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Secondary Mortgage Market

Secondary Mortgage Market. 16 March 2005 Pamela M. Hedstrom, CFA. Why is the Secondary Mortgage Market Important?. Links Housing Market with Capital Market Raises Capital for Lenders Transfers Risks to Capital Market Participants Improves Lender Financials

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Secondary Mortgage Market

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  1. Secondary Mortgage Market 16 March 2005 Pamela M. Hedstrom, CFA

  2. Why is the Secondary Mortgage Market Important? • Links Housing Market with Capital Market • Raises Capital for Lenders • Transfers Risks to Capital Market Participants • Improves Lender Financials • Unbundles Mortgage Lending Process  Lower Rates on Mortgages

  3. The Challenge Requires • Suitable mortgage loans as collateral • Standardization is essential • Sound legal framework • Favorable regulatory environment • Robust banking sector and financial markets • Particularly related derivative instruments

  4. Secondary Mortgage Instruments • Secondary mortgage instruments are derivatives as they are based on other assets... • Primary Types are: • Covered Mortgage Bonds • Structured Covered Bonds • Mortgage-Backed Securities

  5. What is a Covered Mortgage Bond? • A debt instrument secured against a pool of specifically-identified, eligible mortgage assets (cover pool). • Priority of bondholders over cover pool in the event of bankruptcy of the issuer • High quality first rank mortgage assets secured by residential or commercial real estate • Cover pool - at least nominal value of bonds in circulation, often overcollateralised • Dynamic – cover pool may substitute assets • Qualified trustee for cover pool • Matching of assets and liabilities • Additional special supervision • On balance sheet treatment

  6. Covered Mortgage Bonds Supervisory Office, Trustee Borrowers: Private Commercial Mortgage credit institution Investors: Institutional Private Extends loans Issues mortgage bonds First rank mortgage Grants capital

  7. What is Securitization? • Structured financing that converts assets or cash flows into a capital market instrument or security • Assets are pooled and repackaged, underwritten and sold to provide financing to the sellers • Known as “Asset-Backed Securities” (ABS) • Mortgages, home equity loans, car loans, credit card receivables, student loans, corporate debt, commercial paper, tax liens, intellectual property, future flows, etc.

  8. Special Purpose Vehicle – “SPV” • Bankruptcy remote entity – only purpose is to hold assets and perform related activities • Isolates assets from insolvency of seller • Requires tax neutrality • May be a trust, partnership, or joint stock company • Originator sells assets to the SPV • “true sale” ensures removal from bankruptcy estate • “Off balance sheet” treatment • May retain some components – servicing or subordinated tranches • SPV issues securities – may be debt or equity interests

  9. MBS Securitization Process

  10. Deal Structures • “Pass-Through” • Fully amortising – prorata share of cash flows • Prepayments & unpredictability • “Pay-Through” • “Slice and Dice” - reconfiguration of cash flows • Controlled or revolving amortisation

  11. Proposed Mortgage Legislative Package • Proposed Legal Framework • Amended Mortgage Loan Law 190/1999 (“MLL”) • Amended Land Book Law 7/1996 • Mortgage Lending Banks/Mortgage Credit Companies • Mortgage Bond Law (“MBL”) • Securitization of Receivables Law (“SPV”) • Sponsors: Ministry of Finance and Ministry of Transportation, Construction & Tourism with support from the NBR and CNVM • Current Status - submitted to the other relevant Ministries for comments • Goal - submit complete legislative package to the Parliament in spring 2005

  12. For Further Information • Websites: • www.europeansecuritization.com • www.securitization.net • www.vinodkothari.com • www.hypo.org • www.absnet.net • Or contact: • Pamela Hedstrom pmhedstrom@aol.com Mobile 0721.342.286

  13. Why do Issuers Use the Secondary Mortgage Market? • The “Arbitrage” of Separating Financial Assets from Credit, Performance or Other Risks Results in: • Multiplier effect on lending, improved liquidity • Lower funding costs • Improve the balance sheet = regulatory capital relief • Asset/liability management • Better financial ratios – ROI & ROA • Greater corporate visibility

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