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Evaluation of the Malaysian Mortgage Corporation - Cagamas

Evaluation of the Malaysian Mortgage Corporation - Cagamas. Workshop on Housing Finance June 26-29, 2011 Ulaanbaatar, Mongolia. N. Kokularupan. Views expressed in this paper are that of the authors and do not represent the views of IFC/World Bank. Cagamas Liquidity Model.

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Evaluation of the Malaysian Mortgage Corporation - Cagamas

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  1. Evaluation of the Malaysian Mortgage Corporation - Cagamas Workshop on Housing Finance June 26-29, 2011 Ulaanbaatar, Mongolia N. Kokularupan Views expressed in this paper are that of the authors and do not represent the views of IFC/World Bank

  2. Cagamas Liquidity Model Provide liquidity to mortgage originators at competitive prices to promote home ownership Develop the local capital market by being a credible issuer of high quality securities Purchase with Recourse Purchase without Recourse Conventional Cagamas Bonds, Cagamas RMBS, Cagamas Islamic bonds Liquidity Hedging Mechanism

  3. Cagamas Liquidity Model • Started operations in October 1987 by purchasing housing loans with recourse • Purchase with recourse designed to suit local conditions and to overcome barriers that could prevent Scheme from taking off successfully • Interim step towards Purchase without Recourse and Securitization

  4. P Purchase with Recourse with Recourse Grant loans and debts Sell loans and debts Financial Institutions and Selected Corporations House Owners Cagamas Investors Lead Managers Subscribe to or purchase debt securities Issues debt securities

  5. Types of Purchase with Recourse Purchase With Recourse • Housing Loans • - fixed rate (1987) • - floating rate (1992) • - convertible rate (1993) • Islamic house financing debts (1994) • Industrial property loans (1996) • Hire purchase and leasing debts (1998) • Islamic hire purchase debts (2002) • Credit card receivables (2003) • Islamic personal loans (2008)

  6. Benefits of Purchase with Recourse • Able to source long-term funds • Hedge interest rate risk and liquidity risk • Able to price mortgage loans competitively • Proceeds from sale not subject to statutory reserve and liquidity requirements

  7. Features of Purchase without Recourse • Outright sale of housing loans to Cagamas with no recourse to default risk • Cagamas rate based on cost plus basis – bond yield plus Cagamas required margin • Standardized structure and documentation • Cash purchase or settlement by Cagamas • Banks appointed as servicer for the loans

  8. Purchase without Recourse/Securitization • Cagamas first introduced Purchase without Recourse to the financial institutions in 1999 • However, financial institutions did not find it an attractive product then due to following reasons: • housing loans are good assets • excess liquidity in banking system • high risk-weighted capital adequacy ratio of banking system (12.5% in 1999) • default rates very low • foreclosure losses negligible • Breakthrough for Securitization/Purchase without Recourse came in April 2004 • Government of Malaysia mandated Cagamas as the vehicle to undertake securitization of the Government’s staff housing loans on a scheduled basis and over a period of time • 2004 – Securitization of Government’s staff housing loans • 2007 – Purchase without Recourse conventional mortgage loans from banks • 2008 – Purchase without Recourse Islamic mortgage loans from banks • 2009 – Purchase without Recourse conventional and Islamic hire purchase debts from banks

  9. Cagamas Share of Market Loans

  10. Key Success Factors of Cagamas • Shareholding structure and composition of Board • Support by Ministry of Finance, Securities Commission and Bank Negara Malaysia • Proceeds of sale of housing loans to Cagamas are exempt from statutory reserves and liquidity requirements (cheaper than fixed deposits) • Concessions granted to Cagamas bonds to kick start the operations • High quality assets • Strong risk management practices, particularly ALM • Proactive approach

  11. Concessions given to Cagamas

  12. Cagamas Evolving Role 1987-1991 Start-up Phase Take-off and Growth Phase 1992-1997 1998-2003 Diversification Phase 2004 to 2007 Securitization Phase 2007 onwards Provision of Risk Management Tools

