Econ 310 Sec. 2 Group 2

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• Econ 310 Sec. 2 Group 2

Lai Po Yu (023111) Ng To Yeung (033044) Chan
Ka Sin (033046) Cheung Chun Chuen
(033053) Kwok Chun Yin (033063) Kung Yun
Hung (033078) Lai Suet Yee (035122)
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CONTENTS

1. Background
2. Operation of HKMC programmes
3. Recent News
4. The Securitization in Korea
5. The Securitization in Singapore
6. The Securitization in Taiwan
7. Recommendation
8. Q A

Kung Yun Hung (033078)
3
Background

• Before the establishment
• Mortgage financing supply came from the banking
  sector
• Exposed to funding risk

Kung Yun Hung (033078)
4
Background

1. Maturity mismatch
2. Liquidity risk
3. High concentration risk

Kung Yun Hung (033078)
5
Background

• Establishment
• Hong Kong Mortgage Corporation (HKMC) was
  established on March 1997
• Initial capitals HK1 billion
• (from the Exchange Fund)
• Objectives develop 2nd mortgage market

Kung Yun Hung (033078)
6
Background

• Functions of the HKMC
• Address the funding risks of financial
  Institution
• Enhance the stability of the banking sector
• Promote wider home ownership in HK by fund supply

Kung Yun Hung (033078)
7
Background

• Functions of the HKMC
• Encourages and facilitates the development of the
  HK bond market
• Increase the range of financial instruments

Kung Yun Hung (033078)
8
Operations of HKMC programmes
9
The Mortgage-Backed Pass-Through Securitization
Programme (MBS)

• The 4 roles of MBS
• Bank A
• HKMC
• Hong Kong Mortgage Corporation Limited
• SPC
• Bankruptcy remote special purpose company
• HKMC Funding Corporation
• Noteholder
• Originating bank / Another investor

Lai Po Yu (023111)
10
The Operation of MBS
Structure of the Swap and Hold transaction
Hold
Bank A
HKMC
SPC
Noteholder
Sell
Transfer loans to SPC
Issue MBS with HKMC guarantee
It can hold MBSor sell to otherinvestors
Sell loansto HKMC
Lai Po Yu (023111)
11
Pass-through of coupon
Source http//www.hkmc.com.hk/
Lai Po Yu (023111)
12
The Operation of MBS

• Objective
• Developing a secondary market
• Enhance investors confidence

Lai Po Yu (023111)
13
Mortgage Insurance Programme (MIP)

• The roles of Mortgage
• Homebuyer
• Bank
• Insurance Company
• Reinsures

Lai Po Yu (023111)
14
The Operation of MIP
http//www.hkmc.com.hk/
Lai Po Yu (023111)
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The Operation of MIP

• Objective
• Provide a way to reduce Homebuyers deposits
• Without increasing the risk exposure of the
  financial institutions

Lai Po Yu (023111)
16
Retail Bond

• The 3 roles of Retail Bond
• Bond Issuer
• The Hong Kong Mortgage Corporation Limited
  (HKMC)
• Placing bank
• i.e. HSBC and Hang Seng Bank
• Investor
• i.e. Mr. Joe Wong

Lai Po Yu (023111)
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The operation of Retail Bond
HKMC
Placing banks
RetailInvestor
Mr. Wong can subscribe for the bonds through banks
Issue Retail Bond
Appoint placing agents
Lai Po Yu (023111)
18
Recent News
19
Fixed Rate Mortgage

• 3 November extended from the maximum of 5 years
  to 10 years
• ? reduce the influence of fluctuating interest
  rate
• 16 November 2 to 5 years programs are more
  popular
• Standard Poors AA- Moody Investment Aa3

Lai Suet Yee (035122)
20
Retail Bonds

• In mid-July, HKMC issued 4 types of retail bonds
• (Including Hong Kong dollars and US dollars)
• response of US dollars was not very good
• Interest rate of Retail Bond is lower than
  interest rate of time deposit
• Dah Sing Bank and Mevas Bank 3.375 of over
  100000

Lai Suet Yee (035122)
21
Retail Bonds (cont)

