1. Econ 310 Sec. 2 Group 2 Lai Po Yu (023111) Ng To Yeung (033044)
Chan Ka Sin (033046)
Cheung Chun Chuen (033053)
Kwok Chun Yin (033063)
Kung Yun Hung (033078)
Lai Suet Yee (035122)

2. CONTENTS Background Operation of HKMC programmes Recent News
The Securitization in Korea
The Securitization in Singapore
The Securitization in Taiwan
Recommendation
Q & A
Kung Yun Hung (033078)

3. Background Before the establishment:
Mortgage financing supply came from the banking sector
Exposed to funding risk
Kung Yun Hung (033078)

4. Background Maturity mismatch Liquidity risk High concentration risk
Kung Yun Hung (033078)

5. Background Establishment:
Hong Kong Mortgage Corporation (HKMC) was established on March 1997
Initial capitals: HK$1 billion
(from the Exchange Fund)
Objectives: develop 2nd mortgage market
Kung Yun Hung (033078)

6. Background Functions of the HKMC:
Address the funding risks of financial Institution
Enhance the stability of the banking sector
Promote wider home ownership in HK by fund supply
Kung Yun Hung (033078)

7. Background Functions of the HKMC:
Encourages and facilitates the development of the HK bond market
Increase the range of financial instruments
Kung Yun Hung (033078)

8. Operations of
HKMC
programmes

9. The Mortgage-Backed Pass-Through Securitization Programme (MBS)
The 4 roles of MBS:
Bank A
HKMC
Hong Kong Mortgage Corporation Limited
SPC
Bankruptcy remote special purpose company
HKMC Funding Corporation
Noteholder
Originating bank / Another investor
Lai Po Yu (023111)

10. The Operation of MBS Structure of the “Swap and Hold” transaction:
Bank A
HKMC
SPC
Noteholder
Sell
Sell loans to HKMC
Transfer loans to SPC
Issue MBS with HKMC guarantee
It can hold MBS or sell to other investors
Lai Po Yu (023111)

11. Pass-through of coupon
Source:
Lai Po Yu (023111)

12. The Operation of MBS Objective: Developing a secondary market
Enhance investor’s confidence
Lai Po Yu (023111)

13. Mortgage Insurance Programme (MIP)
The roles of Mortgage:
Homebuyer
Bank
Insurance Company
Reinsures
Lai Po Yu (023111)

14. The Operation of MIP
Lai Po Yu (023111)

15. The Operation of MIP Objective:
Provide a way to reduce Homebuyer’s deposits
Without increasing the risk exposure of the financial institutions
Lai Po Yu (023111)

16. Retail Bond The 3 roles of Retail Bond: Bond Issuer
The Hong Kong Mortgage Corporation Limited (“HKMC”)
Placing bank
i.e. HSBC and Hang Seng Bank
Investor
i.e. Mr. Joe Wong
Lai Po Yu (023111)

17. The operation of Retail Bond
HKMC
Placing banks
Retail Investor
Issue Retail Bond
Appoint placing agents
Mr. Wong can subscribe for the bonds through banks
Lai Po Yu (023111)

18. Recent News

19. Fixed Rate Mortgage
3 November: extended from the maximum of 5 years to 10 years
→ reduce the influence of fluctuating interest rate
16 November: 2 to 5 years programs are more popular
Standard & Poors: AA- & Moody Investment: Aa3
Lai Suet Yee (035122)

20. Retail Bonds In mid-July, HKMC issued 4 types of retail bonds
(Including Hong Kong dollars and US dollars)
response of US dollars was not very good
Interest rate of Retail Bond is lower than interest rate of time deposit
Dah Sing Bank and Mevas Bank: 3.375% of over $100000
Lai Suet Yee (035122)

21. Retail Bonds (con’t) 27 July: result is satisfactory
∵over subscribed and received the totals of HK$625,000,000
P.S. ~entrance fee is $
~0.15% of handling charge for ordinary
investors
Lai Suet Yee (035122)

22. Mortgage Insurance Programme
95% of people have good quality of creditability
∵ their amount of money for contribution is 38% of their income
Lai Suet Yee (035122)

23. Mortgage Insurance Programme (con’t)
3 November: market infiltration is increased form last year 16% to this year 20%
10 November: decreased for 23% in September
Early repayment reduced
∵ increasing interest rate
Lai Suet Yee (035122)

24. The Securitization
of Korea

25. The Securitization in Korea
Mortgage interest rate < Market interest rate
Impossible to securitize mortgage before 1998
Chan Ka Sin (033046)

26. The Securitization in Korea
1996
1997
1998
1999
2000
2001
2002
NHF's
Mortgage Interest Rate
9.50
9.00
8.00
Interest Rate
Depository
11.84
13.53
13.37
10.02
9.60
7.02
6.69
Bank's Interest Rate
Average Deposit Rate
9.62
11.08
7.33
6.19
5.95
3.98
3.97
Market
Government Bond
12.19
14.96
7.23
8.85
6.79
5.93
5.28
Rate (3yrs)
12.57
24.31
8.30
9.85
8.12
7.11
5.88
Chan Ka Sin (033046)

27. The Securitization in Korea
Establish mortgage securitization in 1998
Aim of establishment
Development secondary mortgage market
Decrease financial risk to promote long-term mortgage
Chan Ka Sin (033046)

28. The Securitization in Korea
Three acts govern securitization business
Asset-Backed Securitization Act (ABS Act)
-owned by private company
-establish in Sept. 1998
-issued ABS, CBS, MBS
Chan Ka Sin (033046)

