Evaluation of the Malaysian
Mortgage Corporation - Cagamas
Workshop on Housing Finance
June 26-29, 2011
Ulaanbaatar, Mongolia
N. Kokularupan
Views expressed in this paper are that of the authors and do not represent the views of IFC/World Bank
Cagamas Liquidity Model
Provide liquidity to mortgage
originators at competitive
prices to promote
home ownership
Develop the local
capital market by being
a credible issuer of
high quality securities
Purchase with Recourse
Purchase without Recourse
Conventional Cagamas
Bonds, Cagamas RMBS,
Cagamas Islamic bonds
Liquidity
Hedging Mechanism
2
Cagamas Liquidity Model
• Started operations in October 1987
purchasing housing loans with recourse
by
• Purchase with recourse designed to suit local
conditions and to overcome barriers that could
prevent Scheme from taking off successfully
• Interim step towards Purchase without Recourse
and Securitization
3
P Purchase
with Recourse with
Recourse
Grant loans
and debts
House
Owners
Sell loans
and debts
Financial
Institutions
and Selected
Corporations
Cagamas
Issues debt
securities
Lead
Managers
Investors
Subscribe to
or purchase
debt
securities
4
Types of Purchase with Recourse
Purchase With Recourse
• Housing Loans
- fixed rate (1987)
- floating rate (1992)
- convertible rate (1993)
• Islamic house financing debts (1994)
• Industrial property loans (1996)
• Hire purchase
(1998)
and
leasing
debts
• Islamic hire purchase debts (2002)
• Credit card receivables (2003)
• Islamic personal loans (2008)
5
Benefits of Purchase with Recourse
•
Able to source long-term funds
•
Hedge interest rate risk and liquidity risk
•
Able to price mortgage loans competitively
•
Proceeds from sale not subject to statutory
reserve and liquidity requirements
6
Features of Purchase without
Recourse
• Outright sale of housing loans to Cagamas with
no recourse to default risk
• Cagamas rate based on cost plus basis – bond
yield plus Cagamas required margin
• Standardized structure and documentation
• Cash purchase or settlement by Cagamas
• Banks appointed as servicer for the loans
7
Purchase without Recourse/Securitization
•
Cagamas first introduced Purchase without Recourse to the financial
institutions in 1999
•
However, financial institutions did not find it an attractive product then due to
following reasons:
housing loans are good assets
-
excess liquidity in banking system
-
high risk-weighted capital adequacy ratio of banking system (12.5% in
1999)
-
default rates very low
-
foreclosure losses negligible
•
Breakthrough for Securitization/Purchase without Recourse came in April 2004
•
Government of Malaysia mandated Cagamas as the vehicle to undertake
securitization of the Government’s staff housing loans on a scheduled basis
and over a period of time
•
2004 – Securitization of Government’s staff housing loans
•
2007 – Purchase without Recourse conventional mortgage loans from banks
•
2008 – Purchase without Recourse Islamic mortgage loans from banks
•
2009 – Purchase without Recourse conventional and Islamic hire purchase
debts from banks
8
Cagamas Share of Market Loans
Year
Market Share
%
Year
Market Share
%
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
2.0
6.1
10.0
10.8
9.3
14.2
14.2
21.2
22.8
27.2
30.8
29.6
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
21.0
18.7
14.2
11.7
10.6
9.5
9.7
7.3
11.4
11.2
10.3
8.8
9
Key Success Factors of Cagamas
• Shareholding structure and composition of Board
• Support by Ministry of Finance, Securities Commission
and Bank Negara Malaysia
• Proceeds of sale of housing loans to Cagamas are
exempt from statutory reserves and liquidity requirements
(cheaper than fixed deposits)
• Concessions granted to Cagamas bonds to kick start the
operations
• High quality assets
• Strong risk management practices, particularly ALM
• Proactive approach
10
Concessions given to Cagamas
Issuance before
4 September 2004
Issuance after
4 September 2004
10%
20%
Liquefiable assets status
under the Liquidity
Framework
Class-1 liquefiable
