Japan Housing Finance Agency.pdf

6 Business description

71. Outline of JHF business

Support business

Securitization business: Support private financial institutions to generate a steady supply of long-term fixed-rate housing loans

Housing loan insurance business: Support private financial institutions loan issuance by providing loan insurance

Information business

Housing information and consultation services: Provide information about housing loans and residences to enable borrowers to select the most appropriate loan

Supplemental business

Loan origination business: Provide direct loans for the limited use of disaster mitigation or urban rehabilitation, which are important for the public welfare but not feasible through the private sector

Management of outstanding loans: Appropriately manage outstanding loans succeeded from GHLC

85. Sellout housing loan

1. Apply for loan

2. Securitization business Agency Conduit Model

Securitization business (Agency Conduit Model)

JHF purchases housing loans from private financial institutions and entrusts them to trust banks JHF issues mortgage-backed securities (MBSs) using the loans as collateral, and obtains the proceeds from the

capital markets (see the illustration below) By using this structure, private financial institutions can provide long-term fixed-rate housing loans These housing loans satisfy the criteria provided by JHF and will be transferred to JHF when the loans are

executed This structure is similar to the Federal National Mortgage Association ( Fannie Mae) in the US

Number of contracted financial institutions (as of Oct 1, 2007)

Type Number Percentage

46.2%

Regional banks 62 96.9%

Labor banks 12 92.3%

Insurance companies and mortgage banks 24 -

Credit federation of agricultural cooperatives 11 26.8%

Total 336 -

Second-tier regional banks 40 88.9%

Shinkin Banks 162 56.4%

Credit associations 19 11.3%

City banks and trust banks 6

7. Collateral

6. Entrust loans

Trust banks

11. Hand over money collected

9. Payment for purchased loan

Inspection institution

4. Provide long-term fixed rate housing loan

Private financial

institutions

10. Pay principal & interest (including prepayment)

Borrowers

3. Issue a certificate of conformance

2. Apply for inspection of construction

8. MBS proceeds

12. Repayment of Interest & Principle

7. Issue MBS

Investors

92. Securitization business Government Conduit Model

Securitization business (Government conduit model)

JHF underwrites insurance for long-term fixed-rate housing loans made by private financial institutions JHF guarantees the timely payment on MBSs which are backed by those loans (including the beneficiary

certificate of such loans trusted) The structure is similar to the Government National Mortgage Association (Ginnie Mae) in the US

(Note)the above illustration is a case where trust and SPC are used

SPC

10. Proceeds for MBS

12. Guarantee timely payment of principal and interest5. Mortgage insurance

7. Beneficiary Certificate

1. Apply for loan

Trust companies

11. Reimbursement

Inspection institution

4. Provide long-term fixed rate housing loan

Private financial

institutionsBorrowers

3. Issue a certificate of conformance2. Apply for inspection of

Construction

Investors

6. Entrust loans

9. Issue MBS8. Sellout Beneficiary Certificate

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3. Housing loan insurance business and housing information and consultation services

Housing loan insurance business

JHF supports private financial institutions ability to originate loans by underwriting housing loan insurance If borrowers are in default, JHF provides insurance claims for uncollected money to the private financial

institutions based on the compensation rate

Housing information and consultation services

JHF provides a wide range of housing-related information, including Flat 35 (long-term fixed-rate housing loan which is to be purchased by JHF), simulation of funding and repayment plans and technical information

JHF provides basic knowledge of Flat 35 and of other housing loans through events and seminars JHF provides full advisory service regarding funding and repayment plans

Borrowers Loan

Loan & repayment

Credit enhancement

Financial institutions

(Insured)Insurance JHF(Insurer)

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4. Loan origination business and management of outstanding loans

Loan origination business

Rental houses JHF provides loans to develop rental houses for the elderly and families with small children, which are

important for public welfare but not feasible by the private sector Funding source: Straight bonds

Urban rehabilitation etc

JHF provides loans to construct facilities to promote rational and sound use of land in urban areas JHF provides loans to the elderly to renovate their homes to make them barrier-free: these loans include

special repayment terms, such as bullet repayment at death JHF provides loans to people who prepare for disasters by relocating or renovating their homes Funding source: Savings bonds for acquiring houses and sites, Straight bonds

