Residential Mortgage Backed Securitization In Singapore
Introduction:
Securitization residential mortgages has been used effectively to manage mortgage related risks like interest rate risks, credit risks, funding risks and sector concentration risks by financial institutions in many Asian countries. However, in Singapore, development of the residential mortgage-backed securitization (RMBS) market has been slow, despite strong support from the government of Singapore via revising securitization guidelines and making changes to policies that are favorable for RMBS development. Currently, an excess supply of liquidity and a perceived loss in the long-term relationship with the existing mortgagors/ clients are the two main barriers to banks in securitizing their residential mortgages.
Since the success of MBS market in the U.S., coupled with the liquidity problem faced by many Asian property companies and financial institutions in the post-1997 crisis periods, interest in real estate securitization has been mounting steadily in Asia as the market participants recognize the potential benefits of securitization. Essentially, real estate securitization allows property companies to take their assets off the balance sheet, thus improving their liquidity as well as enhancing return on capital. Debt ridden companies have been increasingly opting to recapitalize their balance sheets by securitizing their illiquid assets.
Institutional Framework of RMBS in Asia:
The setting up of the government sponsored secondary market institutions like Hong Kong Mortgage Corporation (HKMC), Korea Mortgage Corporation (KoMoCo) and National Mortgage Corporation of Malaysia (Cagamas) was a deliberate step taken by the governments of the Asian countries in emulating the U.S. MBS story in their respective markets. Exhibit 1 contains a summary of the institutional frameworks and structure of the residential MBS markets and primary mortgage markets for the five selected countries.
The earliest MBS market in the East Asian countries started in Malaysia in 1986 with the setting up of the Perbadanan Cagaran Malaysia (Cagamas), the National Mortgage Corporation under the Companies Act (1965). The securitization process of Cagamas is rather straightforward. Cagamas is involved primarily in buying housing loans from banks and finance companies.
Real Estate Securitization in Singapore: The RMBS Missing Link?
The development of the real estate related securitization market in Singapore is not motivated by the liquidity crunch during the regional economic turmoil. In fact, the first mortgage-backed bond (MBB) of US$8.5 million (S$18.5 million) was issued in 1986 by a private developer, Hong Leong Holdings Limited, who pledged the mortgage on its office building (Hong Leong Building) in the downtown central business district. Property companies, especially unlisted ones,14 had been actively taping the capital markets15 in the mid 1990s by issuing MBB to raise medium- to long-term funds directly from the public investors. Over a five-year period from 1994 to 1998, there were seventeen issues of MBB.
Potential of the RMBS in Singapore:
In the current low interest rate environment coupled with the excess liquidity faced by banks and finance companies in Singapore, selling residential mortgages through securitization will not be appealing to the financial institutions. Instead, they are competing aggressively to entice new homebuyers by offering them preferential interest rate loans.
Primary Mortgage Market:
Based on the 2000 census statistics of Singapore, about 92.3% of households own their own home, out of which 88% of the households stay in public flats. As almost all homeowners take mortgage loans in their home purchase, the high home ownership rate underpins a mature and developed primary mortgage market.
Debt Securities Market:
Following the Asian Financial Crisis in 1997, the Singapore government has adopted a two-prong approach to actively promote and broaden debt security market activities. The MAS and various government agencies such as the Jurong Town Corporation (JTC)23 and the HDB have been issuing government securities and bonds to deepen the bond market.
Potential of Residential Mortgage-Backed Securitization (RMBS) in Singapore:
There are positive factors and policy changes, especially the Central Provident Fund (CPF) rules, which would clear the way for the development of RMBS in Singapore. A synthetic securitization structure, which allows banks to transfer their mortgage credit risks to investors without taking the assets off their balance sheet, is another positive development for RMBS in Singapore.
Central Provident Fund Factors:
The Central Provident Fund (CPF) is a comprehensive compulsory social security saving scheme that is devised to provide retirement, homeownership, healthcare and insurance protection for its members, who are comprised of employees and self employed persons in Singapore. Under the CPF public housing and residential properties schemes, members are allowed to use their CPF ordinary account savings and their future monthly contributions to the account to purchase public or private residential properties.
Devolution of the Public Mortgage Financing Role to Private Banks:
In addition to the role of providing basic affordable public housing, the HDB also currently serves as the public housing mortgage lender. It currently offers two types of loans: concessionary loan and market rate loans, to buyers in the primary and resale HDB housing markets. The market rate loans are given to public housing buyers who are not eligible for the concessionary rate.28 This role of HDB as the market rate lender will be transferred to private mortgage lenders with effect from January 1, 2003. The current excess liquidity in the private financial institutions will be channeled into the HDB market rate mortgage loans. When bank liquidity depletes, mortgage securitization will become an appealing option.
Synthetic Structure for Residential Mortgage-Backed Securitization (RMBS) in Singapore:
The securitization of residential mortgages has generally taken the form of the passthrough technique, which involves the issue of debt/equity instruments by a Special Purpose Vehicle (SPV).29 The payments of interest and principal on the debt securities are secured against mortgages purchased by the SPV from the originator. The ‘‘true sale’’ of mortgages could sever the link and disrupt the business relationships between banks and mortgagors
Conclusion:
In recent years, residential mortgages has been securitized effectively to manage mortgage related risks such as interest rate risk, credit risk, funding risks and sector concentration risks by financial institutions in many Asian countries. The rapid growth of RMBS in Asia is attributed to the liberalization of financial and banking sectors in these countries. In Korea and Japan, the liquidity crunch after the 1997 currency crisis has to some extent accelerated the securitization trends in the countries.
Also Read: The Global Housing Affordability Challenge: Understanding of the Housing Sector