January 31, 2012, New Delhi (Former GHLC: the Government Housing Loan Corporation) Asia Pacific Union for Housing Finance International Conference on Growth with Stability in Affordable Housing Markets during January 29-31, 2012 at Hotel Imperial, Janpath, New Delhi Technical Session VII: Securitization and Secondary Mortgage Market Masahiro Kobayashi, Chief Economist, Global Market, Incorporated Administrative Agency Japan Housing Finance Agency (JHF) All Rights Reserved.

1 Perspectives Financial Stability Consumer Protection Investor Confidence Role of Government Historical and/or Geographical Background Implication for Pro-Poor Housing etc.

2 Outstanding Residential Mortgage Debt and Type of Funding (as of 2010) Trillion USD (Source) EMF, ECBC, AFME, FRB, JHF (Note) No PLS statistics available in Japan PLS = Private Label Securities All Rights Reserved. (Currency Conversion Rate)

3 Growth of Residential Mortgage Debt Outstanding Y/Y change Index (Dec 2000=100) All Rights Reserved. (Source) EMF, FRB, JHF

4 Home Price Index (2000=100) (Source) EMF, FHFA, Real Estate Economic Institute Co., Ltd, Cabinet Office, Government of Japan All Rights Reserved.

5 Europe – not same by countries, like Germany and Spain Home Price Index (2000=100) All Rights Reserved. (Source) EMF Mortgage Debt Outstanding Y/Y Change

Population Bonus – Correlation with Housing Bubble? 6 All Rights Reserved. (Source) United Nations World Population Prospects, the 2010 Revision Ratio of working force population (age 15-64) over dependent population

7 Contraction of Private Label Securities Markets in Japan and US Trillion USD Trillion JPY Japan New Issue US New Issue Source) Japan Securities Dealers Association Source) Securities Industry and Financial Markets Association Agency = Fannie Mae, Freddie Mac, Ginnie Mae All Rights Reserved.

8 Covered Bond Markets in Europe Billion Euro Issuance Outstanding Source) ECBC Billion Euro Source) ECBC All Rights Reserved.

9 According to European Covered Bond Council (ECBC), Covered bonds are debt instruments secured by a cover pool of mortgage loans (property as collateral) or public-sector debt to which investors have a preferential claim in the event of default. While the nature of this preferential claim, as well as other safety features (asset eligibility and coverage, bankruptcy-remoteness and regulation) depends on the specific framework under which a covered bond is issued, it is the safety aspect that is common to all covered bonds. Key features in different covered bond frameworks are available at ECBC Covered Bond Comparative Database What is Covered Bond? All Rights Reserved.

Most European Jurisdictions introduced Covered Bond Legislations Source vdp (The Association of German Pfandbrief Banks) 10 And new legislative initiatives are emerging in many jurisdictions around the globe. ?

All Rights Reserved. Cover Pool Administrator Issuing Bank 11 Stand Alone Credit of Banks When Issuing bank is solvent Typical Legal Framework for Covered Bonds (German Pfandbrief etc) When Issuing bank becomes insolvent Quality of Cover Assets Cover Assets Covered Bonds Investors Other Assets Other Bonds Insolvency Administrator Other Assets Other Bonds Cover Assets Covered Bonds Investors In case of deficiency

12 Covered Bond : Hybrid Nature All Rights Reserved.

Typical Comparison of MBS vs Covered Bond 13 MBSCovered Bond History Since 1970Since 1770 US OrigineGerman Origine Balance Sheet Treatment of Assets Off-BalanceOn-Balance Static Pool Dynamic Pool Credit Risk of the Borrowers Transferred to Investors Retained by Issuers (5% retention Moral Hazard More LikelyLess Likely Originate to Distribute Model Originate to Hold Model Loan ModificationDifficultEasy Market ConditionAlmost CollapsedRelatively Stable Regulatory TreatmentUnfavorablePreferential ALM Risk Transferred to Investors Remains with Issuers Option Premium is included All Rights Reserved.

14 Mortgage Product vis-à-vis Funding Tool All Rights Reserved.

15 Diversification of MBS and Covered Bond from the Perspectives of Cash Flow and Balance Sheet Treatment All Rights Reserved.

Securitization and secondary mortgage market – historical perspective 16 All Rights Reserved. Historical developments of the securitization and secondary mortgage market in the US and Japan are in opposite order. In the US, secondary market developed in the 1930s followed by the securitization in 1970s. In Japan, securitization started in late 1990s to liquidate outstanding portfolio followed by development of secondary market in the early 2000s. This means that development of securitization and secondary mortgage market are not necessarily interrelated FHAFannie Mae Ginnie Mae Freddie Mac BOA Secondary Market Operation Securitization (OTD) HTBSanwaGHLC JHF Securitization (OTH) Secondary Market Operation And Securitization (OTD)

Role that central banks has played in the mortgage market during the Crisis 17 All Rights Reserved. FRB purchased Agency MBS up to 1.25 trillion USD. US Treasury injected capital to Fannie and Freddie amouting169 billion USD so far. ECB purchased covered bond 60 billion Euro so far and announced to purchase another 40 billion. Bank of Japan purchased no JHF MBS so far.] What is the opportunity cost? Share of Central Bank purchase per outstanding balance

Challenges to Covered Bond Legislation in emerging countries Structural Subordination Deposit Insurance, Senior Unsecured Debt etc.Cap Conflict with Existing Bankruptcy Protection Code Bankruptcy Remoteness Investor Confidence Possibility of Spread Tightening Regulatory Framework Rationale for Preferential Treatments Practical Designing Type of Asset Class, Type of Issuer etc. Reference: ECBC Label Initiative Further, Can Covered Bond provide 30 year+ Fixed Rate Mortgage? Is 30+ year Fixed Rate Mortgage Necessary? 18 All Rights Reserved.

19 Govt Bond Price Decline Income Loss Bank Capital Restrict Lending Recession Deteriorate Fiscal Position Cut Expenditure Fair Value Loss Increase Debt Service Hard to inject Damage Deleverage Tighten Underwriting Criteria Deteriorate Asset Quality Reduce Tax Revenue Fiscal Consolidation Banking Sector Public Sector Real Economy Reduce Aggregate DemandsLess Money Supply Adverse Feedback Loop in Europe – Interaction between Govt and BKs Risk Premium All Rights Reserved.

20 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 Est 1950 Est 2007 All Rights Reserved.

21 Before an Beneficiary Certificate Trigger Event Investors Make timely payment of both principal and interest based on JHFs 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 –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 All Rights Reserved.

22 JHF MBS – similar legal framework not applicable to other institutions All Rights Reserved.

23 Collateral for Monthly and S-Series MBS All Rights Reserved.

24 Issuance Volume of JHF MBS – Record High in April 2011 – 6.2 billion USD equivalent Billion USD (Source) JHF All Rights Reserved.

25 Nominal Coupon of JHF MBS and its Spread to 10 year JGB (Source) JHF All Rights Reserved.

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) Thank you for your attention.