Disaster mitigation To support the early restoration of houses damaged by disaster, JHF provides low-interest-rate loans

promptly after the disaster Funding source: Fiscal investment & loan program (FILP loan)

Property accumulation savings scheme-tied houses

JHF provides housing loans to workers who have saved money through property accumulation savings, which was set up to encourage workers to build their assets

Funding source: Property accumulation savings scheme-tied housing bonds

Management of outstanding loans

JHF manages the outstanding loans succeeded from GHLC until the loans are repaid These are managed in a special account separate from other JHFs accounts

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Monthly MBS

Straight Bonds (SB)Savings bonds for acquiring houses and home sites

Securitization business

Rental houses

Urban rehabilitation etc

Disaster mitigationProperty accumulation savings

scheme-tied houses

Government loan (FILP loan)Property accumulation savings

scheme-tied housing bonds

The funds for securitization business are raised primarily by the issuance of Monthly MBSs The funds for the over-collateralized portion for MBS is raised primarily by the issuance of straight bonds Among loan businesses, the rental housing loans are primarily funded by the issuance of straight bonds By issuing S-series MBSs, a portion of outstanding loans is securitized

5. Funding sources for each business

S-series MBS

Loan originationbusiness

Management of outstanding loansNote: the above illustration indicates main fund-raising methods for each business

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6. Monthly MBS ~Funding source of securitization business (Agency conduit model)

1. Asset-backed Zaito Agency bonds

2. Pooling of standardized and qualified loans

3. Over-collateralization

4. Monthly pass-through repayment

5. Partial cancellation of trust agreement with default loan and redemption of MBS

Basic features of Monthly MBS

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1. Asset-backed Zaito Agency bond - I

* Third party benefit trust: Trust whose beneficiary is not a consigner but a third party

5. Issue MBS

4. Entrust loans

7. Repayment of interest & principal

* Third party benefit trust

1. Provide housing loan

6. Pay principal & interest

2. Sellout housing loan

6. Hand over money collected

Under normal circumstances

5. Payment for purchased loan

Private financial

institutions

JHF

3. Loans to be securitized

Trust banks

Investors JHF issues bonds based on the loan pledged as collateral (5.)

Borrowers

JHF MBS

Trust asset

JHF purchases housing loans Flat 35, which were provided by private financial institutions (purchased loans). JHF entrusted the purchased loans together with its originated loans (direct loans). Most of the loans to be

entrusted are purchased loans. JHF enters into trust agreements and establishes a third-party benefit trust whose beneficiaries are holders of the bonds (MBSs). JHF issues bonds backed by trust asset.

If any default (such as delinquency for four months) occurs on trust assets, JHF MBSs are redeemed in the amount equal to principal of the default loan. Delinquency up to three months are not treated as defaults and JHF pays principal and interest as scheduled

The certainty of payment of principal and interest under normal circumstances depends on the creditworthiness of JHF

The entrusted housing loan is not treated as off-balance item.

Flat 35

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1. Asset-backed Zaito Agency bond - II

If any of the following Events Causing a Beneficiary Interest occurs, the transaction becomes true salestructure whereby the payment of principal and interest depends on the creditworthiness of the trust asset

To investors, dividends are paid to their Beneficiary Interest at the same rate as the related JHF MBS, and principal is repaid up to the investment amount only from the trust asset; this method of repayment is called pass-through turbo redemption

[Events Causing a Beneficiary Interest]

* Investment amountThe amount calculated to create a base for expected dividend amount for the beneficiary interest and to set an upper limit of the repayment of principal for the beneficiary right subsequent to the retirement of the related JHF MBS. The initial investment amount shall be the outstanding amount of the related JHF MBS held by each beneficiary at the time immediately before the related JHF MBS is retired on the day of retirement of the related JHF MBS

1 Dissolution of JHF without an entity appointed to succeed the payment obligations of the notes

2 Dissolution of JHF where the entity appointed to succeed the payment obligation is a kabushiki gaisha (joint stock corporation), or laws are amended so that the appointed entity is allowed to file for corporate reorganization or other similar bankruptcy proceedings

3 The obligor of the notes is privatized to become a corporation or laws are amended so that the obligor is allowed to file for corporate reorganization or other similar bankruptcy proceedings

