March 25, 1998 - Mortgage-backed securities to debut at PS

1
SECURITIZATION FOR THE HOUSING SECTOR

• Dr. Victor S. Limlingan
• Asian Institute of Management
• 18 May 2000

2
Outline

• I. Background
• II. The Promise of Securitization
• III. The Process of Securitization
• IV. The Progress of Securitization
• V. Securitization and the Housing Sector
• VI. Proposed Securitization Plan for the Housing
  Sector

3
Background The Philippine Conference on
Securitization

• From July to November of 1999, a private sector
  group comprised of FINEX, CMDCI, AGILE and
  AIM-WSPC worked closely with the public sector
  group comprised of the EMG, HUDCC and DOF to
  explore the potentials of asset backed securities
  in developing the Philippine capital market.

4
Background The Philippine Conference on
Securitization

• On 22 November 1999, after a series of roundtable
  meetings, the Philippine Conference on
  Securitization was held to formally addressed the
  issues raised in the roundtable meetings and
  focused on the theme Mobilizing Markets for
  Housing The Case for Asset Backed Securities

5
Background The Philippine Conference on
Securitization

• Specifically the issues discussed were
• General market concerns of potential investors in
  Asset Backed Securities (ABS)
• Housing Finance Sector
• Taxation regime with respect to ABS
• BSP and SEC rules on the issuance and trading of
  ABS
• Legislative support for ABS

6
Background The Philippine Conference on
Securitization

• On the basis of our role as ...
• Co-Chairman of the Conference and on additional
  research undertaken after the conference, we have
  prepared this paper.

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The Promise of Securitization SEPARATION
ASSET
LIABILITY
EQUITY
SEPARATE ASSET
ASSET
8
The Promise of Securitization TRANSFORMATION
MARKETABLE SECURITIES
after
SEPARATE ASSETS with Future Cash Flow Streams
before
9
The Promise of Securitization MULTIPLICATION
BORROWER
PN
PN
PN
COMPANY
3
2
1
PN
PN
INVESTOR
PN
CASH
10
The Promise of Securitization

• Benefits to consumer-borrowers
• Lower cost of funds
• Increased menu of credit packages
• Competitive rates and terms
• Benefits to originators
• Readily saleable assets
• Turnover income
• Additional service income
• More efficient use of capital

11
The Promise of Securitization

• Benefits to investors
• High yield on rated securities
• Liquidity
• Potential trading profits
• Benefits to intermediaries
• New product line
• Underwriting income
• Potential trading profits

12
The Process of Securitization Basic Requirements

• Standard contracts
• Grading of risk by rating agencies
• Standardization of applicable rules and
  regulations
• Standardization of servicer quality
• Reliable supply of quality credit enhancers

13
PROCESS FLOW HONG KONG MORTGAGE CORPORATION
Mortgage-Backed Securities Back-to-Back
Structure
BANK A
HOLD
SPC
BANK A
SELL
Bank can hold
Issues
Sells loans

Sells loans
MBS or sell
MBS with
to HKMC
to SPC
to other
HKMC
professional
guarantee
investors
to Bank A
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BASIC STRUCTURE OF ASSET-BACKED SECURITIES
1
BORROWER
LOAN ORIGINATOR
2
SPECIAL PURPOSE TRUST
4
RATING AGENCY
CREDIT ENHANCER
3
5
UNDERWRITER
6
7
INVESTOR
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The Progress of Securitization in the Philippines

• Securitization in
• Non-housing sectors
• PLDT
• PAL

• Securitization in the
• Housing Sector
• Citibank MBS
• PAG-IBIG
• Urban Bank
• NHMFC-DOF
• Thrift Banks

16
Securitization in Non-housing Sectors PLDT

• PLDT through Citicorp securitized net
  settlements, the asset which arises from the
  imbalance between calls coming into the country
  from the Filipino diaspora and the much smaller
  quantity of outgoing calls. Citicorp arranged a
  US98m deal for PLDT in December 1997 and a US
  100m in March 1998

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PLDTs SECURITIZATION STRUCTURE
P L D T
RECEIVABLES
RECEIVABLES
RECEIVABLES
receives discounted proceeds
sells receivables every three months
MBIA Monoline Wrap
CXC
Liquidity Facility Provider
payments on maturing asset-backed CP
Sponsor/ Administrator
INVESTORS
Legal Owner
Source Asiamoney, ASIA, PLDT
18
SecuritizationHousing Sector

