June 28, 2011, Ulaanbaatar, Mongolia (Former GHLC: the Government Housing Loan Corporation) Workshop on Housing Finance, APUHF Technical Session III: Experience with Secondary Mortgage Market Operators Session to deliberate on developments and experience of the secondary mortgage markets, linkages & issues and scaling up Development of Secondary Mortgage Market in Japan Masahiro Kobayashi, Chief Economist, Global Market Incorporated Administrative Agency Japan Housing Finance Agency (JHF)

1 Reform of Japanese Mortgage Market GHLC Borrowers Fixed Rate Mortgage Treasury Loan with Prepayment Penalty GOJ Subsidies Banks ARM Depositors Deposit JHF Borrowers Investors Banks ARM Depositors Deposit Banks and Mortgage Banks MBS F35 20th Century 21st Century Sell Loans to JHF 35 year Fixed Rate Mortgage Adjustable Rate Mortgage Government of Japan GHLC: Government Housing Loan Corporation JHF: Japan Housing Finance Agency Mortgage Backed Security

2 Stakeholder ChallengesSolutions Borrower Uncertainty about the holder of note Clarified that loan will not be negotiated beyond JHF Originator Banks were not willing to originate F35. Encouraged the establishment of mortgage banks (New distribution channel) Gave incentives for originators by liberalization of servicing fee Standardization of documentation and data transmission system Worked with legal firms and accounting firms regarding extinguishment of loan Investor Investors were not familiarized with MBS. Achieved investor confidence by enhancement of transparency through disclosure in a satisfactory manner Credit enhancement via over-collateralization and achieved AAA rating Conduct JHF RMBS non-deal road shows to both domestic and overseas investors What were the challenges to develop secondary mortgage market?

3 Number of Accredited Mortgage Banks (Source) JHF These 26 mortgage banks accounts for ％ of total F35 origination while remaining 40-50% are originated by 300+ depository institutions.

4 Number of loan applications for F35 (Source) JHF With the expansion of distribution channel (mortgage banks), mortgage origination for F35 increased gradually. But there was some policy support needed to go further.

5 (Source) JHF Market Share of GHLC and JHF (Mortgage at Origination) Mortgage origination for F35 has increased gradually, but its market share is still below the level of Direct Origination of GHLC in 1990’s.

6 Reduction of CO2 emission through enhancement of energy efficiency of housing structure Grade ４ Grade ３ Grade ２ Grade １ Corresponding energy efficiency grade under House Quality Disclosure System （ 10 years interest discount ） Reduce emission of CO 2 by 800kg （ around 23% ） ※ Criteria for insulator is based on the case around Sapporo High-grade glass wool 230 ㎜ High-grade Glass wool 135 ㎜ Paired glass High-grade glass wool 135 ㎜ High-grade glass wool 110 ㎜ High-grade Glass wool 85 ㎜ High-grade glass wool 85 ㎜ 1980 standard （ Old energy efficiency criteria ） 1999 standard （ Next generation energy efficiency criteria ） 【 F35 】 S 【 F35 】 【 F35 】 S - incentive mechanism to supply energy efficient houses - Blinds etc

7 subsidies Image of incentives for F35 S F 35 Fixed Rate Mortgage funded by MBS F 35 S Fixed Rate Mortgage funded by MBS + Enhancement of Energy Efficiency via subsidy Note) Figures listed above are indicative ones. Interest rate on F 35 varies depending on market conditions as well as the servicing fee which each lender charges individually.

8 Consumer Protection: Fixed Rate Mortgage Capital Markets Development: Standardized MBS Reduction of CO2 Emission: Incentive to enhance house quality F35 S funded by JHF MBS Policy orientation and approach – rationale for scaling up Challenge: Sustainability of Subsidy under Fiscal Constraints

9 Before an Beneficiary Certificate Trigger Event Investors Make timely payment of both principal and interest based on JHF’s responsibility Trust banks Trust asset JHF MBS JHF Loans to be securitized Proceeds from the trust loan pool are passed along as the repayment of the MBS principal. JHF MBS – some similarity with Covered Bond After an Beneficiary Certificate Trigger Event Dividend based on beneficiary right JHF Occurrence of event causing a beneficiary interest JHF MBS Beneficiary (investors) Beneficiary right Trust bank Trust asset Note :Beneficiary certificate trigger events 1.The obligor of the JHF MBS becomes a joint stock corporation or a legal entity to which file for corporate reorganization or other similar bankruptcy proceedings can be applied 2.The failure by JHF to fulfill a payment obligation with respect to the MBS is not cured within 7 days JHF MBS is an asset-backed Zaito bond Before any beneficiary certificate trigger event, interest and principal are paid by JHF, as if MBS is a corporate bonds The credit of JHF MBS is supported by both the credit of JHF and the credit of housing loan pool Due to Japanese government's policy to maintain flexibility against the borrowers, JHF will recognize the housing loans on the balance sheet even after the MBS is issued After an beneficiary certificate trigger event, JHF MBS, a Zaito bond, will be replaced with the beneficiary right Risk weight of JHF MBS, as a Zaito bond is 10% under standardized approach By selecting a corporate bond format, JHF contributes to the development of secondary markets

These materials have been prepared for the sole purpose of providing information to our investors and not as an offer, sale or inducement to buy or sell bonds. We urge investors when they are making investment decisions regarding bonds to carefully confirm details of the conditions, content, and structure of the final products in the latest product prospectus prepared for the issuance of the relevant bonds as well as any other most recent available information and accordingly assume personal responsibility for their decisions. (Former the Government Housing Loan Corporation)