Mortgage Market in Korea - Secret of rapid growth MBS Issuance Trend March 2016 60 50 40 30 20 10 0 150.1 Annual Issuance (KRW in trillion) Accumulated Issuance (KRW in Trillion) 94.8 80.3 58.3 55.8 22.0 29.8 38.3 20.0 22.0 8.6 10.8 13.4 6.9 14.5 8.6 7.8 8.5 3.0 3.9 1.7 2.2 2.6 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 1
Table of Content SECTION 1 Company Overview 3 SECTION 2 Mortgage Backed Securities (MBS) 8 SECTION 3 Relief Switch Loan Program 13 SECTION 4 Current Challenge 18 2
Section 1: Korea Housing Finance Corporation Company Overview 3
Company Profile Government Controlled Entity 100% owned by the Government Government ownership structure Korean Government History Established in 2004 with the merger of two Government entities 100% Corporate Governance The president is appointed by the President of Korea Bank of Korea Ministry of Strategy and Finance Ministry of Land, Transport and Maritime Affairs 35.2% 59.0% 5.8% Support of the housing sector Helped 878,286 families ( 15.12) 4
Organization Steering Committee Board of Directors The whole personnel: 780 people in all Chairman, President & CEO Vice President Auditor Auditing Office Securitization Group Credit Guarantee Operating Group Management & Customer Relation Group Risk Management Group Public Mortgage Planning Department Housing Credit Guarantee Department Planning&Coordination Office Risk Management Department Human Resources Department Securitization Business Department Reverse Mortgage Department Financial Management Department IT Strategy & Security Department Housing Finance Research Institute Asset Management Department Credit Management Department Consumer Protection Department Information System Department Trust Management Department Creation & Innovation Department Corporate Communication Office 20 Branches & 1 Collection Management Centers 5
Corporate Overview Long-term Fixed Rate Amortized Mortgage Issuance of MBS and Covered Bond Supply long-term, fixed rate, amortized mortgage loans known as Bogeumjari Issue domestic MBS and cross-border Covered Bond market Loans and Conforming Loan Improve the Nation s Housing Welfare and Advance the Housing Finance Industry Reverse Mortgage Guarantee Guarantees for Housing Finance Grant pension to senior citizens by Reverse Mortgage Issue letters of guarantees to eligible rentees and home builders 6
Performances in Major Business Group Fixed Rate Mortgage Supply MBS Issuance Trend 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 KRW Bn Bogeumjari Loan supplied (KRW in billion) Conforming Loan supplied (KRW in billion) 31,659 Reilf Swich Loan supplied (KRW in billion) 17,117 12,265 6,529 10,463 14,750 9,415 11,206 11,905 8,469 3,332 4,219 3,595 4,243 5,943 5,848 1,387 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 60 50 40 30 20 10 0 150.1 Annual Issuance (KRW in trillion) Accumulated Issuance (KRW in Trillion) 94.8 80.3 58.3 55.8 22.0 29.8 38.3 20.0 22.0 8.6 10.8 13.4 6.9 14.5 8.6 7.8 8.5 3.0 3.9 1.7 2.2 2.6 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Reverse Mortgage Credit Guarantees 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 Amount of Guarantee Supplied (KRW 10million) Allowance Paid (KRW in millions) Number of Gurantees Cases 5,296 5,013 5,039 6,486 2,936 2,016 1,124 695 515 2007 2008 2009 2010 2011 2012 2013 2014 2015 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 11,893 Annual Credit Guarantees (KRW in billion) Outstanding Credit Guarantees (KRW in billion) 19,205 15,734 9,076 8,111 8,721 11,406 28,521 20,670 38,747 40,397 43,380 31,877 27,559 26,581 60,000 54,287 37,477 50,000 40,000 30,000 20,000 11,490 10,000 9,655 3,834 4,802 4,121 5,089 6,760 Cases 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 7
Section 2: Korea Housing Finance Corporation Mortgage Loan Backed Securities (MBS) 8
