4 th Global Conference on Housing Finance in Emerging Markets The Mortgage Securitization Market in Korea May 27, 2010 Chae-Sun Chung Korea Housing Finance Corporation
Outline 2 Updates on Mortgage Securitization Market Impact of the Global Financial Crisis Countermeasures of HF Banks Securitization Strategy Measures for Expanding Supply of Liquidity Key Positive Factors to Stabilization of MBS Market
MBS Positioned as a Funding Source for FRMs 3 HF, the only issuer in the domestic MBS market since 2004 Government agency taking the leading role in developing MBS market Focusing on the securitization of long-term FRMs Banks kept tapping the overseas market as a funding source for mortgage business for years. But no cross-border MBS transaction closed after 2008, except one CB deal and one privately placed MBS HF issues fixed-rate MBS. Mainly due to the lack of investor base for FRNs, HF hasn t issued floatingrate MBS backed by ARMs on a public placement and a full-scale basis. Domestic MBS market stabilized in a relatively short period of time after global financial crisis 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Domestic MBS vs. Cross-border MBS Source : FSS (KRW in billions) 04 05 06 07 08 0 Domestic Cross-border
HF s Mortgage Securitization Activities 4 HF completed 51 MBS deals. Underlying assets are mostly FRMs originated by financial institutions. Mortgage-MBS Swap transactions backed by ARMs implemented 3,000 1,600 1,400 1,200 1,000 Monthly HF MBS Issuance & Mortgage Portfolio Balance (KRW in billions) 3,000 2,500 2,000 Total MBS Issuance Amount KRW 23.4 trillion (~ Mar. 2010) SLBS : KRW 7.8 trillion Mortgage portfolio increased sharply since 4Q 2008 800 600 400 200-04.6 05.3 6 06.3 6 07.3 6 08.3 6 0.3 6 10.3 1,500 1,000 500 0 KRW 2.6 trillion (Mar. 2010) MBS (L) SLBS (L) Mortgage-MBS Swap (L) Mortgage Portfolio (R) Source : HF
HF MBS Issuance Structure 5 FSC Registration of Securitization Plan & Transfer/Trust Sales of Mortgages Trust Issuance of MBS Lenders (Seller/Servicer) HF Trust (Trustee: HF) Investors Mortgages Monthly Repayment of P&I Borrowers Servicing Fee Guarantee Fee Trustee Fee Guarantee on MBS P&I payment MBS P&I Repayment
Investor Base in the Domestic MBS Market 6 Investor base widened to 85 investors, but highly concentrated Investment of top ten & five investors covering 67% & 4%, respectively Top five investor share for long-term MBS( 10yr) reaching 74% Secondary MBS market underdeveloped MBS Placement by Investor Type MBS Issuance by Maturity Insurance (37.63%) Pension Fund (13.25%) 7yr (18.86%) 10yr (16.76%) 15yr (10.41%) Investment Trust (6.83%) 5yr (20.5%) 20yr (3.35%) Banks (32.70%) Securities (.5%) 3yr (13.4%) 2yr (.33%) 1yr (6.75%) * Note : 1) Mortgage-MBS Swap (Total KRW 4. trillion) not included 2) Purchase from insurance account of banks classified as insurance companies 3) June 2004 ~ Apr. 2010
Impact of Global Financial Crisis 7 Market conditions for MBS issuance rapidly deteriorated Available investor base contracted MBS spread widened sharply Mismatch between FRMs to be securitized and HF s funding capability by issuing MBS increased HF forced to modify business model and diversify funding strategy Cross-border MBS getting no longer valid Banks seeking to find a new funding method Banks faced with refinancing risk and mismatch risk between yield from mortgage assets held in their book and funding cost Banks getting more focused on liquidity risk, credit risk and the efficient use of their capital
