SECURITIZATION FOR
THE HOUSING SECTOR
Dr. Victor S. Limlingan
Asian Institute of Management
18 May 2000
1
Outline
I.
II.
III.
IV.
V.
VI.
Background
The Promise of Securitization
The Process of Securitization
The Progress of Securitization
Securitization and the Housing Sector
Proposed Securitization Plan for the
Housing Sector
2
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.
3
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
4
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
5
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.
6
The Promise of Securitization :
SEPARATION
ASSET
LIABILITY
EQUITY
SEPARATE
ASSET
ASSET
7
The Promise of Securitization :
TRANSFORMATION
MARKETABLE
SECURITIES
after
SEPARATE
ASSETS
with Future Cash
Flow Streams
before
8
The Promise of Securitization:
MULTIPLICATION
BORROWER
1
2
3
COMPANY
INVESTOR
= CASH
9
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
10
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
11
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
12
PROCESS FLOW
HONG KONG MORTGAGE CORPORATION
Mortgage-Backed Securities
“Back-to-Back Structure”
HOLD
SPC
BANK A
BANK A
SELL
Sells loans
to HKMC
Sells loans
to SPC
Issues
MBS with
HKMC
guarantee
to Bank A
Bank can hold
MBS or sell
to other
professional
investors
13
BASIC STRUCTURE OF
ASSET-BACKED SECURITIES
1
BORROWER
LOAN
ORIGINATOR
4
3
RATING
AGENCY
6
2
SPECIAL
PURPOSE
TRUST
CREDIT
ENHANCER
5
UNDERWRITER
INVESTOR
7
14
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
15
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
US$98m deal for PLDT in December 1997 and a
US$ 100m in March 1998
16
PLDT’s SECURITIZATION STRUCTURE
PLDT
RECEIVABLES
RECEIVABLES
receives discounted
proceeds
MBIA
Monoline
Wrap
RECEIVABLES
sells receivables
every three months
CXC
Liquidity
Facility
Provider
payments
on maturing
asset-backed CP
Sponsor/
Administrator
Source: Asiamoney, ASIA, PLDT
INVESTORS
Legal
Owner
17
Securitization:Housing 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
18
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
19
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
20
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
21
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.
22
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
23
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."
24
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.
25
Securitization in the
Housing Sector
Why so little
progress for so
much promise?
26
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
27
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.
28
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
29
The Malaysian Model:
Cagamas
Cagamas Berhad, The National Mortgage
Corporation, was incorporated in 1986 to
support the Malaysian Government’s 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.
30
The Malaysian
Model:Cagamas
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.
31
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 highincome housing projects
32
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.
33
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.
34
The Hong Kong Model
1998 -Without
HKMA,
any
prodding
by
Deutsche Bank reopened the Hong
Kong mortgage securitization market in
April 1998. The HK$244.15m transaction
was for its own account, parceling a portfolio
of mortgages made the previous year.
35
The Hong Kong Model
1999 - Private sector expands
securitization
The Wharf (Holdings) Ltd undertakes nonJapan Asia's biggest ever securitization.
Sino Land Ltd and Chinese Estates Ltd
followed.
Société Générale repeated that approach in
November for Chinese Estates
36
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.
37
Proposed Securitization Plan
for the Housing Sector
Conference Resolution #1
Conference Resolution #2
Recommendation
38
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.
39
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 assetbacked securities
Promote the organization and operation of a
‘private sector-led’ SMI
40
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
41
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.
42
Recommendation:
Champions 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
43
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
44
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
45
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.
46
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.
47
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.
48