Mortgage Business Bogeumjari Loans KHFC originates mortgage loans, the Bogeumjari Loans, under the Mortgage Commitment Program through the 21 Participating Institutions Participating Institutions originate and sell Bogeumjari loans by following KHFC s underwriting guidelines and procedures Conforming Loans To enhance household debt structure, the Government recommends banks to increase proportion of fixed rate mortgage loans up to 40% by 2017 The Conforming is originated by 13 banks, following KHFC s eligibility criteria for loans to be purchased for securitization by KHFC KHFC Mortgage Loans Commercial Bank Mortgage Loans Borrower Eligibility Maximum LTV Property price limit of KRW 900Mn Only one property financing per household 70% 60% if DTI criteria is not met No restriction No restriction 70% Maximum DTI 60% if borrower is looking for 70% LTV 60% Loan Limit KRW 500Mn No restriction Interest Rate Fixed Floating (General) 9
KHFC MBS Structure Providing 100% Guarantee on Senior MBS P&I payment FSC Registration of Securitization Plan & Transfer/Trust Lenders Sales of Mortgages KHFC Trust Trust (Trustee: KHFC) KHFC Guaranteed MBS Investors Servicing Fee Guarantee & Trustee Fee Monthly Repayment of P&I Borrowers Guarantee on P&I Payment Issuance Amount KRW 500 billion ~ 1 trillion (per issuance) Issuance Structure Multiple tranches with each tranche having a different tenor Sequentially Partially Callable tranches (except 1~3 years maturities) Servicer Participating Lenders (or KHFC in case of u-bogeumjari Loans) 10
Support for KHFC s MBS Regulatory Support Title Transfer Operational Support Standard Rules Perfection against obligors can be achieved through written notification to obligors at transfer Issuer of securities should submit prospectus 5 days before issuance Mortgage can be acquired after title transfer registration is completed with fee Collateral security claims can be fixed by written notification to the obligor Asset Backed Securities aren t eligible for BOK s Repurchase Agreement Asset Backed Securities aren t regarded as high quality liquid Asset in LCR Preferential Treatment Perfection against obligors can be achieved if obligor consent is obtained prior to mortgage loan transfer KHFC s MBS is exempted the duty of handing in prospectus Mortgage can be acquired after the Securitization Plan is filed Collateral security claims can be fixed if prior agreement has been reached KHFC MBS is eligible for RP program of BOK KHFC s MBS is regarded as high quality liquid asset in LCR Effect Save the period for securitization process by four weeks Save 60bps of upfront costs Save the period for securitization by three weeks Can contribute to promoting secondary Market for MBS
Secondary Market Funding KHFC has issued 216 MBS transactions totaling KRW 150.1 trillion. KHFC has issued 4 cross-border and 5 domestic transaction totaling more than KRW 3.8 trillion. MBS Issuances Covered Bond Issuances (KRW Bn) (KRW Bn) 55,796 1,538 20,031 21,998 14,505 8,587 7,797 8,522 3,016 3,861 1,753 2,188 2,648 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 608 695 600 250 2010 2011 2012 2013 2014 2015 Note: 2015.7 up to 31 July 2015 12
Section 3: Korea Housing Finance Corporation Relief Switch Loan Program 13
Background of Relief Switch Loan Program To mitigate potential structural weakness of household credit 1,200 1,000 800 600 400 200 0 Fast Increase of Household Credit 776.0 843.2 916.2 963.8 1021.4 1087.7 2009 2010 2011 2012 2013 2014 Household Credit Outstanding(KRW in trillion) Installment Loan Weight Fixed-rate Loan Weight Structure of Banks Mortgage Loan 2010 2011 2012 2013 2014 6.4% 7.7% 13.9% 18.7% 26.5% 0.5% 3.1% 14.2% 15.9% 23.6% South Korea s Mortgage loan structure has been Improving gradually. However, there was still potential structural weakness due to the high weight of bullet & floating payment mortgage loans Source: Bank of Korea Source: Bank of Korea Fast increase of household credit and mortgage loan structure, which is tilted to bullet & floating payment loan, could cause another issue during the future crisis The need for household credit that is based on long-term installment payment & fixed-rate loans became larger KHFC Relief Switch loan to help restructure household credit 14
