The Mortgage Securitization Market in Korea May 27, 2010 Chae-Sun Chung Korea Housing Finance Corporation 4 th Global Conference on Housing Finance in Emerging Markets

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 Outline 2

MBS Positioned as a Funding Source for FRMs 3 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 Source : FSS Domestic MBS vs. Cross-border MBS HF issues fixed-rate MBS. Mainly due to the lack of investor base for FRNs, HF hasn’t issued floating- rate 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

HF’s Mortgage Securitization Activities 4 Source : HF 4 (KRW in billions) Monthly HF MBS Issuance & Mortgage Portfolio Balance ≈ 3,000 HF completed 51 MBS deals. Underlying assets are mostly FRMs originated by financial institutions. Mortgage-MBS Swap transactions backed by ARMs implemented Total MBS Issuance Amount KRW 23.4 trillion (~ Mar. 2010) ※ SLBS : KRW 7.8 trillion Mortgage portfolio increased sharply since 4Q 2008 KRW 2.6 trillion (Mar. 2010)

HF MBS Issuance Structure 5 5 Sales of MortgagesTrustIssuance of MBS Borrowers Monthly Repayment of P&I Servicing Fee Guarantee Fee Trustee Fee Lenders (Seller/Servicer) Trust (Trustee: HF) Investors FSC MBS P&I Repayment Mortgages Registration of Securitization Plan & Transfer/Trust Guarantee on MBS P&I payment HF

Investor Base in the Domestic MBS Market 6 MBS Placement by Investor Type Investor base widened to 85 investors, but highly concentrated Investment of top ten & five investors covering 67% & 49%, respectively Top five investor share for long-term MBS(≥10yr) reaching 74% Secondary MBS market underdeveloped 6 MBS Issuance by Maturit y * Note :1) Mortgage-MBS Swap (Total KRW 4.9 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 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 Source : BOK, HF 8 MBS Spread over 5yr KTB HF stopped issuing MBS for four months from Sep under hostile market conditions. MBS spread widened sharply and securing investors for targeting MBS issuance amount getting extremely difficult From Jan. 2009, HF restarted to issue MBS, as the bond market stabilized. Since 2Q 2009, MBS spread has been on the declining trend. Expanded Mortgage Portfolio HF obligated to purchase FRMs from financial institutions

Diversification of HF’s Funding Activities 9 9 Existing New (3Q 2008 ~ ) HF-guaranteed MBS Short-term borrowings (e.g. Bank credit line) Repo transactions with banks Targeted to finance mortgage portfolio Bond  Firstly issued in Sep  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 OriginalAmended MBS Guarantee Limit (Feb. 2009) 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. 2009) Max. KRW 300 million Max. KRW 500 million House Price * (Jan. 2009) Max. KRW 600 millionMax. KRW 900 million HF Act (including Enforcement Decree) amended Allowing its coverage and capacity as a policy instrumentality to be broadened

Impact on Banks’ Securitization Strategy 11 HF MBSMortgage-MBS Swap Structure Underlying Assets  FRMs  ARMs Coupon Payment  Quarterly coupon payment  Monthly coupon payment MBS Tranching  Multiple sequentially callable tranches with different maturities  Single tranche MBS Terms  Fixed-rate MBS  AAA Credit Rating  Floating-rate MBS  AAA Credit Rating Credit Enhancement  100% guarantee on P&I by HF Call Option  Quarterly exercise of call option  Non-callable 1,2,3 yr tranches  Monthly exercise of call option  Clean-up call after the 7 th year Issuer  Trust (Trustee: HF) Servicer  Lenders (Sellers) 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 2009 More focused on risk management or financial efficiency than funding

12 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 Eligible SecuritiesEligible Counterparties Original Treasury bonds Government-guaranteed bonds Monetary stabilization bonds 14 Banks 5 Foreign Banks’ Branches 1 Securities company Korea Securities Finance Corp. Newly Added Bank debentures Bonds issued by 3 government agencies MBS & Bond issued by HF 12 Securities companies Effective PeriodNov. 7, 2008 ~ Nov. 6, 2009Dec. 15, 2008 ~ July 31, 2009

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.