• Business World Archives
• July 21, 1994 - HIGC to accelerate implementation
  of mortgage securitization program
• November 28, 1995 - Yasay vows support for
  development of asset-backed securities mart
• May 9, 1996 - NHMFC bats for mortgage securities
  trading

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Securitization Housing Sector

• January 29, 1997 - Bankers Trust in talks with
  KBs on securitization
• June 12, 1997 - Finance pushes secondary mart for
  mortgage IOUs
• September 2, 1997 - Guidelines on sale of
  asset-backed securities drafted
• October 30, 1997 - BAP, Citibank eye secondary
  mortgage firm

20
Securitization Housing Sector

• March 25, 1998 - Mortgage-backed securities to
  debut at PSE by October
• June 2, 1998 - PSE, Urban Bank to formulate rules
  on trading of asset backed securities
• April 30, 1999 - Mortgage-backed securities of
  IFC, Urban postponed

21
Securitization Housing Sectors

• December 1, 1999 - FOCUS A secondary market for
  housing
• March 20, 2000 - Government to exempt housing
  securities from taxes
• April 25, 2000 MONEY MANAGERS - Finding Pag-IBIG
  Fund's real identity

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Securitization Housing Sectors NHMFC-DOF

• Euroweek May 5,1999
• Philippines mulls housing loan sell-off
• The government aims to either streamline or shut
  down the operations of agencies which have been
  responsible for building up portfolios of
  non-performing mortgage loans averaging 40 to
  60 of the total.

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Securitization Housing Sectors NHMFC-DOF

• The Philippine government is envisaging either a
  straight sale to third parties of both
  portfolios, totaling Ps42bn (1.04bn) for NHMFC
  and Ps38bn (940m) for Pag-IBIG, or creating a
  new merged government-owned entity responsible
  for bad debt workout and improved revenue
  collection

24
Securitization Housing Sectors NHMFC-DOF

• A number of banks including Goldman Sachs, Lehman
  and Salomon Smith Barney have already put forward
  proposals. But as one banker said, "This has
  resulted in very optimistic government
  projections envisaging the realization of 50 to
  70 of face value. The actual prices it should
  expect to receive will come nowhere near these
  levels."

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Securitization Housing Sectors NHMFC-DOF

• The government only guaranteed the first 22 of
  potential losses, so if any part of the portfolio
  is worth less than 78 of face value, so the
  three funders will be prepared to absorb the
  losses themselves from any potential sale. Many
  bankers doubt whether the government has the
  political will to absorb losses.

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Securitization in the Housing SectorWhy so
little progress for so much promise?
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Why is there no secondary market for
mortgage-backed securities?

• 1. Secondary market for government securities is
  practically non-existent
• 2. Primary mortgage market is weak
• 3. NHMFC, designed as government secondary
  mortgage institution is not functioning as such.
• - Romeo L. Bernardo
• Former Undersecretary
• Department of Finance

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Our Analysis

• Under a free market system, if there is a demand
  for a product or service, some entrepreneur
  motivated by profit and not by public service
  will come in and supply the the product or
  service. If not, then we have a market failure.

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Addressing Market Failure

• Government takes the initiative to address the
  market failure - The Malaysian Model Cagamas
• Government provides the incentives for the
  private sector to address the market failure -
  The Hong Model

30
The Malaysian Model Cagamas

• Cagamas Berhad, The National Mortgage
  Corporation, was incorporated in 1986 to support
  the Malaysian Governments policy of encouraging
  house ownership, particularly of the lower income
  group. By providing liquidity to the financial
  institutions and at the same time, to develop the
  private debt securities market.

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The Malaysian ModelCagamas

• Since commencing operations in October 1987 with
  an initial bond issue of RM 100 million, the
  total volume mortgage purchased stood at RM
  19,419 million as of end December 1999. As a
  result, Cagamas has securitized 25.1 of the
  outstanding loans of the financial institutions
  as of the end of December 1999.