• 27 July result is satisfactory
• ?over subscribed and received the totals of
  HK625,000,000
• P.S. entrance fee is 390 000
• 0.15 of handling charge for ordinary
  
• investors

Lai Suet Yee (035122)
22
Mortgage Insurance Programme

• 95 of people have good quality of creditability
• ? their amount of money for contribution is
  38 of their income

Lai Suet Yee (035122)
23
Mortgage Insurance Programme (cont)

• 3 November market infiltration is increased form
  last year 16 to this year 20
• 10 November decreased for 23 in September
• Early repayment reduced
• ? increasing interest rate

Lai Suet Yee (035122)
24
The Securitization of Korea
25
The Securitization in Korea

• Mortgage interest rate lt Market interest rate
• Impossible to securitize mortgage before 1998

Chan Ka Sin (033046)
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The Securitization in Korea
1996 1997 1998 1999 2000 2001 2002
NHF's Mortgage Interest Rate 9.50 9.50 9.50 9.00 9.00 8.00 8.00
Interest Rate Mortgage Interest Rate 9.50 9.50 9.50 9.00 9.00 8.00 8.00
Depository Mortgage Interest Rate 11.84 13.53 13.37 10.02 9.60 7.02 6.69
Bank's Interest Rate Mortgage Interest Rate 11.84 13.53 13.37 10.02 9.60 7.02 6.69
Average Deposit Rate 9.62 11.08 7.33 6.19 5.95 3.98 3.97
Market Government Bond 12.19 14.96 7.23 8.85 6.79 5.93 5.28
Interest Rate Rate (3yrs) 12.19 14.96 7.23 8.85 6.79 5.93 5.28
Government Bond 12.57 24.31 8.30 9.85 8.12 7.11 5.88
Rate (3yrs) 12.57 24.31 8.30 9.85 8.12 7.11 5.88
Chan Ka Sin (033046)
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The Securitization in Korea

• Establish mortgage securitization in 1998
• Aim of establishment
• Development secondary mortgage market
• Decrease financial risk to promote long-term
  mortgage

Chan Ka Sin (033046)
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The Securitization in Korea

• Three acts govern securitization business
• Asset-Backed Securitization Act (ABS Act)
• -owned by private company
• -establish in Sept. 1998
• -issued ABS, CBS, MBS

Chan Ka Sin (033046)
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The Securitization in Korea

• 2) Mortgage-Backed Securitization Company Act
  (MBS Company Act)
• -owned private company
• -establish in Jan. 1999
• -only issued MBS

Chan Ka Sin (033046)
30
The Securitization in Korea

• 3) Korea Housing Finance Corporation Act (KHFC
  Act)
• Owned by Korea government
• Establish in March 2004
• Only issued MBS
• Issued long-term fixed rate mortgage
• Maturity of mortgage
• 10 yrs, 15 yrs, 20 yrs

Chan Ka Sin (033046)
31
The Securitization in Korea
Maturity of Mortgage Loans
Unit
1998 1999 2000 2001 2002
3 years or less 4.1 55.4 62.6 70.8 75.6
3 years or less than 10 years 12.7 19.5 20.5 12.4 9.3
10 years or less than 20 years 9.1 3.7 4.4 4.9 1.7
20 years of more 74.1 21.5 12.5 11.8 13.4
Total 100.0 100.0 100.0 100.0 100.0
Source Kookmin Bank
Chan Ka Sin (033046)
32
The Securitization of Singapore
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The Securitization in Singapore

• First commercial mortgage backed securitization
  (CMBS) in 1986
• Issued by Hong Leong Holdings Limited (a private
  company)
• Total issued S18.5 million
• Second CMBS was issued in 1992
• Popular after 1997

Kwok Chun Yin (033063)
34
Major differences between HK and Singapore
The Securitization in Singapore

• Hong Kong
• Issued by HKMC
• Mortgage backed for residential loans
• Not popular

• Singapore
• Issued by private company
• Mortgage backed for commercial loans
• popular

Kwok Chun Yin (033063)
35
Why CMBS is popular in Singapore?
The Securitization in Singapore

• Experience of financial crisis in 1997
• Government support
• Advancement of financial innovation and
  securitization technology
• Tradable (liquidity)
• Fund managers willing to hold CMBS
• Low default risk

