Developing MBS in the Philippines Dr. Felixberto Bustos, Jr. NHMFC President CREBA 8 th Monthly Business Meeting August 29, 2013
Outline Brief Background on NHMFC Future Projects Overview of MBS in the Philippines Challenges in Developing MBS in the Philippines Key Success Factors for Securitization
Brief Background on NHMFC Creation 1977 (through PD 1267) Key Policy Roles Major secondary government mortgage institution Mandated to operate a viable housing finance system by enhancing and ensuring liquidity in the housing sector Key Programs Housing Loan Receivables Purchase Program (HLRPP) Bahay Bonds (Securitization)
Future Project: Bahay Bonds 3 Target Issue Size PhP500M Target Issue Date Last quarter of 2013 Asset Pool Low cost and socialized housing loans Proposed Transaction Structure 50% Senior A Notes (for retail investors) 30% Senior B Notes (for institutional investors) 20% Subordinated Notes (to be kept by NHMFC)
Future Project: CMP Bonds Community Mortgage Program (CMP) A mortgage financing program which assists legally organized associations of residents of depressed areas to own the lots they occupy, providing them security of tenure and eventually improve their neighborhood and homes to the extent of their affordability CMP is a program of SHFC, a subsidiary of NHMFC
Features of the CMP Bonds Target Issue Size PhP2.2B Target Issue Date Last quarter of 2013 Asset Pool CMP Loans Proposed Transaction Structure 80% Senior Notes 20% Junior Notes An alternative mode of compliance to Section 18 of UDHA
Urban Development and Housing Act Section 18 of UDHA refers to Balanced Housing Development which requires developers of proposed subdivision projects to develop an area for socialized housing equivalent to at least 20% of the total subdivision area or total subdivision project cost within the same city or municipality Under Sec 5.3 of HLURB MC No. 5 (Series of 2013), the purchase of CMP asset-backed securities shall be deemed as compliance to UDHA Section 18
MBS in the Philippines Legal framework: Securitization Act of 2004 Government institutions that play a major role: Bureau of Treasury, Securities and Exchange Commission, Bangko Sentral ng Pilipinas, Home Guaranty Corporation, Bureau of Internal Revenue, National Home Mortgage Finance Corporation
Government Institution Role in MBS Bureau of Treasury Oversees the trading of government securities specifically the auction of government securities and the accreditation and evaluation of government securities dealers Securities and Exchange Commission Supervises over-the-counter securities trading as well as other players in the securities industry including brokers and dealers Bangko Sentral ng Pilipinas Supervises securities transactions of banks (whether a bank is the originator, trustee or issuer) Home Guaranty Corporation Bureau of Internal Revenue Provides guarantees to MBS issued in the Philippines Assesses and collects all national internal revenue taxes, fees and charges including income tax of SPEs, withholding tax of yield or income, etc. National Home Mortgage Finance Corporation Major government secondary mortgage institution intended to develop the secondary mortgage market in the Philippines
Philippine Experience of MBS Issuances Date Originator Issuer (SPT) Amount Cash flow source Term Guarantor Legal Framework 1994 Developers HGC P 21B Raw Land 1994-2004 HGC SEC 1997 HDMF HDMF P 436M 1997 2009 2012 Ayala Life Sta Lucia NHMFC & UHLP NHMFC & UHLP P 93M P 300M P 2.06B P 604M HDMF Home loans Seasoned mortgages (at least 2 years amortizing) NHMFC prime accounts NHMFC Prime & restructured accounts 1997-2006 HGC SEC 1997-2007 1998-2001 HGC HGC SEC and BSP RA 9267 (Securitization Act of 2004) HGC RA 9267 Source: Ballesteros, M. and Dulay, D (2013). Developing Mortgage-Backed Securitization (MBS) for the Underserved Housing Market in the Philippines (Unpublished)