Class-2 liquefiable
Yield slippage under the
Liquidity Framework
4%
6%
Mode of Primary
Issuance
Through Principal
Dealers’ Network
Book Building
Holdings by insurance
companies
Accorded low risk
asset status
Accorded credit
facilities status
Risk weight under the
Risk-Weighted Capital
Ratio Framework
11
Cagamas Evolving Role
1987-1991
Start-up Phase
1992-1997
Take-off and Growth Phase
1998-2003
Diversification Phase
2004 to 2007
Securitization Phase
2007 onwards
Provision of Risk Management Tools
12
Cagamas Evolving Role (Contd)
1987-1991: Start-up Phase
•
The newness of its operations and its limited
product line contributed to its slow progress in the
early stage
•
Client base:
- Financial institutions (1987)
- Government (1988)
•
Initially, only one product - buying on fixed rate for
5 years with recourse
13
Cagamas Evolving Role (Contd)
•
1 Nov 1989, introduced 7-year Cagamas Rate
- to increase the Company’s range of products offered to the
market
- to satisfy the market’s demand for such longer term facilities
•
On 24 August 1990, introduced 3-year Cagamas Rate
- to cater to the demand for sale of housing loans for a period
shorter than the standard 5 years
•
With the new facility, primary lenders can sell their housing
loans to Cagamas for a period that may range from 3 to 7 years
14
Cagamas Evolving Role (Contd)
•
First five years - low volumes of housing loans purchased
-
unfamiliarity with Cagamas’ operations and the
advantages of selling housing loans to Cagamas
-
•
interest rates were declining rapidly
Outstanding loans held by Cagamas (1987-91)
As at end
Housing Loans
(RM million)
1987
407
1988
1,396
1989
2,490
1990
3,082
1991
3,060
15
Cagamas Evolving Role (Contd)
1992-1997: Take-off and Growth Phase
•
From 1992 - active marketing and introduction of new
products
•
Widening of client base to include selected corporations
•
Extended its range of products on with recourse basis
- Floating rate housing loans (1992)
- Convertible rate housing loans (1993)
- Islamic house financing debts (1994)
- Industrial property loans (1996)
16
Cagamas Evolving Role (Contd)
•
Outstanding loans and debts held by Cagamas
(1992-97)
As at
end
Housing
Loans
RM million
%
Islamic House Financing
Debts
RM million
%
Industrial Property
Loans
RM million
%
Total
RM million
%
1992
5,345
100.0
5,345
100.0
1993
6,076
100.0
6,076
100.0
1994
9,915
99.7
29
0.3
9,944
100.0
1995
11,854
99.8
28
0.2
11,882
100.0
1996
16,086
99.7
56
0.3
16,142
100.0
1997
21,317
96.7
85
0.4
22,045
100.0
643
2.9
17
Cagamas Evolving Role (Contd)
1998-2003: Diversification Phase
Purchase With Recourse
•
Hire purchase and leasing debts (1998)
- serves as a hedging mechanism for such debts
which are granted on a fixed rate basis
•
Islamic hire purchase debts (2002)
- provides Islamic institutions with an avenue to raise fixed
rate funds at low cost to hedge their fixed rate assets
•
Credit card receivables (2003)
- allows the sellers to diversify their funding resources
18
Cagamas Evolving Role (Contd)
As at
end
•
Diversification into non-mortgage products has prevented the
Company’s balance sheet from decreasing
•
Outstanding loans and debts held by Cagamas (1998-2003)
Housing
Loans
RM million
%
Islamic House
Financing Debts
RM million
%
Industrial Property Hire Purchase and
Islamic Hire
Loans
Leasing Debts
Purchase Debts
RM million
%
RM million
%
RM million
%
Total
RM million
%
1998
21,363
95.1
150
0.7
762
3.4
200
0.9
22,475
100.0
1999
17,493
86.9
120
0.6
868
4.3
1,659
8.2
20,140
100.0
2000
17,803
79.4
213
1.0
550
2.5
3,844
17.2
22,410
100.0
2001
15,309
68.8
143
0.6
377
1.7
6,437
28.9
22,266
100.0
2002
14,579
56.0
244
0.9
238
0.9
10,513
40.4
459.0
1.8
26,033
100.0
2003
15,140
55.4
345
1.3
55
0.2
11,236
41.1
563.0
2.1
27,339
100.0
19
Cagamas Evolving Role (Contd)
2004 : Securitization Phase
•
Purchase of housing loans on without recourse basis
- introduced in March 1999 in tandem with the thrust
towards asset-backed securitization
•
However, there was no urgency for the financial institutions