32
The Hong Kong Model

• The Hong Kong Mortgage Corporation (incorporated
  March 1997) creates a market for low-income and
  middle-income housing loans through purchase of
  MBS papers, loan guarantees and outright
  subsidies
• The Hong Kong Monetary Authority encourages the
  securitization of high-income housing projects

33
The Hong Kong Model

• The Hong Kong Mortgage Corporation Limited (HKMC)
  launched its Guaranteed Mortgage-Backed
  Securities (MBS) Programme on 22 October 1999
  with Dao Heng Bank Limited (DHB).
• MBS papers provided a new alternative for banks
  in Hong Kong to liquefy their residential
  mortgage loans in the market with a powerful new
  balance sheet management tool.

34
The Hong Kong Model

• 1997 - HKMA asks banks to reduce mortgage
  exposure to 40.
• Dah Sing Bank mortgages stood at 46. Dah Sing
  moved a portion of its residential mortgage
  portfolio (HK 300m) off balance sheet. The
  transaction enabled the bank to move below the
  HKMA's 40 limit.

35
The Hong Kong Model

• 1998 -Without any prodding by HKMA,
  Deutsche Bank reopened the Hong Kong
  mortgage securitization market in April 1998. The
  HK244.15m transaction was for its own account,
  parceling a portfolio of mortgages made the
  previous year.

36
The Hong Kong Model

• 1999 - Private sector expands securitization
• 
  
• The Wharf (Holdings) Ltd undertakes non-Japan
  Asia's biggest ever securitization.
• Sino Land Ltd and Chinese Estates Ltd
  followed.
• Société Générale repeated that approach in
  November for Chinese Estates

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Conclusion

• While Malaysia and Hong Kong have used
  securitization to restructure the badly battered
  real estate sector as well as provide needed
  liquidity and future market-based rating of the
  banking system, the Philippines seems to have
  completely abandoned a promising tool of monetary
  management.

38
Proposed Securitization Plan for the Housing
Sector

• Conference Resolution 1
• Conference Resolution 2
• Recommendation

39
Conference Resolution 1

• The conference members submitted to the President
  proposals in the form of a
• Draft Executive Order instructing the concerned
  agencies of government to develop a legal, fiscal
  and regulatory framework for ABS
• Draft Securitization Law creating special purpose
  corporations and secondary market institutions
  and providing tax incentives for ABS.

40
Conference Resolution 2

• The private sector conference participants
  bound themselves to undertake the following
• Endorse to the BSP Governor a framework on a
  legal and regulatory regime on asset-backed
  securities
• Promote the organization and operation of a
  private sector-led SMI

41
Conference Resolution 2

• Initiate the standardization primary mortgage
  market documentation
• Initiate the creation of a central depository for
  good titles and the introduction of title
  insurance

42
Recommendation Creation of a Public Good

• Conference resolutions are really seeking the
  creation of the infrastructure that must be
  present before securitization of the housing
  sector can proceed. In order words, a public good
  must first be produced before private gains can
  be realized.

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RecommendationChampions of Securitization Needed

• We believe that the infrastructure will be built
  if
• 1. A government agency will act as champion in
  building the infrastructure and
• 2. An entrepreneur will convert the act of
  securitizing the housing sector into a highly
  profitable business

44
Recommendation Build on Existing Infrastructure

• Moreover, if there is a will, a way will be found
  to build the infrastructure by building on
  existing foundations and programs without
  resorting to the issuance of Executive Orders or
  the passing of Legislation

45
Recommendation BSP, the Ideal Champion

• The government agency who should build the
  infrastructure is the Bangko Sentral ng Pilipinas
  (BSP)
• 1. Banks are the major players in asset
  securitization as originators, trustees, issuers,
  servicers and investors

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Recommendation BSP, the Ideal Champion

• 2. Securitization will provide the needed
  liquidity to some illiquid banks or their
  illiquid clients.
• 3. BSP has the technical expertise, the financial
  credibility and the regulatory power to build the
  securitization infrastructure.

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Recommendation ABS Innovator Needed

• International Financial Institutions specializing
  in ABS will be needed given
• 1. The apparent lack of interest of the local
  players without the incentives considered too
  generous by government agencies
• 2. The expertise, the resources and the
  credibility that these players can provide.

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Recommendation Proposed Plan of Securitization

• BSP invites financial institutions who would be
  interested in developing a market for Mortgaged
  Backed Securities in the Philippines.
• BSP reviews with the interested financial
  institutions BSP Circular 185 (Series of 1998) as
  basis for developing the market.