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January 31, 2012, New Delhi
(Former GHLC: the Government Housing Loan Corporation)
Asia Pacific Union for Housing Finance
International Conference on “Growth with Stability in Affordable Housing Markets” during January 29-31, 2012 at Hotel Imperial, Janpath, New Delhi
Technical Session VII:Securitization and Secondary Mortgage Market
Masahiro Kobayashi,Chief Economist, Global Market,
Incorporated Administrative Agency Japan Housing Finance Agency (JHF)
All Rights Reserved.
2
Perspectives
• Financial Stability• Consumer Protection• Investor Confidence• Role of Government• Historical and/or Geographical Background• Implication for Pro-Poor Housing
etc.
3
Outstanding Residential Mortgage Debt and Type of Funding (as of 2010)
Trillion USD
(Source) EMF, ECBC, AFME, FRB, JHF (Note) No PLS statistics available in Japan
PLS = Private Label Securities
All Rights Reserved.
87.7817 (USD/ J PY)1.3261 (Euro/ USD)
(Currency Conversion Rate)
4
Growth of Residential Mortgage Debt Outstanding
【 Y/Y change 】 【 Index (Dec 2000=100) 】
All Rights Reserved.
(Source) EMF, FRB, JHF (Source) EMF, FRB, JHF
5
Home Price Index (2000=100)
(Source) EMF, FHFA, Real Estate Economic Institute Co., Ltd, Cabinet Office, Government of Japan
All Rights Reserved.
6
“Europe” – not same by countries, like Germany and Spain
【 Home Price Index (2000=100) 】
All Rights Reserved.
(Source) EMF (Source) EMF
【 Mortgage Debt Outstanding ( Y/Y Change )】
“Population Bonus” – Correlation with Housing Bubble?
7
All Rights Reserved.
(Source) United Nations “World Population Prospects, the 2010 Revision”
Ratio of working force population (age 15-64) over dependent population
8
Contraction of Private Label Securities Markets in Japan and US
Trillion USD
Trillion JPY
【 Japan New Issue 】 【 US New Issue 】
( Source) Japan Securities Dealers Association
( Source) Securities Industry and Financial Markets Association
Agency = Fannie Mae, Freddie Mac, Ginnie Mae
All Rights Reserved.
9
Covered Bond Markets in Europe
BillionEuro
【 Issuance 】 【 Outstanding】
( Source) ECBC
BillionEuro
( Source) ECBC
All Rights Reserved.
10
According to European Covered Bond Council (ECBC),
“Covered bonds are debt instruments secured by a cover pool of mortgage loans (property as collateral) or public-sector debt to which investors have a preferential claim in the event of default.
While the nature of this preferential claim, as well as other safety features (asset eligibility and coverage, bankruptcy-remoteness and regulation) depends on the specific framework under which a covered bond is issued, it is the safety aspect that is common to all covered bonds. “
http://ecbc.hypo.org/Content/default.asp?PageID=504
Key features in different covered bond frameworks are available at ECBC Covered Bond Comparative Database
http://www.ecbc.eu/
What is Covered Bond?
All Rights Reserved.
All Rights Reserved.
Most European Jurisdictions introduced Covered Bond Legislations
( Source ) vdp (The Association of German Pfandbrief Banks)
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And new legislative initiatives are emerging in many jurisdictions around the globe.
?
All Rights Reserved.
Cover Pool Administrator
Issuing Bank
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Stand Alone Credit of Banks
【 When Issuing bank is solvent 】
Typical Legal Framework for Covered Bonds (German Pfandbrief etc)
【 When Issuing bank becomes insolvent 】
Quality of Cover Assets
CoverAssets
CoveredBonds
Investors
OtherAssets
OtherBonds
Insolvency Administrator
OtherAssets
OtherBonds
CoverAssets
CoveredBonds
Investors
+
In case of deficiency
Senior UnsecuredDebt
Covered BondMBS
(Securitization)
Balance Sheet Treatment On balance On balance Off balance
Priority Claim on Collateral No
YesDual
Recourse
YesSingle
Recourse
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Covered Bond : Hybrid Nature
All Rights Reserved.