4 Payment default on the part of JHF, taking into consideration a grace period of seven days, on this note or any other bond that JHF issues or that is transferred to JHF

3. Trustee directly collects loans

2. Retirement of bonds

4. Dividend based on beneficiary right (Bond holders definitely acquire beneficiary right)

After an Event Causing a Beneficiary Interest

JHF1. Occurrence

of Event Causing a Beneficiary interest

JHF MBS

Beneficiary(investors)

Beneficiary interest

Borrowers

Trust banks

Trust asset

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2. Pooling the standardized and qualified loans

Avoid individuality among purchased loans by setting certain purchase standards No regional concentration risk, because JHF supports homeownership across Japan Avoid uncertainty in housing loan interest rate, as all loans are fixed-rate

[Eligibility criteria]Age Less than 70 at the time of loan application

Repayment capacity

Debt to income (DTI) ratio limits If annual income is less than 4 mm yen,

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3. Over-collateralization

Over-collateralization and fundraising (Basic concept)Over-collateralization and fundraising (Basic concept)

[JHF MBS] Create an over-collateralization by using a portion of purchased loan

Mortgage-backed securities (MBS)

Covered by the funds raised from the

issuance of Straight bonds

Purchased loan

Direct loan

Over-collateralization

Sufficient collateral with over-collateralization is pledged to mitigate an Event Causing a Beneficiary Interest By pledging sufficient collateral, JHF intends to obtain and maintain AAA ratings from S&P and R&I (note that a

bond rating from Moodys is not obtained) The funding for over-collateralization is raised from the issuance of straight bonds, not MBS

Trust pool

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0

10

20

30

40

50

60

70

80

0 5 10 15 20 25 30 35


The principal redemption amount paid by loan borrower is applied to repayment of principal of JHF MBS

0

10

20

30

40

50

60

70

80

0 5 10 15 20 25 30 35

4. Monthly pass-through repayment - I

(Note) The redemption scheme above is the one for the face amount of 100 mm yen of JHF #1.In addition, the above charts were created based on the Prepayment Standard Japan (PSJ) model provided by Japan Securities Dealers Association.Also, the calculation is based on the assumption that no clean-up call(*) is exercised, even if the expected outstanding trust pool balance is 10% or less. Therefore, please note that the above redemption amount, interest amount and weighted average life is different from the actual ones.

0%PSJ 5%PSJ

years years

Redemption amount

Interest amount

Weighted average life (WAL)18.9 yrs

Redemption amount

* If the outstanding balance of JHF MBS is 10% or less of the total initial issue amount, JHF may accelerate the redemption of all of the outstanding balances

Yen in ten thousands Yen in ten thousands

Weighted average life (WAL)12.6 yrs

Interest amount

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4. Monthly pass-through repayment - II

What is the Prepayment Standard Japan (PSJ) model ?

The Prepayment Standard Japan (PSJ) model indicates the speed of prepayment which may occur in the housing loan pool as a function of loan age

For JHF MBS, PSJ model is adopted as a convenient prepayment vector and usable for many investors. Meanwhile, JHF MBS is the only MBS in Japan for which Japan Securities Dealers Association calculates and provides statistics of PSJ forecasts of underwriters

PSJ vector starts at 0% CPR at 0 months, and ramps up to a specified terminal CPR in 60 months (5yrs)

PSJ model vs PSA model

PSJ vector (Japan) PSA vector (US)Initial CPRRamp-up period 60 months 30 months

Terminal CPR

0% 0%

A terminal CPR of X% corresponds to X% PSJ

A terminal CPR of 6% corresponds to 100% PSA, and scales accordingly

(Weighted average loan age (WALA))

(CPR)

Ramp-up period (60 months)

Terminal CPR (5%)

5%PSJ

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5. Partial cancellation of trust agreement with default loan and redemption of MBS

In the monthly MBSs which are to be issued in and after April 2007, if any default housing loan occurs in the trust

pool, the principal amount of such default loan is prepaid in related Monthly MBSs and then dissolved from the

trust pool

Main causes are as follows:

Delinquency of principal and interest for four months Debt assumption by a third party Succession following the death of debtor If repayment of all amount is requested by JHF Occurrence of termination events, such as start of bankruptcy proceeding as to the loan agreement

Prepayment of MBS in the amount equal to principal of the default loan

Events of prepayment

(Note) Event of prepayment includes but is not limited to the above causes.

