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Mortgage Securitization in Hong Kong & Asia

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  • 1. Mortgage Securitization in Hong Kong & Asia Presented by Rohit LN Satish
  • 2. STRUCTURE OF THE PRESENTATION What is securitisation & what is the structure of securitisation followed by HKMC How it benefits the parties involved (HKMC, Banks, Investors ) What are the necessary conditions for securitisation market to thrive We would then answer the questions raised in the case. Risk Allocation to different parties Recommendations -
  • 3. Securitization Securitisation" in its widest sense implies every such process which converts a financial relation into a transaction. Securitisation is the process of commoditisation Securitisation is the process of integration and differentiation Securitisation is the process of de-construction of an entity
  • 4. Securitization Jargon Originator Future Flows Securitization Asset backed securitization Mortgage backed securitization True Sale SPV(issuer) Pass through certificates Pay through certificates Bankruptcy remote transfer Credit Enhancement Servicer Guarantor
  • 5. THE SECURITISATION PROCESS Asset Pool (Mortgages, Originator Loans etc) True Sale Proceeds from sale of Assets Credit SPV Enhancement Issue Securities Proceeds from sale of Notes Credit Tranching Class A Notes Note Structuring (AAA) Class B Notes (A) Investors Class C Notes (C) Class D Notes (Equity tranch)
  • 6. MORTGAGE BACKED SECURITIES (Structure As Followed by HKMC) Hold Asset Pool (Mortgages, Originator Originator Originator Loans etc) Sell Sell Loans to Sell Loans to Issues MBS with Bank can hold HKMC SPC HKMC guarantee MBS of sell to to Bank A investors
  • 7. Overview of Securitization in Asia Lack of Credit Enhancements Lack of investor confidence(lack of sophisticated foreign investors) Lack of Regulatory framework and other structural problems Lack of Rationalization of Taxation Structure Lack of Domestic long term bond market Lack of Liquidity For Hong Kong along with some issues listed above, lack of homogeneity of the MBS issues before HKMC resulted in an illiquid market.
  • 8. Benefit to HKMC Mandate for HKMC is to create a liquid debt Market and a liquid secondary market for MBS in Hong Kong . Why a liquid debt market is important in a region? Alternate source of funding for companies especially during time of crisis would release pressure of the Interbank market when they most need it . During the time of crisis when there is a capital flight an active debt market gives some avenues for banks to tap in to the local investors through raising local debt and issuing MBS in the local market . It helps in addressing the issue of asset liability mis match .
  • 9. Benefit to HKMC How securitization helps in creating an active debt market ? It acts as the second leg to the bond market in the region . In US the treasury market size is 3.1 Trillion and the MBS size is 1.7 Trillion . Why liquid debt market is important for creating thriving MBS market ? If corporate debt market is active banks can focus on Mortgages . Benchmarking and attracting sophisticated foreign investor base
  • 10. Benefit to Investors diversify sectors of interest (access sectors that are otherwise not open to them.) access different (and sometimes superior) risk-reward profiles. Tailor risk-return profiles Better risk return pay off as the originator holds the first loss tranche. Lower event risk Pooled assets have lowered concentration risk
  • 11. Benefit to Banks Reduce cost of funding (Bankruptcy free structure ,credit rating, credit enhancement) To reduce capital requirements Diversification of funding source (compare the all in cost in both the bond market and ABS market to see which is cheaper, in our case compute the cost of funding for bank from the two sources) Diversification is beneficial in the time of crisis or difficult market condition as you have alternatives . Banks aim to optimize their funding among a mix of retail, interbank, and wholesale sources. Securitization has a key role to play in this mix .
  • 12. Benefits to Banks Generation of Fee income To increase ROA balance sheet capital management (reduce maturity mismatches) Release regulatory capital Risk management and credit risk transfer. (First loss tranche , transferring of NPAs) Accelerating earning for financial reporting purposes.
  • 13. What do credit rating organisations see in ABS (1) Credit quality of the collateral market value of the loan VS the collateral (2) The quality of the seller/servicer- default rate , recovery rate , concentration of the risk Servicer might needed to make short term payments if there are short term liquidity issue. (3) Cash flow stress and payment structure. Loan to Value Ratio Higher the LTV higher the probability of default . LTV>1 implies borrowers equity is negative. Payment to income ratio- front and back ratio DSCR -
  • 14. What do credit rating organisations see in ABS Credit enhancement external and internal External credit enhancement third-party guarantees such as insurance or a letter of credit. Internal credit enhancement includes overcollateralization, senior-subordinate structures and reserves. Deals often have more than one form of credit enhancement. The rating agencies specify the amount of credit enhancement required to obtain a specific credit rating. The issuer decides on what mechanisms to use.
  • 15. Conditions for a successful MBS market 1) Continuous and sizable volume of Residential and Commercial Mortgages . 2) Policy & Regulatory framework- Improvement of Corporate Governance Regulatory and supervisory arrangements Taxation policy, Legal protection Regulatory authority power
  • 16. Conditions for a successful MBS market 3) Market Infrastructure and liquidity- Development of Long Term Bond markets Lack of benchmark yield curve(Malaysia, Philippines) Limited supply of quality bonds Limited bond demand Inadequate bond infrastructure Market making and creation of secondary markets . 4) Incentive for investors Comparison with other sources of investment Favorable returns viz a viz other traditional sources . MPF scheme authorities are looking for a quality paper to invest in . (AUM 30 B by 2011 and 60 billion HKU by 2030) Huge capital flow from china expected ..