The development of Hong Kong Mortgage Corporation Limited (HKMC)

2. The development of Hong Kong Mortgage Corporation Limited (HKMC)

3. Agenda • Introduction • Current development • Future development • Conclusion • MC Questions

4. Introduction

5. Background of HKMC • established in March 1997 • supply of mortgage financing in Hong Kong • majority of mortgage loans are in floating rate terms • not exposed to any substantial interest rate risk, but subject to other funding risks

6. Background of HKMC (cont.) • initial capital of HK$1 billion from the Exchange Fund • primary objective is to promote the development of the secondary mortgage market in Hong Kong • can sell their mortgage loans in the secondary market to raise liquidity

7. Functions of HKMC • Stability of the banking sector • Fund supply for mortgages • Promotion for the debt securities market

8. Current development

9. Mortgage-Backed Securities • 17th November 2005 • HK$1 billion MBS • Under the US$3 billion Bauhinia Mortgage-Backed Securitization Programme • Target : institutional investors • Mortgage loans : from HKHA

10. Mortgage-Backed Securities (cont.) • The price of the MBS issue is at par • Two classes of notes - Class A-1 notes (HK$400 million) - Class A-2 notes (HK$600 million)

11. Mortgage-Backed Securities (cont.) • Class A-1 notes - coupon rate : 4.73% (Fixed rate) - maturity : three years - stable return

12. Mortgage-Backed Securities (cont.) • Class A-2 notes - coupon rate : 1-month HIBOR+0.18% (Floating rate) - unstable investment yield

13. Mortgage-Backed Securities (cont.) • Both classes of notes - repay principal and interest on time • Notes rating - Standard & Poor's : AA-minus - Moody's Investors Service : Aa3

14. 10-Year Fixed Rate Mortgage Scheme • 3rd November 2005 • Under the Corporation’s Fixed Adjustable Rate Mortgage (FARM) Programme • Mortgage loans : - fixed-rate period from 1 year to 10 years • Six participating banks

15. 10-Year Fixed Rate Mortgage Scheme (cont.) • Extend the loan tenor - from 5 years to 10 years • Fixed-rate period: - 1, 2, 3, 5, 7 and 10 years • LTV : 95%

16. 10-Year Fixed Rate Mortgage Scheme (cont.) • Mortgage Rate : Fixed during the period  protect borrowers against any future volatility in interest rates during the entire period • End of the fixed-rate period • 2 choices: - re-fixing the mortgage rate - floating rate of Prime - 2.25% per annum

17. 10-Year Fixed Rate Mortgage Scheme (cont.)

18. 10-Year Fixed Rate Mortgage Scheme (cont.) • Long-term mortgage rates are attractive - e.g. - prime rate 7.5% - floating mortgage rate of Prime-2.25%  5.25% • Higher than the fixed mortgage rate up to 3 years offered under the special scheme

19. 10-Year Fixed Rate Mortgage Scheme (cont.) • Triple-win situation - Homebuyers : additional choice of mortgage financing - Participating banks : procuring new mortgage businesses - HKMC : diversify the mortgage portfolio

20. HK$20 Billion Retail Bond Issuance Programme • Issued date: 1 August, 2005 • The issuer’s credit rating: - Moody’s: Aa3/A1 - S&P: AA-/A+ • Four series of notes issued • 17 Placing Banks to distribute the Issue to retail investors

21. HK$20 Billion Retail Bond Issuance Programme (cont.) • The followings are the coupons of the four series of notes:

22. HK$20 Billion Retail Bond Issuance Programme (cont.) • Series A and B: - Denomination: HK$50,000 - Application Price: 102% of the principal amount of the notes • Series C and D: - Denomination: US$5,000 - Application Price: 100% of the principal amount of the notes • Interest for all four series were payable semi-annually

23. HK$20 Billion Retail Bond Issuance Programme (cont.) • Benefits: - Provided investors to achieve a balanced investment portfolio and stable interest income - Wide distribution network to reach out effectively to retail investors

24. HK$20 Billion Retail Bond Issuance Programme (cont.) • Benefits: - Variety in currency, tenor and return to provide investment choices to retail investors - Established market making arrangement to facilitate transactions in the secondary market

25. HK$20 Billion Retail Bond IssuanceProgramme (cont.) • The issue obtained a satisfactory subscription result with a total application amount of HK$625 million

26. Future Development

27. Reverse Mortgage Scheme • Home equity conversion mortgages • Instead of making regular for the loan • Receives a regular monthly installment • When dies, repossess and sell the property • Surplus → return to the homeowner's estate

28. Reverse Mortgage Scheme (cont.) • The feasibility is quite low • Monthly payout is relatively low ∴ not too attractive • Not too many HK people are familiar • May be launched if matures

29. Future Business • Continue to launch 10-year Fixed Rate Mortgage Scheme • Launch Retail Bonds Issuance Programme • Provide a better network and market-making mechanism for the retail bonds • Further develop MBS, MIP and retail bonds • Develop mortgage-based and debt securities market

30. Conclusion

31. Conclusion • Aim: Mortgage financing market in HK grows healthily • Continue to meet its business targets • Meet the needs of banking sectors and homeowners • Promote the development of the debt market

32. MC Questions

33. What is(are) the function(s) of HKMC? • Stability of the banking sector • Fund supply for mortgages • Promotion the debt securities market • All of the above

34. If the investors want to have a stable return, which class of note do they buy under the new issued MBS? • Class A-1 notes (fixed rate) • Class A-2 notes (floating rate) • (A) & (B) • None of the above

35. What is(are) the triple-win situation(s) of the 10 years Fixed-rate Mortgage Scheme? • provides an additional choice of mortgage financing • provides an effective avenue for procuring new mortgage businesses • diversify the mortgage portfolio • All of the above