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7. Straight bonds ~Funding source of loan origination business

Straight Bonds

Use of proceeds: To raise funds for over-collateralization of MBS and loan origination business of rental houses

Period: 5, 10 and 20 yrs Bond Rating: S&P: AA, R&I: AAA

Savings bonds for acquiring houses and house site (Private Placement)

Use of proceeds: To raise funds for loan origination business of rental houses and urban rehabilitation etc Period: 10 yrs Solicitation: Once a year Target subscribers: Condominium associations which meet certain standards

Property accumulation savings scheme-tied housing bonds (Private Placement)

Use of proceeds: To raise funds for loan origination business of property accumulation savings scheme-tied houses

Period: 5 yrs Issue timing: Jun, Sep, Dec, and Mar Underwriters: Financial institutions dealing property accumulation savings

(Note) All bonds are backed by general lien of JHFs asset

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8. S-series MBS ~ Management of outstanding loan

FY2005 FY2006 FY2007

Amount of prepayment of the government loans

Issue amount of S-series MBS

Y 1.6 trillion (A)($13.9 billions)


Y 2.7 trillion (E)($23.5 billions)



Y 1.2 trillion (E)($10.4 billions)

Track record of prepayment of the government loans

Use of proceeds: Implement prepayment of high-interest-rate government loan to improve financial position Collateral: Outstanding loans succeeded from GHLC and seasoned for a certain period after origination Credit enhancement: Over-collateralization, same as Monthly MBS Bond rating: AAA from S&P and R&I

Monthly MBS S-type MBS

WAL (Weighted Average Life)

Cancellation method of default housing loan

910 yrs*1 78 yrs*1

Prepayment*2 Replacement*3

*1 Average of the figures provided by potential underwriters*2 Replacement method is adopted for monthly MBS of GHLC (GHLC MBS #1-53)*3 If default occurs, replace default housing loan with sound one

Characteristics of S-series MBS *Overall scheme is same as the one of Monthly MBS

* under the assumption of $1 = Y115

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9. Medium-term objectives / Medium-term plan

06 08 09 10 11

Period for the 2nd mid-term objectives(2012.4 - 2017.3)

12 13 14 15 16

Period for the 1st mid-term objectives(2007.4 - 2012.3)

03 04 05 07

Securitization businesswas started

2003.10

FY

Expected revenue and expenditure for securitization business

Streamlining business operation

Business Reform Planwas formulated

2005.7

Improvement of financial situation in the outstanding loan management account

JHF aims to turn profitable on a single fiscal-year basis in the first period of the medium-term objectives period and to eliminate losses carried forward during the second period

Realize a turnaround in a single fiscal year during the 1st period

Eliminate loss forwarded during the 2ndperiod

Reduce regular staff(reduce 10%+)

Reduce SG&A(reduce 15%+)

Reduce regular staff by 4%+ and SG&A by 6%+ in advance (compared with the data for 2004)

Prepay government loans without penalty by securitizing the outstanding loan.

Abolish subsidies during the 1st period

JHF was founded2007.4

2. Securitization businessAgency Conduit Model2. Securitization businessGovernment Conduit Model3. Housing loan insurance business and housing information and consultation services4. Loan origination business and management of outstanding loans6. Monthly MBS ~Funding source of securitization business (Agency conduit model) 6. Monthly MBS ~Funding source of securitization business (Agency conduit model)6. Monthly MBS ~Funding source of securitization business (Agency conduit model)6. Monthly MBS ~Funding source of securitization business (Agency conduit model)6. Monthly MBS ~Funding source of securitization business (Agency conduit model)6. Monthly MBS ~Funding source of securitization business (Agency conduit model)6. Monthly MBS ~Funding source of securitization business (Agency conduit model)6. Monthly MBS ~Funding source of securitization business (Agency conduit model)7. Straight bonds ~Funding source of loan origination business8. S-series MBS ~ Management of outstanding loan9. Medium-term objectives / Medium-term plan

Documents

Japan Housing Finance Agency.pdf