29. The Securitization in Korea
2) Mortgage-Backed Securitization Company Act (MBS Company Act)
-owned private company
-establish in Jan. 1999
-only issued MBS
Chan Ka Sin (033046)

30. The Securitization in Korea
3) Korea Housing Finance Corporation Act (KHFC Act)
Owned by Korea government
Establish in March 2004
Only issued MBS
Issued long-term fixed rate mortgage
Maturity of mortgage
10 yrs, 15 yrs, 20 yrs
Chan Ka Sin (033046)

31. The Securitization in Korea
Maturity of Mortgage Loans Unit %
1998
1999
2000
2001
2002
3 years or less
4.1
55.4
62.6
70.8
75.6
3 years or less than 10 years
12.7
19.5
20.5
12.4
9.3
10 years or less than 20 years
9.1
3.7
4.4
4.9
1.7
20 years of more
74.1
21.5
12.5
11.8
13.4
Total
100.0
Source: Kookmin Bank
Chan Ka Sin (033046)

32. The Securitization
of Singapore

33. The Securitization in Singapore
First commercial mortgage backed securitization (CMBS) in 1986
Issued by Hong Leong Holdings Limited (a private company)
Total issued S$18.5 million
Second CMBS was issued in 1992
Popular after 1997
Kwok Chun Yin (033063)

34. Major differences between HK and Singapore
The Securitization in Singapore
Major differences between HK and Singapore
Hong Kong
Issued by HKMC
Mortgage backed for residential loans
Not popular
Singapore
Issued by private company
Mortgage backed for commercial loans
popular
Kwok Chun Yin (033063)

35. Why CMBS is popular in Singapore?
The Securitization in Singapore
Why CMBS is popular in Singapore?
Experience of financial crisis in 1997
Government support
Advancement of financial innovation and securitization technology
Tradable (liquidity)
Fund managers willing to hold CMBS
Low default risk
Kwok Chun Yin (033063)

36. References to Hong Kong
The Securitization in Singapore
References to Hong Kong
Very successful in Singapore
Companies in Hong Kong may follow Singapore to issue private CMBS
Make it attractive to fund managers and investors
Kwok Chun Yin (033063)

37. The Securitization
of Taiwan

38. The Securitization in Taiwan
In the past
Lack of
professional knowledge
Lack of
personnel
Lack of
technological
No domestic firms were currently engaged in the asset securitization business
Cooperation with foreign
financial service companies
Cheung Chun Chuen (033053)

39. The Securitization in Taiwan
The role played by the Ministry of Finance (MOF)
Offering attractive tax incentives
Trust firms --10 percent tax exemption on interest earnings
Banks-- exempted from income tax
Improve the legal structure 
Friendly legal environment 
protecting investors
Cheung Chun Chuen (033053)

40. The Securitization in Taiwan
Aim at the development of Asset Backed Securitization (ABS)
Like automobile loans, housing loans, leases, credit card receivables, accounts receivable, etc
permitted
financial assets
Special
purpose
company
Local Financial Institution
Public
Cheung Chun Chuen (033053)

41. The Securitization in Taiwan Type of Financial Assets
List of Securitization Plans by Taiwan Financial Institutions
Total Value (US$ Millions)
Type of Financial Assets
Industrial Bank of Taiwan
$104.0
Corporate Loans
Chinatrust Commercial Bank
$145.0/$145.0
Mortgage Loans/Credit Card Receivables
Taishin International Bank
$145.0
Mortgage Loans
First Commercial Bank
Chien Hwa Commercial Bank
Chang Hwa Bank
Hwa Nan Commercial Bank
Cosmos Bank
$203.0
Accounts Receivables
Chinalease Corporation
Leases Receivables
Cheung Chun Chuen (033053)

42. Recommendation

43. Recommendations To minimize the cost of funds
The coming interest rate hike cycle will present a challenge to the HKMC by increasing overall funding costs
Ng To Yeung (033044)

44. Recommendations Provide suitable kinds of bonds
On 3 November 2005, HKMC extends the program of Fixed Rate Mortgage from the maximum of 5 years to 10 years
Liquidity risk
Inflation risk
Ng To Yeung (033044)

45. Recommendations Don’t securitize HKMC Issued by private company
Cannot enhance the stability of the banking sector
Ng To Yeung (033044)

46. Q & A

47. Q1 Which of the following(s) about HKMC in Hong Kong is/are true?
(a) HKMC stands for Hong Kong Mortgage Corporation (b) a partly-owned HKSAR Government Corporation through the Exchange Fund (c) established in March 1997 (d) (a) & (c) only (e) all of the above

48. Q1 Which of the following(s) about HKMC in Hong Kong is/are true?
(a) HKMC stands for Hong Kong Mortgage Corporation (b) a partly-owned HKSAR Government Corporation through the Exchange Fund (c) established in March 1997 (d) (a) & (c) only (e) all of the above

49. Q2 What is/are the mission(s) of the HKMC ?
(a) enhance the stability of the banking sector (b) promote wider home ownership in Hong Kong (c) facilitate the growth and development of debt securities markets (d) (b) & (c) only (e) all of the above

50. Q2 What is/are the mission(s) of the HKMC ?
(a) enhance the stability of the banking sector (b) promote wider home ownership in Hong Kong (c) facilitate the growth and development of debt securities markets (d) (b) & (c) only (e) all of the above

51. Q3 What are the risk(s) that HKMC aim to solve?
Maturity mismatch
Liquidity Risk
High Concentration Risk
(a) & (c) only
All of the above

52. Q3 What are the risk(s) that HKMC aim to solve?
Maturity mismatch
Liquidity Risk
High Concentration Risk
(a) & (c) only
All of the above

53. THE END