Hong Kong Showcase on Islamic Finance HKMC s Model in Enhancing Risk Management James H. Lau Jr. Chief Executive Officer The Hong Kong Mortgage Corporation Limited
Outline of Presentation I. Strategic Roles of the HKMC II. The Mortgage Insurance Programme III. The Asset Purchase Programme IV. The MBS Programmes V. Mortgage Guarantee Programme Offered by the Joint Venture of the HKMC and Cagamas Berhad 2
Strategic Roles of HKMC Established in March 1997 by the Hong Kong SAR Government through the Exchange Fund to promote the development of a secondary mortgage market The HKMC performs vital strategic roles for three key sectors in the Hong Kong economy banking, housing and capital markets: enhance monetary and banking stability by acting as a liquidity provider to Authorized Institutions promote home ownership by channeling long-term funds from the capital market to the mortgage market and by the Mortgage Insurance Programme promote development of the MBS and debt capital markets to further enhance Hong Kong s role as an international financial centre 3
The Mortgage Insurance Programme MIP 4
Mortgage Insurance Programme ( MIP ) The HKMC provides insurance cover to enable banks to lend mortgage loans up to 95% loan-to-value ( LTV ) ratio, 25% above the 70% prudential limit set by the HKMA MIP enables home buyers to buy their homes with as little as 5% down payment helpful especially to first-time buyers The HKMC offloads part of the risk through reinsurance with mortgage reinsurers of good credit rating 5
MIP Benefits Benefits for the Regulators / the Banking Sector Capping the credit risk exposure of banks to 70% LTV while allowing interest income from 95% LTV lending Expediting standardisation of loan documentation and underwriting criteria => improving banks lending and risk management practices and facilitating future securitisation Enhancing mortgage loan credit quality (over 90-days delinquency ratio at end-jan 2008: 0.03%) Drives product innovation and diversification, benefiting both primary and secondary property markets 6
MIP Benefits (cont d) Benefits to the Economy / the Real Estate Sector Hong Kong s home ownership rate increased from 52% in 1999 to 58% in 2006 MIP Market penetration: 12% in 2007 (7% in 2000) Improved housing affordability contributes to the healthy growth of the real estate sector and the overall economy Faster and sustainable growth of the housing finance industry 7
The Asset Purchase Programme 8
Asset Purchase Programme Apart from Authorised Institutions, source of Sellers has extended to property developers, Government Housing Agencies and HK SAR Government Diversifying from mortgage assets to other assets, including hire purchase assets Acquiring local as well as overseas assets Developing new forms of purchase, such as RMBS, other than physical purchase of assets The total amount of assets purchased has exceeded HK$90 billion 9
The MBS Programmes 10
HKMC s MBS Programmes The HKMC has established two MBS Programmes Since October 1999, a total of 14 MBS issues have been made under the two programmes for an aggregated amount of HK$13.2 billion (US$1.7 billion): Guaranteed Pass-Through Programme 8 issues for HK$2.8 billion Bauhinia Programme 6 issues for HK$10.4 billion 11
MBS Programmes Benefits Benefits to Banks Releasing capital as MBS with HKMC s guarantee carries a 20% risk-asset weighting The released capital can be re-deployed for other high margin business Offloading the credit risk of mortgage loans Converting illiquid asset into a liquid asset Maintaining customer relationship for cross-selling Opportunity to invest in MBS originated by the HKMC 12
Mortgage Guarantee Programme Offered by the Joint Venture of the HKMC and Cagamas Berhad 13
Mortgage Guarantee arrangement The HKMC and Cagamas Berhad established a joint venture ( JV ) incorporated in Malaysia to offer guarantee product for conventional and Shariah-compliant mortgage loans JV provides mortgage guarantee to banks in Malaysia, whereby banks will be able to parcel out a portion of their credit risk while retaining the whole mortgage loan portfolio on their balance sheet Possibility to extend business cooperation model to other markets 14
Mortgage Guarantee arrangement (cont d) Key Features Guarantee provided on portfolio basis Standardised and centralised guarantee programme offered to banks for both conventional and Islamic residential mortgage loans Guarantee coverage for current loan-to-value ratio between 80% to 90% or possibly up to 95% Guarantee fees paid by banks To adopt risk-based pricing approach 15