 123.4 393 160.2 418 149.5 460 286.0 486 183.6 510 126.3 538 178.1 595 312.9 644 264.7 687 254.4 714 168.2 774 348.1 785 80.0 806 119.7 854 319.5 875 138.7 928 338.4 5,597.4

Cumulative 64.3 128.4 305.7 512.4 651.6 813.6 959.1 1,178.8 1,410.1 1,594.2 1,750.4 2,045.9 2,169.3 2,329.5 2,478.9 2,764.9 2,948.4 3,074.7 3,252.8 3,565.7 3,830.4 4,084.8 4,253.0 4,601.1 4,681.0 4,800.7 5,120.3 5,259.0 5,597.4

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