1 How can Hong Kong Mortgage Corporation Limited play an important role in secondary mortgage loan market in Hong Kong?

2 Mortgage Backed Securities (MBS) Bank X  sells mortgage loans to HKMC HKMC  transfer mortgage loans to SPC SPC (special purpose company)  issues MBS with the HKMC guarantee Note holder  bank X and other investors Bank X  HKMC  SPC  Note holder

3 Mortgage Backed Securities (MBS) Pool of mortgage loan  gives the monthly payment Original bank  keeps the service fee, gives the rest to HKMC HKMC  keeps the guarantee service fee, gives the rest to paying agent Paying agent  gives the pass through payment to the note holders Bank X  HKMC  SPC  Note holder

4 Mismatch mortgage securities The HKMC  group the similar mortgage loans into the same group Issue different maturity date for the securities Normally for the short term Reduce mismatch mortgage securities

5 The effect of prepayment to the HKMC The prepayment  the abundant liquidity  bank—doesn’t like the prepayment  affect interest income  bad for HKMC to develop the MBS market.

6 Debt issuers  Fund raised by HKMC is the maximum  Top issuer of debt  Issued about $11,400million of debt  HKMC has the significant role in the debt market  Sufficient financial support MBS

7 Bauhinia Programme (US$ 3 billion MBS programme) Background and development: HKMC introduced the Bauhinia programme in Dec 2001 Totally launched four MBS issues With amount of HK$7.4 billion Second MBS issue of HK$ 3 billion, largest

8 Bauhinia Programme (US$ 3 billion MBS programme) Background and development: HKMC sell mortgage portfolios to Bauhinia in different MBS series Originators  HKMC  Bauhinia MBS Limited  issue notes in different series

9 Bauhinia Programme (US$ 3 billion MBS programme) Differences between MBS and Bauhinia: HK$ vs. multi-currency Originating bank vs. both institutional investors and retail investors Bank sells to HKMC vs. HKMC sells to Bauhinia Prime-based vs. choices between prime and HKBOR-based coupon

10 Bauhinia Programme (US$ 3 billion MBS programme) Advantages: 1. Multi-currency attract both domestic and oversea investors,↑liquidity 2. HIBOR-based more choice for investors 3. Flexible offering mechanisms both public issues and private placements, wider distribution network of MBS

11 Bauhinia Programme (US$ 3 billion MBS programme) Advantages: 4. Convenient platform illiquid mortgage portfolios into liquid MBS To sum up, Major milestone for the development of the secondary mortgage market

12 Mortgage Insurance Programme Background: 1991  people are intent on speculative activities in the property markets. Hong Kong government  reduce the loan-to-value (LTV) ratio from 90% to 70%.

13 Mortgage Insurance Programme Background: After the Asian financial crisis  many financial institutions wanted to increase the LTV ratio to 95% Hong Kong government did not release the regulation The HKMC provided a MIP programme to the financial institutions.

14 Mortgage Insurance Programme (MIP) ---- Example Homebuyers raise funds (HK$3,000,000) to buy a house HK $150,000 5% down payment by the borrower HK $750,000 25% provided loan by the insured HK $2,100,000 70% loan provided by the insured

15 Mortgage Insurance Programme (MIP) ---- Example Bank HKMC Approved Reinsurers HK $750,000 (25%) Insurance Premium Reinsurance Premium

16 Mortgage Insurance Programme (MIP) Advantages: 1. Reduce the down payment of the homebuyers: the insured can lend up to 95% loan-to-value ratio 2. Reduce the additional risks of the financial institutions: HKMC provide insurance cover (25% of the mortgage loan) HKMC take out reinsurance with the approved reinsurers

17 Criteria Product typeFloating rate mortgage Fixed Adjustment rate mortgage Maximum loan sizeFor Loan-to-value (LTV) ratio up to 90%: HK$ 12,000,000 For LTV up to 95%: HK$ 8,000,000 Maximum Debt-To-Income Ratio 50% Source:

18 Criteria Maximum Loan Tenor30 years Minimum Loan Tenor10 years

19 Criteria Employment typeNon-regular salaried employed persons and self- employed persons are not eligible except for self- employed professionals such as medical practitioners, barristers, solicitors etc.

20 Criteria Owner Occupancy At least one of the income- generating mortgagor(s)/ borrower(s) must occupy the property as his/ her primary residence. The occupying borrower/ mortgagor’s income must not be less than the monthly mortgage installment payment and other monthly debt obligations.

21 Credit Risk Two committees: 1. Credit Committee Duties: set up overall credit policies and standards mortgage purchase and insurance

22 Credit Risk 2. Transaction Approval Committee Duties: assess the credit risks about the new products e.g. mortgage purchase, mortgage insurance and MBS propose the terms and conditions for the products

23 Credit Risk Four strategies: 1. Careful selection of approved sellers seller’s mortgage loan underwriting policies seller’s historical delinquency experiences seller’s loan serving capabilities

24 Credit Risk Four strategies: 2. Prudent mortgage purchasing purchase mortgage of owner-occupied properties only consider mortgagor’s exposure to outside debts debt-to-income ratio (normally less than 50%)

25 Credit Risk Four strategies: 3. Effective due diligence process: review a sample of acquired mortgage loans ensure compliance with HKMC’s mortgage purchasing criteria

26 Credit Risk Four strategies: 4. Protection for some higher-risk mortgages: e.g. top-up loans Solution: repurchase warranties and reserve funds

27 ~END~ Presented by: Mary (034032) Danise (034053) Emily (034056) Melva (034057) Dawn (037007)

28 Multiple Choice Q.1 How much debt has the HKMC raised in 2004? 1) $ 11,400 million 2) $ 11,500 million 3) $ 12,400 million 4) $ 12,000 million Ans: a)1 b)2 c)3 d)4

29 Multiple Choice Q.2 Which of the following about the advantage(s) of Bauhinia programme is/are correct? 1) Issue securities in multi-currency to meet the need of both domestic and oversea investors 2) Provide convenient platform to convert liquid mortgage portfolios into liquid MBS 3) Investors can choose between HIBOR and prime- based coupon. Ans: a)1 b)2 c)3 d)1&3 e)1,2,3

30 Multiple Choice Q.3 How many insurance cover does HKMC provide to the financial banks? 1) Up to 25% of mortgage loan 2) Up to 20% of mortgage loan 3) Up to 75% of mortgage loan 4) Up to 70% of mortgage loan Ans: a)1 b)2 c)3 d)4