MBS Issuing Process of Relief Switch Loan MBS Issuing Structure for Relief Switch Loan Relief Switch Loan Participating Bank (Servicer) Borrower Monthly P&I Transfer of Relief Swith Loans KRW 100 Payment for Loans KRW 100 KHFC Servicing Fee Payment for MBS KRW α Investors Non-Auction Allocation Short-term MBS KRW 50 Payment for MBS KRW 50 Long-term MBS KRW α Payment for MBS KRW 50-α Participating Bank Long-term MBS KRW 50-α Auction & the Remaining Allocation Issuance Amount KRW 3.4 ~ 4.0 KRW in trillion (per issuance) ; Avg. 3.9 KRW in trillion MBS Coupon & Issuance procedure Short-term tranches(1 to 3 years): Allocation to the participating banks Long-term tranches(5 to 20 years): Auction and allocation the remaining shares 15
Rates Rates Accomplishment of Relief Switch Loan Program KHFC attained its goal, 20 KRW trillion, in a week and end Relief Switch Loan with 31.7 KRW trillion. Thanks to this product, South Korea attained its goals for weight of fixed-rate loans, 35.7% at 2015 from 23.6% at 2014 Installment Loan Share Trend Fixed Rate Loan Share Trend 45.0% 40.0% 35.7% 45.0% 40.0% 38.9% 35.0% 30.0% 26.5% 35.0% 30.0% 23.6% 25.0% 20.0% 15.0% 10.0% 5.0% 6.4% 7.7% 13.9% 18.7% 25.0% 20.0% 15.0% 10.0% 5.0% 0.5% 3.1% 14.2% 15.9% 0.0% 2010 2011 2012 2013 2014 2015 0.0% 2010 2011 2012 2013 2014 2015 Note: Domestic banks on total loans Source: FSS Note: Domestic banks on total loans Source: FSS 16
Critical Success Factors Leveraging low-interest rate environment with three financial measures Stimulate the Demand Reduce Contributions Burden Mitigate Market Impact South Korea keeps an easy money policy after 2012 % 5 4.5 4 3.5 3 2.5 2 1.5 1 KTB 5yr Yield Base Rate of S.Korea Set Affordable Loan Rate KHFC set loan rate by 1% lower than Bogeumjari Loan The reflection of lowering base rate (0.25%) and other saved costs, such as handling fees, let us set low interest rate Reduce banks contributions for Housing Credit Guarantee Funds For bullet & floating rate loans, banks should contribute 26~30bps of loan balance every months Due to the characteristic of Relief Switch Loan, amortized & fixed rate loans, Banks can reduce their burden of contribution by 21~25bps; they just pay 5bps of loans balance every months Mandatory purchase condition Banks should purchase all MBS with one-year lock-up period to prevent them from creating credit again with the liquidity Auction & Allocation KHFC sell long-term tranches to bonds investors via auction and then banks should buy the remaining shares 17
Section 4: Korea Housing Finance Corporation Current Challenge 18
Develop Secondary Market & New Issuing Structure for MBS 1. Develop New MBS Issuing Structure 2. Underdeveloped Secondary Market By enhancing predictability of cash flow, KHFC will try to reduce the issuing costs for MBS KHFC will develop new issuance way for MBS to control prepayment risk more efficiently KHFC MBSs turnover ratio is 1/25 of that of Korean Treasury Bonds Due to the recent increase of MBS issuance, KHFC have to activate MBS secondary market (KRW Bn) 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 Source: KRX Outstanding Bonds Balance in South Korea 0 2007 2008 2009 2010 2011 2012 2013 2014 ABS Corporate Bond Other financial institutions Banks Monetary Stabilize Bond Public company Municipal Bond Tresury MBS Bonds turnover in South Korea (%, 100%=X1) 1000.0 900.0 800.0 700.0 600.0 500.0 400.0 300.0 MBS Tresury 200.0 Monetary Stabilize Bond Corporate Bonds 100.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 Source: KRX 19
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