Typical Comparison of MBS vs Covered Bond
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MBS Covered Bond
HistorySince 1970 Since 1770US Origine German Origine
Balance Sheet Treatment of Assets
Off-Balance On-Balance( Static Pool ) ( Dynamic Pool )
Credit Risk of the BorrowersTransferred to Investors
Retained by Issuers(→5% retention )
Moral HazardMore Likely Less Likely
( Originate to Distribute Model ) ( Originate to Hold Model )
Loan Modification Difficult Easy
Market Condition Almost Collapsed Relatively Stable
Regulatory Treatment Unfavorable Preferential
ALM RiskTransferred to Investors
Remains with Issuers( Option Premium is included )
All Rights Reserved.
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Mortgage Product vis-à-vis Funding Tool
MortgageProduct
ARMAdjustable RateMortgage
Hybrid ARMFRM
Fixed RateMortgage
(Image)
Suited Funding Tool Deposit Senior Unsecured DebtCovered Bond
MBS(Mortgage Backed Securities)
Interest Risk Born byBorrower
Shared byBorrower and Bank
Transfrered toInvestors
Prepayment Risk N/A Shared byBorrower and Bank
Transfrered toInvestors
Nomiral Rate Low Moderate High
Typical Case UK, Spain and many othersUS SubprimeGermanyFrance etc
US ConformingJ HF F35Denmark
All Rights Reserved.
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Bullet (Straight Bond) Pass-through (with Amortization and prepayment)
On-B
alance
Pfandbrief Germany( )Cédulas Hipotecarias Spain( )
J HF MBS J apan( )Særligt Dækkede Obligationer Denmark( )
Fannie Mae MBS Freddie Mac PC US、 ( )
Off-Balance
Obligations Foncières France( )Obbligazioni Bancarie Garantite Italy( )
Ginnie Mae MBS US( )Private Label Securities US( )Master- Trust MBS (UK)
Patern of Cash Flow
Balance Sheet T
reatment of A
ssets
Diversification of MBS and Covered Bond from the Perspectives of Cash Flow and Balance Sheet Treatment
All Rights Reserved.
Securitization and secondary mortgage market – historical perspective
17
All Rights Reserved.
• Historical developments of the securitization and secondary mortgage market in the US and Japan are in opposite order. In the US, secondary market developed in the 1930’s followed by the securitization in 1970’s. In Japan, securitization started in late 1990’s to liquidate outstanding portfolio followed by development of secondary market in the early 2000’s. This means that development of securitization and secondary mortgage market are not necessarily interrelated.
1934 1938 1970 1971 1977 1981
FHA Fannie Mae Fannie MaeGinnie Mae Freddie Mac BOA
Secondary Market Operation Securitization (OTD)
1997 1999 2001 2003 2007
HTB Sanwa GHLC GHLC JHF
Securitization (OTH)Secondary Market Operation
And Securitization (OTD)
Role that central banks has played in the mortgage market during the Crisis
18
All Rights Reserved.
• FRB purchased Agency MBS up to 1.25 trillion USD. US Treasury injected capital to Fannie and Freddie amouting169 billion USD so far.
• ECB purchased covered bond 60 billion Euro so far and announced to purchase another 40 billion.
• Bank of Japan purchased no JHF MBS so far.]
What is the opportunity cost?
Share of Central Bank purchase per outstanding balance
Challenges to Covered Bond Legislation in emerging countries
• Structural Subordination
Deposit Insurance, Senior Unsecured Debt etc.←Cap ?• Conflict with Existing Bankruptcy Protection Code
Bankruptcy Remoteness• Investor Confidence
Possibility of Spread Tightening• Regulatory Framework
Rationale for Preferential Treatments• Practical Designing
Type of Asset Class, Type of Issuer etc.
← Reference: ECBC Label Initiativehttp://intranet.hypo.org/docs/1/FCJJPFKBNDNGPDLLGGADEJCFPDWY9DBYB1TE4Q/EMF/Docs/DLS/2011-00105.pdf
Further, Can Covered Bond provide 30 year+ Fixed Rate Mortgage?
←Is 30+ year Fixed Rate Mortgage Necessary?
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All Rights Reserved.