Challenges in Developing MBS in the Philippines Despite the passage of the Securitization Act in 2004, MBS in the Philippines is still in its infancy stage: Volume of mortgages securitized is small Institutions providing securitization services are mostly government-controlled banks or finance corporations MBS are mostly sold to institutional investors
Key Success Factors for Securitization 1. Funding A. External sources a. HDMF b. DBM c. IFC or other multilateral agencies B. Internal sources a. No or less interest to funders b. No or less taxes c. No or less dividends
Estimated Available Funds to Cover Personal, Maintenance and Other Operating Expenses and Securitization Activities Item Income from Collection and Other Operations Deduct Servicing Cost to Funders Value (in 000 Pesos) 2,436,542 100% 1,733,343 71% Income after Servicing Cost 703,199 29% Tax (30%) on Income and Other Receipts 135,649 6% Income after Tax 567,550 23% Imposed NG Dividends 42,000 2% Remaining Available Fund 525,550 21%
Required NHMFC Funding to Help Address Housing Need Depending on the assumption used, NHMFC will need an additional cumulative funding of PhP4B-33B for 2013-2017. Extraction rate RELs as % of outstanding loans 20% 17.21%-19.52% 16.16% 100% 4B 8B 10B 80% 4B 9B 15B 52% 5B 14B 33B
2013 2014 2015 2016 2017 Assumption on REL as % of Loans 17.21% 17.76% 18.33% 18.92% 19.52% Housing Starts (net of can t afford, high end segments) 126.90B 127.67B 127.98B 128.06B 128.44B Housing Starts (net of contribution from other agencies) 69.79B 70.22B 70.39B 70.43B 70.64B Bank RELs 53.32B 59.24B 65.82B 73.12B 81.24B Financial need outside banking 16.47B 13.04B 6.63B 0 0 No. of securitization 1 2 2 3 3 MBS volume needed 8.24B 6.52B 3.32B 0 0 Initial fund for securitization 0 6.59B 5.22B 3.89B 1.99B Required additional funding for MBS (1) 8.24B 0 0 0 0 Net proceeds from securitization (1) 6.59B 5.22B 2.65B 3.11B 1.59B Required additional funding for MBS (2) 0 1.23B 0 0 0 Net proceeds from securitization (2) 0 5.22B 2.65B 2.49B 1.27B Required additional funding for MBS (3) 0 0 Net proceeds from securitization (3) 1.99B 1.02B Fund at the end of the year 6.59B 5.22B 3.89B 1.99BB 1.02B Cumulative MBS funding needed 8.24B 9.47B 9.47B 9.47B 9.47B
Projected Contribution in Addressing the Housing Need 2013 2014 2015 2016 2017 5.66% 9.14% 4.65% 6.65% 3.39%
Key Success Factors for Securitization 2. Extraction rate Extraction rate is NOT recovery rate It should not be misunderstood with losses Fund that can be utilized readily for subsequent securitizations Grows over time
Extraction rate Extraction rate is affected by the following factors: Supply of securitizable accounts Quality of accounts Will banks be willing to let go of their good accounts? NHMFC might be constrained to highly delinquent accounts? Professional market for subordinate tranches
Sample calculation of Extraction Rate Bahay Bonds 1 Item Amount Portfolio Size 2, 060, 898, 053.43 100% Junior bonds 310, 898, 053.43 15.09% Expenses (Financial advisory fee, rating fee, underwriting fee, legal fee, Tax reserve, liquidity reserve, commingle reserve, etc.) 318, 447, 220.70 15.45% Net proceeds 1, 431, 552, 779.30 69.46% Extraction rate Net proceeds Portfolio size 69.46%
Key Success Factors for Securitization 3. Leverage A. Faster due diligence a. Uniform forms For the borrowers: Simplify the process of applying for housing loans For lending institutions: Streamline the review and due diligence process for housing loans For regulatory agencies: Ensure the quality of mortgages b. Sharing of credit files c. Sharing of valuation
Key Success Factors for Securitization 3. Leverage B. One-stop shop a. NHMFC s exemption from SEC s registration and reporting requirements and fees b. Tax exemption for investor s yield or income from any low-cost or socialized housing-related ABS issued by NHMFC or through a special purpose entity under the Securitization Act c. Reactivation of NHMFC Guarantee
Key Success Factors for Securitization 3. Leverage C. Others a. NHMFC may accept equity participation from other financial institutions or from other private investors and multilateral agencies if it would serve the public interest