Mortgage Backed Securities (MBS)

How can Hong Kong Mortgage Corporation Limited play an important role in secondary mortgage loan market in Hong Kong?

Mortgage Backed Securities (MBS) Bank X  HKMC SPC  Note holder • Bank X  sells mortgage loans to HKMC • HKMC  transfer mortgage loans to SPC • SPC (special purpose company)  issues MBS with the HKMC guarantee • Note holder  bank X and other investors

Mortgage Backed Securities (MBS) Bank X  HKMC SPC  Note holder • Pool of mortgage loan  gives the monthly payment • Original bank  keeps the service fee, gives the rest to HKMC • HKMC  keeps the guarantee service fee, gives the rest to paying agent • Paying agent  gives the pass through payment to the note holders

Mismatch mortgage securities • The HKMC group the similar mortgage loans into the same group • Issue different maturity date for the securities • Normally for the short term • Reduce mismatch mortgage securities

The effect of prepayment to the HKMC • The prepayment the abundant liquidity bank—doesn’t like the prepayment affect interest income bad for HKMC to develop the MBS market.

Debt issuers Fund raised by HKMC is the maximum Top issuer of debt Issued about $11,400million of debt HKMC has the significant role in the debt market Sufficient financial support MBS

Bauhinia Programme (US$ 3 billion MBS programme) Background and development: • HKMC introduced the Bauhinia programme in Dec 2001 • Totally launched four MBS issues • With amount of HK$7.4 billion • Second MBS issue of HK$ 3 billion, largest

Bauhinia Programme (US$ 3 billion MBS programme) Background and development: • HKMC sell mortgage portfolios to Bauhinia in different MBS series • Originators  HKMC Bauhinia MBS Limited  issue notes in different series

Bauhinia Programme (US$ 3 billion MBS programme) Differences between MBS and Bauhinia: • HK$ vs. multi-currency • Originating bank vs. both institutional investors and retail investors • Bank sells to HKMC vs. HKMC sells to Bauhinia • Prime-based vs. choices between prime and HKBOR-based coupon

Bauhinia Programme (US$ 3 billion MBS programme) Advantages: 1. Multi-currency • attract both domestic and oversea investors,↑liquidity 2. HIBOR-based • more choice for investors 3. Flexible offering mechanisms • both public issues and private placements, wider distribution network of MBS

Bauhinia Programme (US$ 3 billion MBS programme) Advantages: 4.Convenient platform • illiquid mortgage portfolios into liquid MBS To sum up, Major milestone for the development of the secondary mortgage market

Mortgage Insurance Programme Background: • 1991  people are intent on speculative activities in the property markets. • Hong Kong government  reduce the loan-to-value (LTV) ratio from 90% to 70%.

Mortgage Insurance Programme Background: • After the Asian financial crisis  many financial institutions wanted to increase the LTV ratio to 95% • Hong Kong government did not release the regulation • The HKMC provided a MIP programme to the financial institutions.

Mortgage Insurance Programme (MIP) ----Example 5% down payment by the borrower HK $150,000 25% provided loan by the insured HK $750,000 Homebuyers raise funds (HK$3,000,000) to buy a house HK $2,100,000 70% loan provided by the insured

Mortgage Insurance Programme (MIP) ----Example HK $750,000 (25%) Insurance Premium HKMC Bank Reinsurance Premium HKMC Approved Reinsurers

Mortgage Insurance Programme (MIP) Advantages: 1. Reduce the down payment of the homebuyers: • the insured can lend up to 95% loan-to-value ratio 2. Reduce the additional risks of the financial institutions: • HKMC provide insurance cover (25% of the mortgage loan) • HKMC take out reinsurance with the approved reinsurers

Criteria Source:http://www.hkmc.com.hk/mktg/ourbusiness/mip-annex4.pdf

Criteria

Credit Risk Two committees: 1. Credit Committee • Duties: set up overall credit policies and standards • mortgage purchase and insurance

Credit Risk 2. Transaction Approval Committee • Duties: assess the credit risks about the new products • e.g. mortgage purchase, mortgage insurance and MBS • propose the terms and conditions for the products

Credit Risk Four strategies: 1. Careful selection of approved sellers • seller’s mortgage loan underwriting policies • seller’s historical delinquency experiences • seller’s loan serving capabilities

Credit Risk Four strategies: 2. Prudent mortgage purchasing • purchase mortgage of owner-occupied properties only • consider mortgagor’s exposure to outside debts • debt-to-income ratio (normally less than 50%)

Credit Risk Four strategies: 3. Effective due diligence process: • review a sample of acquired mortgage loans • ensure compliance with HKMC’s mortgage purchasing criteria

Credit Risk Four strategies: 4. Protection for some higher-risk mortgages: • e.g. top-up loans • Solution: repurchase warranties and reserve funds

~END~ Presented by: Mary (034032) Danise (034053) Emily (034056) Melva (034057) Dawn (037007)

Multiple Choice Q.1 How much debt has the HKMC raised in 2004? 1) $ 11,400 million 2) $ 11,500 million 3) $ 12,400 million 4) $ 12,000 million Ans: a)1 b)2 c)3 d)4

Multiple Choice Q.2 Which of the following about the advantage(s) of Bauhinia programme is/are correct? 1) Issue securities in multi-currency to meet the need of both domestic and oversea investors 2) Provide convenient platform to convert liquid mortgage portfolios into liquid MBS 3) Investors can choose between HIBOR and prime-based coupon. Ans: a)1 b)2 c)3 d)1&3 e)1,2,3

Multiple Choice Q.3 How many insurance cover does HKMC provide to the financial banks? 1) Up to 25% of mortgage loan 2) Up to 20% of mortgage loan 3) Up to 75% of mortgage loan 4) Up to 70% of mortgage loan Ans: a)1 b)2 c)3 d)4

Mortgage Backed Securities (MBS)