Modification of HF Business Model 8 HF stopped issuing MBS for four months from Sep. 2008 under hostile market conditions. MBS spread widened sharply and securing investors for targeting MBS issuance amount getting extremely difficult 1.6%p 1.4%p 1.2%p 1.0%p MBS Spread over 5yr KTB 8% 7% 6% 5% From Jan. 200, HF restarted to issue MBS, as the bond market stabilized. Since 2Q 200, MBS spread has been on the declining trend. 0.8%p 0.6%p 0.4%p 0.2%p 4% 3% 2% 1% Expanded Mortgage Portfolio HF obligated to purchase FRMs from financial institutions 0.0%p 07.1 4 7 10 08.1 4 7 10 0.1 Weighted Avg. MBS Spread (L) Source : BOK, HF 4 7 10 10.1 4 5yr KTB (R) 0%
Diversification of HF s Funding Activities Existing HF-guaranteed MBS Short-term borrowings (e.g. Bank credit line) Repo transactions with banks Targeted to finance mortgage portfolio New (3Q 2008 ~ ) Bond Firstly issued in Sep. 2008 Maturities of 1~3 years Fixed-rate or Floating-rate(indexed to CD rate) CP HF Act amended Firstly issued in Feb. 2010
Role of HF as a Policy Instrumentality Strengthened 10 HF Act (including Enforcement Decree) amended Allowing its coverage and capacity as a policy instrumentality to be broadened MBS Guarantee Limit (Feb. 200) Original Up to 50 times of Equity Capital Amended Up to 50 times of Equity Capital In case urgent measures are necessary due to liquidity problem of financial institutions, up to 70 times of Equity Capital allowed, subject to the approval of FSC Loan Amount * (Apr. 200) House Price * (Jan. 200) Max. KRW 300 million Max. KRW 600 million Max. KRW 500 million Max. KRW 00 million
Impact on Banks Securitization Strategy 11 As cross-border MBS got to be unavailable, banks have tried to find new funding method (e.g. covered bond) for mortgage business. Mortgage-MBS Swap transactions executed by HF with ARMs sold by four banks and one insurance company in 200 More focused on risk management or financial efficiency than funding HF MBS Underlying Assets FRMs ARMs Mortgage-MBS Swap Structure Coupon Payment Quarterly coupon payment Monthly coupon payment MBS Tranching MBS Terms Credit Enhancement Call Option Multiple sequentially callable tranches with different maturities Fixed-rate MBS AAA Credit Rating 100% guarantee on P&I by HF Quarterly exercise of call option Non-callable 1,2,3 yr tranches Single tranche Floating-rate MBS AAA Credit Rating 100% guarantee on P&I by HF Monthly exercise of call option Clean-up call after the 7 th year Issuer Trust (Trustee: HF) Trust (Trustee: HF) Servicer Lenders (Sellers) Lenders (Sellers)
Monetary Policy for Expanding Supply of Liquidity Monetary Policy Committee took measures to facilitate the movement of funds into the bond markets. Broadening of eligible securities for open market operations enforced MBS & Bond issued by HF added Broadening of counterparties of RP operations enforced Original Newly Added Eligible Securities Treasury bonds Government-guaranteed bonds Monetary stabilization bonds Bank debentures Bonds issued by 3 government agencies MBS & Bond issued by HF Eligible Counterparties 14 Banks 5 Foreign Banks Branches 1 Securities company Korea Securities Finance Corp. Securities companies Effective Period Nov. 7, 2008 ~ Nov. 6, 200 Dec. 15, 2008 ~ July 31, 200
Key Positive Factors to Stabilization of MBS Market 13 Existence of Government-run Secondary Market Enterprise, HF Providing guarantee, an efficient tool in recovering investors confidence Soundness of mortgage loans well managed Attributed largely to tightened mortgage regulations The mortgage rate currently set at low level has contributed to the reduction of the households repayment burden. Expansionary Monetary Policies Overall improvement of economy and bond market conditions Availability of Investor Base Insurance companies and pension funds have strong incentive to purchase long-term MBS.