  13. Cagamas Evolving Role (Contd) • 1987-1991: Start-up Phase • The newness of its operations and its limited product line contributed to its slow progress in the early stage • Client base: • - Financial institutions (1987) • - Government (1988) • Initially, only one product - buying on fixed rate for 5 years with recourse

  14. Cagamas Evolving Role (Contd) • 1 Nov 1989, introduced 7-year Cagamas Rate • - to increase the Company’s range of products offered to the • market • - to satisfy the market’s demand for such longer term facilities • On 24 August 1990, introduced 3-year Cagamas Rate • - to cater to the demand for sale of housing loans for a period shorter than the standard 5 years • With the new facility, primary lenders can sell their housing loans to Cagamas for a period that may range from 3 to 7 years

  15. Cagamas Evolving Role (Contd) • First five years - low volumes of housing loans purchased • - unfamiliarity with Cagamas’ operations and the advantages of selling housing loans to Cagamas - interest rates were declining rapidly • Outstanding loans held by Cagamas (1987-91)

  16. Cagamas Evolving Role (Contd) 1992-1997: Take-off and Growth Phase • From 1992 - active marketing and introduction of new products • Widening of client base to include selected corporations • Extended its range of products on with recourse basis • - Floating rate housing loans (1992) • - Convertible rate housing loans (1993) • - Islamic house financing debts (1994) • - Industrial property loans (1996)

  17. Cagamas Evolving Role (Contd) • Outstanding loans and debts held by Cagamas (1992-97)

  18. Cagamas Evolving Role (Contd) 1998-2003: Diversification Phase • Purchase With Recourse • Hire purchase and leasing debts (1998) • - serves as a hedging mechanism for such debts which are granted on a fixed rate basis • Islamic hire purchase debts (2002) • - provides Islamic institutions with an avenue to raise fixed rate funds at low cost to hedge their fixed rate assets • Credit card receivables (2003) • - allows the sellers to diversify their funding resources

  19. Cagamas Evolving Role (Contd) • Diversification into non-mortgage products has prevented the Company’s balance sheet from decreasing • Outstanding loans and debts held by Cagamas (1998-2003)

  20. CagamasEvolving Role (Contd) 2004 : Securitization Phase • Purchase of housing loans on without recourse basis • - introduced in March 1999 in tandem with the thrust towards asset-backed securitization • However, there was no urgency for the financial institutions to securitize their housing loans • - housing loans are good quality assets • - excess liquidity in the banking system • - high risk-weighted capital adequacy ratio of the banking system [12.5% (1999), 13.1% (2005)] • - housing loans are deemed to be high quality assets since their default rates are very low and foreclosure losses are negligible

  21. Cagamas Evolving Role (Contd) • The breakthrough for the Scheme came in April 2004 when the Government of Malaysia mandated Cagamasas the vehicle to undertake the securitization of the Government’s staff housing loans (GSHL) on a scheduled basis and over a period of time

  22. Cagamas Evolving Role (Contd) First Securitization Deal with the Government • 20 October 2004 • RM1,936 million of pensioners’ housing loans and the issuance of RM1,555 million in nominal value RMBS • Represents Malaysia’s first transaction, backed by residential mortgages • Attracted RM11.1 billion in book size (RM2.2 billion from offshore investors, RM8.9 billion domestic investors) • At the cut-off rates, book size remained substantial at RM10.6 billion giving an over-subscription rate of 5.6 times

  23. Cagamas Evolving Role (Contd) 2007 Onwards: Provision of Risk Management Tools • Due to excess liquidity, the banks do not require a liquidity tool. Instead, with Basel II, banks were looking for risk management tools • Thus, Cagamas enhanced the Purchase with Recourse to create the Purchase without Recourse – risk management tool for banks • 2007 – Purchase without Recourse Conventional mortgage loans from banks • 2008 – Purchase without Recourse Islamic mortgage debts from banks • 2009 – Purchase without Recourse Conventional and Islamic Hire Purchase Debts from banks

  24. Assets of Cagamas

  25. Types of Bonds End 2010

  26. Holders of Cagamas Group Debt Securities

  27. Total Outstanding Debt Market Securities

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