The success of JHF : With a commitment of long-term fixed rate housing loan for better lives of people. Shinya Shishido President, JHF

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1 Bangkok, Thailand January 7, 2015 Outlook beyond : Mortgage Bank in Japan Forum 2015 The success of JHF : With a commitment of long-term fixed rate housing loan for better lives of people Shinya Shishido President, JHF 1

2 Profile of Japan Housing Finance Agency (JHF) Established: in April 2007 Total Assets: 26,492 billion JPY (app. 265 billion USD) Capitalization: 705 billion JPY (app. 7 billion USD) All paid in by the Government of Japan Net Income: 246 billion JPY (app. 2.5 billion USD) FY2013 Competent Ministers Minister of Land, Infrastructure, Transport and Tourism Minister of Finance Number of staff: 920 Head Office: Tokyo, Japan Regional Office: 11 offices in major cities Main line of business Secondary market operation under securitization support business, Direct mortgage origination for disaster mitigation or urban rehabilitation, Mortgage insurance, Management of legacy assets of GHLC, etc. 2

3 Reform of Japanese Mortgage Market Fixed Rate Mortgage GHLC: Government Housing Loan Corporation JHF: Japan Housing Finance Agency Loan with Prepayment Penalty 20th Century Borrowers ARM Adjustable Rate Mortgage GHLC Banks Subsidies Deposit Treasury GOJ Government of Japan Depositors 21st Century Borrowers 35 year Fixed Rate Mortgage F35 JHF MBS Mortgage Backed Security Sell Loans to JHF Banks and Mortgage Banks Investors ARM Banks Deposit Depositors 3 3

4 From primary market to secondary market Background information Government Housing Loan Corporation ( GHLC ) was established in 1950 to originate fixed rate mortgages funded and subsidized by the Government of Japan and enhance the quality of housing In the late 1990 s, competition with banks in the primary mortgage market intensified and GHLC incurred significant losses because prepayment on outstanding mortgages surged The government of Japan decided to abolish GHLC and establish JHF to support private sector to originate fixed rate mortgages through secondary market operation. JHF was established in 2007 GHLC used to receive 400 billion JPY (approximately 4 billion USD equivalent) subsidy from the government annually through 1990 s, but JHF recorded 246 billion JPY net income in FY2013. This dramatic change of financial conditions highlights the successful reform of the mortgage market in Japan. 4

5 GHLC and JHF GHLC JHF Established Ownership Mission Main Products 100% Owned by the Government of Japan Provide liquidity to mortgage markets to low and medium income household Enhance quality of housing Fixed Rate Mortgages Main Business Main Funding Source Origination in primary mortgage market (Compete with private sector) Borrowing from the Government (MOF FILP) Secondary market operation (Support private sector) Mortgage Backed Securities (MBS) Subsidy Yes No (in principle) (Note) JHF still originates mortgages for such exceptional cases as disaster mitigations. In such cases, JHF still have access to funding from the MOF FILP and subsidies from General Appropriations. (Source) JHF 5

6 S Series to expand investor base for MBS (trillion JPY) (Source) JHF 6

7 MBS Markets Share in Japan (Issuance volume) (Source) JASDA 7

8 JHF MBS similarity with Covered Bond JHF MBS is an asset-backed Zaito bond Before any beneficiary certificate trigger event, interest and principal are paid by JHF, as if MBS is a corporate bonds The credit of JHF MBS is supported by both the credit of JHF and the credit of housing loan pool Due to Japanese government's policy to maintain flexibility against the borrowers, JHF will recognize the housing loans on the balance sheet even after the MBS is issued After an beneficiary certificate trigger event, JHF MBS, a Zaito bond, will be replaced with the beneficiary right Risk weight of JHF MBS, as a Zaito bond is 10% under standardized approach By selecting a corporate bond format, JHF contributes to the development of secondary markets Before an Beneficiary Certificate Trigger Event After an Beneficiary Certificate Trigger Event JHF Trust banks JHF Trust bank Make timely payment of both principal and interest based on JHF s responsibility Loans to be securitized JHF MBS Proceeds from the trust loan pool are passed along as the repayment of the MBS principal. Trust asset Occurrence of event causing a beneficiary interest JHF MBS Beneficiary (investors) Trust asset Beneficiary right Dividend based on beneficiary right Investors Note :Beneficiary certificate trigger events 1. The obligor of the JHF MBS becomes a joint stock corporation or a legal entity to which file for corporate reorganization or other similar bankruptcy proceedings can be applied 2. The failure by JHF to fulfill a payment obligation with respect to the MBS is not cured within 7 days 8

9 Hybrid nature of JHF MBS Balance Sheet Treatment Cash Flow Covered Bond MBS On Balance On balance Pass-through Pass-through JHF MBS (Source) JHF 9

10 Interest rate on fixed rate mortgage in Japan and the US (Source) FRB, JHF 10

11 Composition of interest rate structure of Flat 35 (Source) JHF 11

12 More liquidity in the banking sector due to preference to deposits in Japan (Source) FRB, Bank of Japan 12

13 Mortgage banks emerged Entrepreneurs in Japan welcomed the opportunity to participate in mortgage origination market and started to establish non-depository financial institutions called mortgage banks since the beginning of the 21 st century Many of these mortgage banks are subsidiaries of home builders, credit card companies, internet banks and so on. They are better positioned to provide competitively priced mortgages because of cost efficacy and advanced IT systems These 25 mortgage banks accounts for 70-80% of total F35 origination while remaining 20-30% are originated by 300+ depository institutions Number of accredited mortgage banks (As of April 1 for each year) 13 (Source) JHF 13

14 Affiliation of mortgage banks in Japan 14 14

15 Criteria for mortgage banks to be JHF-approved originator Eligibility criteria Eligibility criteria for lenders to join JHF secondary market operation are stipulated under the JHF business instruction and other by-laws. Financial institutions must meet the all of the following criteria and must be approved by JHF as appropriate to participate in JHF secondary market operation. 1.Financial criteria 2.Reputational and social responsibility criteria 3.Implementation capacity criteria 4.Privacy Law compliance criteria 15 15

16 Share of fixed rate mortgage in Japan Plan and Actual (Source) JHF 16

17 Mortgage delinquencies by loan type in the US (Source) Mortgage Bankers Association 17

18 US borrowers learned the risk of ARM after subprime crisis (Source) Freddie Mac 18

19 Enhancement of housing quality through incentives Higher Energy Efficiency Technical standard level Technical standards for F35S (with interest-rate reduction) Technical standards for F35 Earthquake Resilience Elderly Accessibility Durability and Flexibility The Building Standards Act applicable to all houses 19

20 Share of housing that met technical criteria for energy-efficiency (Note) Share among JHF F35 applicants Single Detached Houses (New Construction) Condominium (New Construction) Source: JHF 20

21 JHF MBS Coupon and the Number of Investors (Source) JHF 21

22 Population Bonus diminishes both in Japan and Thailand (UN Estimate) (Source) United Nations Department of Economic and Social Affairs, Population Division. World Population Prospects: The 2010 Revision(June 2011) 22

23 Thank you for your attention. More information on JHF is available at the following URL; These materials have been prepared for the sole purpose of providing information to our investors and not as an offer, sale or inducement to buy or sell bonds. We urge investors when they are making investment decisions regarding bonds to carefully confirm details of the conditions, content, and structure of the final products in the latest product prospectus prepared for the issuance of the relevant bonds as well as any other most recent available information and accordingly assume personal responsibility for their decisions. 23