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

1
How can Hong Kong Mortgage Corporation Limited
play an important role in secondary mortgage loan
market in Hong Kong?
2
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

3
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

4
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

5
The effect of prepayment to the HKMC

• The prepayment
• ?the abundant liquidity
• ?bankdoesnt like the prepayment
• ?affect interest income
• ?bad for HKMC to develop the MBS market.

6
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

7
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 HK7.4 billion
• Second MBS issue of HK 3 billion, largest

8
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

9
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

10
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

11
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

12
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.

13
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.

14
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 (HK3,000,000) to buy
a house
HK 2,100,000
70 loan provided by the insured
15
Mortgage Insurance Programme (MIP) ----Example
HK 750,000 (25)
Insurance
Premium
HKMC
Bank
Reinsurance
Premium
HKMC
Approved Reinsurers
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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

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Criteria
Product type Floating rate mortgage Fixed Adjustment rate mortgage
Maximum loan size For Loan-to-value (LTV) ratio up to 90 HK 12,000,000 For LTV up to 95 HK 8,000,000
Maximum Debt-To-Income Ratio 50
Sourcehttp//www.hkmc.com.hk/mktg/ourbusiness/mip
-annex4.pdf
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Criteria
Maximum Loan Tenor 30 years
Minimum Loan Tenor 10 years
19
Criteria
Employment type Non-regular salaried employed persons and self-employed persons are not eligible except for self-employed professionals such as medical practitioners, barristers, solicitors etc.
20
Criteria
Owner Occupancy At least one of the income-generating mortgagor(s)/ borrower(s) must occupy the property as his/ her primary residence. The occupying borrower/ mortgagors income must not be less than the monthly mortgage installment payment and other monthly debt obligations.
21
Credit Risk

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

22
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

23
Credit Risk

• Four strategies
• 1. Careful selection of approved sellers
• sellers mortgage loan underwriting policies
• sellers historical delinquency experiences
• sellers loan serving capabilities

24
Credit Risk

• Four strategies
• 2. Prudent mortgage purchasing
• purchase mortgage of owner-occupied properties
  only
• consider mortgagors exposure to outside debts
• debt-to-income ratio (normally less than 50)

25
Credit Risk

• Four strategies
• 3. Effective due diligence process
• review a sample of acquired mortgage loans
• ensure compliance with HKMCs mortgage purchasing
  criteria

26
Credit Risk

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

27

• END

Presented by Mary (034032) Danise (034053) Emily
(034056) Melva (034057) Dawn (037007)
28
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

29
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)13 e)1,2,3

30
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