20
Gov’t BondPrice Decline
Income Loss
Bank Capital
RestrictLending
Recession
DeteriorateFiscal Position
Cut Expenditure
Fair Value Loss Increase Debt Service
Hard to injectDamage
Deleverage
TightenUnderwritingCriteria
DeteriorateAsset Quality
Reduce Tax Revenue
Fiscal Consolidation
【 Banking Sector 】 【 Public Sector 】
【 Real Economy 】
Reduce Aggregate DemandsLess Money Supply
Adverse Feedback Loop in Europe – Interaction between Gov’t and BKs
Risk Premium
All Rights Reserved.
21
Reform of Japanese Mortgage Market
GHLC
Borrowers
Fixed Rate Mortgage
Treasury
Loan with Prepayment Penalty
GOJSubsidies
BanksARM
DepositorsDeposit
JHF
Borrowers
Investors
BanksARM
DepositorsDeposit
Banks and Mortgage Banks
MBS
F35
20thCentury
21stCentury Sell Loans to JHF35 year Fixed Rate Mortgage
Adjustable Rate Mortgage
Government of Japan
GHLC: Government Housing Loan CorporationJHF: Japan Housing Finance Agency
Mortgage Backed Security
Est 1950
Est 2007
All Rights Reserved.
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Before an Beneficiary Certificate Trigger EventBefore an Beneficiary Certificate Trigger Event
Investors
Make timely payment of both principal and interest based on JHF’s responsibility
Trust banks
Trust asset
JHF MBS
JHF
Loans to be securitized Proceeds from
the trust loan pool are passed along as the repayment of the MBS principal.
JHF MBS –similarity with Covered Bond
After an Beneficiary Certificate Trigger EventAfter an Beneficiary Certificate Trigger Event
Dividend based on beneficiary right
JHF
Occurrence of event causing a beneficiary interest
JHF MBS
Beneficiary(investors)
Beneficiary right
Trust bank
Trust asset
Note :Beneficiary certificate trigger events1. The obligor of the JHF MBS becomes a joint stock corporation or a legal entity to
which file for corporate reorganization or other similar bankruptcy proceedings can be applied
2. The failure by JHF to fulfill a payment obligation with respect to the MBS is not cured within 7 days
JHF MBS is an asset-backed Zaito bondBefore any beneficiary certificate trigger event , interest and principal are paid by JHF, as if MBS is a corporate bonds
The credit of JHF MBS is supported by both the credit of JHF and the credit of housing loan pool Due to Japanese government's policy to maintain flexibility against the borrowers, JHF will recognize the housing loans
on the balance sheet even after the MBS is issued After an beneficiary certificate trigger event , JHF MBS, a Zaito bond, will be replaced with the beneficiary right Risk weight of JHF MBS, as a Zaito bond is 10% under standardized approach By selecting a corporate bond format, JHF contributes to the development of secondary markets
All Rights Reserved.
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JHF MBS – similar legal framework not applicable to other institutions
Legal Status
Main business
Ownership
Appilcability ofBancruptcyProceedings
1950
Incorporated Administrative Agency (J HF)Special Public Corporation (GHLC)
Not applicable to other institutions
Mortgage Origination (Funding : Treasury Borrowing) Secondary Market Operation (Funding : MBS)
Amendment to GHLC Law
GHLC MBS Structure, including Asset Seggregationin case of insolvency or privatization etc., introduced
No (No article pertaining to insolvency of GHLC)No, but if privatized,
possible depending on legal framework
Same legal framework inherited
100% Owned by the Government of J apan
1999 2007
All Rights Reserved.
24
Collateral for Monthly and S-Series MBS
All Rights Reserved.
25
Issuance Volume of JHF MBS – Record High in April 2011 – 6.2 billion USD equivalent
Billion USD
(Source) JHF
All Rights Reserved.
26
Nominal Coupon of JHF MBS and its Spread to 10 year JGB
(Source) JHF
All Rights Reserved.
These materials have been prepared for the sole purpose of providing information to our investors and not as an offer, sale or inducement to buy or sell bonds.
We urge investors when they are making investment decisions regarding bonds to carefully confirm details of the conditions, content, and structure of the final products in the latest product prospectus prepared for the issuance of the relevant bonds as well as any other most recent available information and accordingly assume personal responsibility for their decisions.
(Former the Government Housing Loan Corporation)
Thank you for your attention.