Mortgage-Backed Securities

1
(No Transcript)
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 HK1 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
• HK1 billion MBS
• Under the US3 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 (HK400 million)
• - Class A-2 notes (HK600 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 HIBOR0.18
  (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 Corporations 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.)
FARM Period Mortgage Rate ( per annum) Mortgage Rate after FARM Period ( per annum)
1 5.00 Prevailing fixed rate OR Prime - 2.25 per annum
2 5.10 Prevailing fixed rate OR Prime - 2.25 per annum
3 5.20 Prevailing fixed rate OR Prime - 2.25 per annum
5 5.40 Prevailing fixed rate OR Prime - 2.25 per annum
7 5.50 Prevailing fixed rate OR Prime - 2.25 per annum
10 5.60 Prevailing fixed rate OR Prime - 2.25 per annum
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
HK20 Billion Retail Bond Issuance Programme

• Issued date 1 August, 2005
• The issuers credit rating
• - Moodys Aa3/A1
• - SP AA-/A
• Four series of notes issued
• 17 Placing Banks to distribute the Issue to
  retail investors

21
HK20 Billion Retail Bond Issuance Programme
(cont.)

• The followings are the coupons of the four series
  of notes

Currency Tenor Coupon (payable semi-annually)
HKD (Series A) 1-year 3.00
HKD (Series B) 3-year 3.50
USD (Series C) 1-year 3.10
USD (Series D) 1-year extendable for 1 year and further extendable for 1 year 3.10 for first year3.50 for second year4.00 for third year
22
HK20 Billion Retail Bond Issuance Programme
(cont.)

• Series A and B
• - Denomination HK50,000
• - Application Price 102 of the principal
  amount of the notes
• Series C and D
• - Denomination US5,000
• - Application Price 100 of the principal
  amount of the notes
• Interest for all four series were payable
  semi-annually

23
HK20 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
HK20 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
HK20 Billion Retail Bond Issuance Programme
(cont.)

• The issue obtained a satisfactory subscription
  result with a total application amount of HK625
  million

HKD 1-year notes (HKMC102) HK177.7 million
HKD 3-year notes (HKMC311) HK306.0 million
USD 1-year notes (HKMC103) US10.7 million
USD 1-year extendable notes (extendable for 1 year and further extendable for 1 year) (HKMC312E) US7.5 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?

1. Stability of the banking sector
2. Fund supply for mortgages
3. Promotion the debt securities market
4. 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?

1. Class A-1 notes (fixed rate)
2. Class A-2 notes (floating rate)
3. (A) (B)
4. None of the above

35
What is(are) the triple-win situation(s) of the
10 years Fixed-rate Mortgage Scheme?

1. provides an additional choice of mortgage
   financing
2. provides an effective avenue for procuring new
   mortgage businesses
3. diversify the mortgage portfolio
4. All of the above