Mortgage Market Sector Development Program 1. The program is aligned with the following impact: living standards improved for the population of Uzbekistan.  The program will have the following outcome: availability of affordable market-based residential mortgage credit increased.  The outcome will be achieved by establishing the premise for improved access to long-term market-based funding and enhanced development of competitive housing finance products, as well as reforming the inefficient housing subsidy framework and some of its programs.

2. The program will have three outputs. The stand-alone multitranche PBL will primarily support reforms under outputs 1 and 2.  The PBL comprises 13 policy actions under tranche 1 and 14 policy actions under tranche 2. The FIL will focus on delivering output 3 of the program.

3. Output 1: Policy, regulatory, and legal framework for the mortgage finance industry strengthened. The government will revise and strengthen the existing housing policy and subsidy framework, which is presently distorting the financial system (i.e., government housing programs are provided at below-market rates, crowding out market funding and pricing). Activities include review of the existing, and establishment of better targeted, subsidy programs that reach lower-income households. Some of the changes under tranche 1 of the PBL are aimed at reducing excessive subsidies and their regressive nature.  Policy actions under tranche 2 of the PBL will further deepen these reforms to enhance the fiscal sustainability and effectiveness of pro-poor targeting.  The transition, which the UMRC will facilitate, toward stronger private sector participation in the development of the housing sector will be supported by (i) introducing a new category of financial institutions specializing in mortgage refinancing activities, (ii) mandating the Central Bank of Uzbekistan (CBU) to supervise and regulate this new category of financial institutions, and (iii) developing new regulations on mortgage lending to induce sound lending practices by banks.

4. Output 2: Housing finance strategy and subsidy framework strengthened. Tranche 1 of the PBL will establish the institutional mechanisms required to effectively implement and rationalize the government's housing subsidy framework. The government will establish the HAU to coordinate all existing housing policies and subsidy programs.  In the initial phase, the HAU will take stock of the existing government housing programs and redefine the eligibility criteria for beneficiaries, review the housing policy framework, and agree on a road map that sets out priorities for the required legal and policy reforms. Ultimately, the HAU will become a single point of contact for all housing programs and subsidy schemes, with the objectives of reducing the excessive burden on the public budget and improving efficiency and sustainability. The HAU will also increase coverage by developing innovative and new housing finance solutions and instruments (such as the up-front and one-time subsidy schemes for low-income beneficiaries, and rental programs in the housing sector).

5. The following actions will be carried out by the government under tranche 2 of the PBL to facilitate implementation of outputs 1 and 2: (i) introduction of a pilot program of income-based up-front housing subsidies for low-income families and preparation of a feasibility study for a new government-sponsored housing assistance scheme; (ii) development of a comprehensive housing and mortgage market database; (iii) eventual transformation of the HAU into an independent housing agency; (iv) preparation and approval of a new system for the collection and timely dissemination of statistical data and information on the housing sector, which will ultimately lead to the establishment of a house price index; (v) review and amendment of the current prudential and regulatory framework governing housing finance and mortgage lending in line with international norms; and (vi) comprehensive review of the housing sector (demand and supply sides) to identify areas and initiatives to promote greater competition by introducing international best practices. A feasibility study will also look into the future roles and relevance of the two dominant state-owned real estate developers.

6. Output 3: The establishment and operationalization of the mortgage refinancing company supported with long-term funding. Under this output (solely addressed by the FIL), ADB will provide long-term funding to the proposed UMRC to make long-term local currency resources available to banks to fund residential mortgage and housing improvement loans.  The UMRC will facilitate the provision of mortgage loans at an interest rate close to market rates (with an average loan maturity of 10 years), and address the demand for housing improvement loans, which are currently unavailable in the market.  The UMRC will address a fundamental market constraint that is preventing banks from expanding their housing finance portfolios, by better matching their assets and liabilities.  The UMRC will provide loans to participating financial institutions (PFIs) that are secured by eligible mortgage loans, based on criteria that will assess product design, market-based pricing, underwriting practices, loan documentation, and performance. This will help to professionalize the overall housing finance industry and address the risks associated with broadening access to housing finance across new borrower segments.  Eligibility criteria will also target end-beneficiaries that are currently underserved by the banking sector. In the medium to long term, the UMRC will support more exponential sector growth by using new debt instruments such as corporate bonds, covered bonds, and/or mortgage-backed securities to mobilize long-term funds from institutional investors.