Kwok Chun Yin (033063)
36
References to Hong Kong
The Securitization in Singapore

• Very successful in Singapore
• Companies in Hong Kong may follow Singapore to
  issue private CMBS
• Make it attractive to fund managers and investors

Kwok Chun Yin (033063)
37
The Securitization of Taiwan
38
The Securitization in Taiwan
In the past
Lack of technological
Lack of professional knowledge
Lack of personnel
No domestic firms were currently engaged in the
asset securitization business
Cooperation with foreign financial service
companies
Cheung Chun Chuen (033053)
39
The Securitization in Taiwan
The role played by the Ministry of Finance (MOF)

• Offering attractive tax incentives
• Trust firms --10 percent tax exemption on
  interest earnings
• Banks-- exempted from income tax
• ?Improve the legal structure ?
• Friendly legal environment ?
• protecting investors

Cheung Chun Chuen (033053)
40
The Securitization in Taiwan

• Aim at the development of Asset Backed
  Securitization (ABS)
• Like automobile loans, housing loans, leases,
  credit card receivables, accounts receivable, etc

permitted financial assets
Special purpose company
Local Financial Institution
Public
Cheung Chun Chuen (033053)
41
The Securitization in Taiwan
List of Securitization Plans by Taiwan Financial
Institutions
Total Value (US Millions) Type of Financial Assets
Industrial Bank of Taiwan 104.0 Corporate Loans
Chinatrust Commercial Bank 145.0/145.0 Mortgage Loans/Credit Card Receivables
Taishin International Bank 145.0 Mortgage Loans
First Commercial Bank 145.0 Mortgage Loans
Chien Hwa Commercial Bank 145.0/145.0 Mortgage Loans/Credit Card Receivables
Chang Hwa Bank 145.0 Mortgage Loans
Hwa Nan Commercial Bank 145.0 Mortgage Loans
Cosmos Bank 203.0 Accounts Receivables
Chinalease Corporation 145.0 Leases Receivables
Cheung Chun Chuen (033053)
42
Recommendation
43
Recommendations

• To minimize the cost of funds
• The coming interest rate hike cycle will present
  a challenge to the HKMC by increasing overall
  funding costs

Ng To Yeung (033044)
44
Recommendations

• Provide suitable kinds of bonds
• On 3 November 2005, HKMC extends the program of
  Fixed Rate Mortgage from the maximum of 5 years
  to 10 years
• Liquidity risk
• Inflation risk

Ng To Yeung (033044)
45
Recommendations

• Dont securitize HKMC
• Issued by private company
• Cannot enhance the stability of the banking
  sector

Ng To Yeung (033044)
46
Q A
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(a) HKMC stands for Hong Kong Mortgage
Corporation(b) a partly-owned HKSAR Government
Corporation through the Exchange Fund(c)
established in March 1997(d) (a) (c) only(e)
all of the above
Q1Which of the following(s) about HKMC in Hong
Kong is/are true?
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(a) HKMC stands for Hong Kong Mortgage
Corporation(b) a partly-owned HKSAR Government
Corporation through the Exchange Fund(c)
established in March 1997(d) (a) (c) only(e)
all of the above
Q1Which of the following(s) about HKMC in Hong
Kong is/are true?
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(a) enhance the stability of the banking
sector(b) promote wider home ownership in Hong
Kong(c) facilitate the growth and development
of debt securities markets(d) (b) (c)
only(e) all of the above
Q2What is/are the mission(s) of the HKMC ?
50
(a) enhance the stability of the banking
sector(b) promote wider home ownership in Hong
Kong(c) facilitate the growth and development
of debt securities markets(d) (b) (c)
only(e) all of the above
Q2What is/are the mission(s) of the HKMC ?
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Q3What are the risk(s) that HKMC aim to solve?

1. Maturity mismatch
2. Liquidity Risk
3. High Concentration Risk
4. (a) (c) only
5. All of the above

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Q3What are the risk(s) that HKMC aim to solve?

1. Maturity mismatch
2. Liquidity Risk
3. High Concentration Risk
4. (a) (c) only
5. All of the above

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THE END