to securitize their housing loans
- housing loans are good quality assets
- excess liquidity in the banking system
- high risk-weighted capital adequacy ratio of the banking
system [12.5% (1999), 13.1% (2005)]
- housing loans are deemed to be high quality assets since
their default rates are very low and foreclosure losses are
negligible
20
Cagamas Evolving Role (Contd)
•
The breakthrough for the Scheme came in April 2004 when
the Government of Malaysia mandated Cagamas as the
vehicle to undertake the securitization of the Government’s
staff housing loans (GSHL) on a scheduled basis and over a
period of time
21
Cagamas Evolving Role (Contd)
First Securitization Deal with the Government
•
20 October 2004
-
RM1,936 million of pensioners’ housing loans and the issuance of RM1,555
million in nominal value RMBS
-
Represents Malaysia’s first transaction, backed by residential mortgages
Tenure
(Years)
Issue Amount
(RM million)
Maturity
Date
Coupon
Rate
(%)
Spread over MGS
(basis points)
3
5
7
10
580
340
290
345
19-Oct-2007
20-Oct-2009
20-Oct-2011
20-Oct-2014
3.70
4.30
4.95
5.50
18
26
38
45
•
Attracted RM11.1 billion in book size (RM2.2 billion from offshore investors,
RM8.9 billion domestic investors)
•
At the cut-off rates, book size remained substantial at RM10.6 billion giving an
over-subscription rate of 5.6 times
22
Cagamas Evolving Role (Contd)
2007 Onwards: Provision of Risk Management Tools
•
Due to excess liquidity, the banks do not require a liquidity tool. Instead, with
Basel II, banks were looking for risk management tools
•
Thus, Cagamas enhanced the Purchase with Recourse to create the
Purchase without Recourse – risk management tool for banks
•
2007 – Purchase without Recourse Conventional mortgage loans from
banks
•
2008 – Purchase without Recourse Islamic mortgage debts from banks
•
2009 – Purchase without Recourse Conventional and Islamic Hire Purchase
Debts from banks
23
Assets of Cagamas
2005
RM bil
2006
RM bil
2007
RM bil
2008
RM bil
2009
RM bil
2010
RM bil
11.4
0.7
3.3
8.7
0.6
3.1
9.9
2.7
2.5
5.3
8.0
2.4
4.8
2.2
4.9
3.9
1.8
12.2
8.0
-
3.9
0.5
11.4
7.7
-
PWR Conventional MLs
PWR Islamic MLs
PWOR Conventional MLs
PWOR Islamic MLs
Government’s Securitization
(Conventional MLs)
Government’s Securitization (Islamic
MLs)
Sub total MLs
2.1
2.0
4.1
4.0
-
-
17.5
14.4
24.5
26.3
25.9
23.5
PWR Conventional HPLs
PWR Islamic HPLs
PWR Islamic Personal Financing
PWOR Conventional HPLs
PWOR Islamic HPLs
Sub total MLs
9.7
2.0
11.7
7.2
4.6
11.8
3.4
4.3
7.7
1.7
2.8
0.4
4.9
0.8
1.7
1.0
0.003
0.03
3.5
0.4
2.6
3.7
0.0008
0.03
6.7
Grand Total
29.2
26.2
32.2
31.2
29.4
30.2
24
Types of Bonds
End 2010
RM Million
Fixed Rate Bonds
Medium Term Notes
Commercial Papers
Residential Mortgage Backed Securities
Secured Credit Linked Notes
Islamic Securities
Islamic Residential Mortgage Backed
Securities
Total
480
9,420
35
4,115
150
10,535
3,365
______
28,100
25
Holders of Cagamas Group
Debt Securities
2006
RM million
Banking Institutions
%
2007
RM million %
2008
RM million %
2009
RM million %
2010
RM million
%
10,772
39.8
14,844
45.4
14,797
47.7
10,752
36.67
10,837
38.57
Insurance Companies
and Investment Funds
4,976
18.4
6,246
19.1
7,298
23.5
8,336
28.43
8,281
29.47
Government Funds and
Trusts
9,124
33.7
9,573
29.3
7,344
23.7
8,393 28.62
7,523
26.77
872
3.2
556
1.7
171
0.6
-
-
-
-
Non-resident Investors
Individuals
Other Corporations
Total
1,307
4.8
1,476
27,050
100
32,695
4.5
100
-
-
186
0.63
146
0.52
3
0.01
3
0.01
5.64
1,310
4.66
28,100
100
1,435
4.6
1,655
31,045
100
29,325
100
26
Total Outstanding Debt Market Securities
% of total issuance outstanding
Instruments
Malaysian Government
Securities
2006
2007
2008
2009
2010
48.8
52.5
47.7
49.7
51.0
Khazanah Bonds
2.3
1.9
1.9
2.1
2.0
Other Quasi-Government
e.g. Multilaterial
Development Financial
Institutions
3.9
3.6
3.9
4.7
4.7
Cagamas Group Debt
Securities
5.9
5.9
5.7
4.7
4.2
39.1
36.1
40.8
38.8
38.1
100.0
100.0
100.0
100.0
100.0
Private Debt Securities
Total
27