2. The development of Hong Kong Mortgage Corporation Limited (HKMC)

3. Agenda Introduction Current development Future development Conclusion MC Questions

4. Introduction

5. Background of HKMC established in March 1997 supply of mortgage financing in Hong Kong majority of mortgage loans are in floating rate terms not exposed to any substantial interest rate risk, but subject to other funding risks

6. Background of HKMC (cont.) initial capital of HK$1 billion from the Exchange Fund primary objective is to promote the development of the secondary mortgage market in Hong Kong can sell their mortgage loans in the secondary market to raise liquidity

7. Functions of HKMC Stability of the banking sector Fund supply for mortgages Promotion for the debt securities market

8. Current development

9. Mortgage-Backed Securities 17th November 2005 HK$1 billion MBS Under the US$3 billion Bauhinia Mortgage- Backed Securitization Programme Target : institutional investors Mortgage loans : from HKHA

10. Mortgage-Backed Securities (cont.) The price of the MBS issue is at par Two classes of notes - Class A-1 notes (HK$400 million) - Class A-2 notes (HK$600 million)

11. Mortgage-Backed Securities (cont.) Class A-1 notes - coupon rate : 4.73% (Fixed rate) - maturity : three years - stable return

12. Mortgage-Backed Securities (cont.) Class A-2 notes - coupon rate : 1-month HIBOR+0.18% (Floating rate) - unstable investment yield

13. Mortgage-Backed Securities (cont.) Both classes of notes - repay principal and interest on time Notes rating - Standard & Poor's : AA-minus - Moody's Investors Service : Aa3

14. 10-Year Fixed Rate Mortgage Scheme 3rd November 2005 Under the Corporation’s Fixed Adjustable Rate Mortgage (FARM) Programme Mortgage loans : - fixed-rate period from 1 year to 10 years Six participating banks

15. 10-Year Fixed Rate Mortgage Scheme (cont.) Extend the loan tenor - from 5 years to 10 years Fixed-rate period: - 1, 2, 3, 5, 7 and 10 years LTV : 95%

16. 10-Year Fixed Rate Mortgage Scheme (cont.) Mortgage Rate : Fixed during the period  protect borrowers against any future volatility in interest rates during the entire period End of the fixed-rate period 2 choices: - re-fixing the mortgage rate - floating rate of Prime - 2.25% per annum

17. 10-Year Fixed Rate Mortgage Scheme (cont.) FARM PeriodMortgage Rate (% per annum) Mortgage Rate after FARM Period (% per annum) 15.00% Prevailing fixed rate OR Prime - 2.25% per annum 25.10% 35.20% 55.40% 75.50% 105.60%

18. 10-Year Fixed Rate Mortgage Scheme (cont.) Long-term mortgage rates are attractive - e.g. - prime rate 7.5% - floating mortgage rate of Prime-2.25%  5.25% Higher than the fixed mortgage rate up to 3 years offered under the special scheme

19. 10-Year Fixed Rate Mortgage Scheme (cont.) Triple-win situation - Homebuyers : additional choice of mortgage financing - Participating banks : procuring new mortgage businesses - HKMC : diversify the mortgage portfolio

20. HK$20 Billion Retail Bond Issuance Programme Issued date: 1 August, 2005 The issuer’s credit rating: - Moody’s: Aa3/A1 - S&P: AA-/A+ Four series of notes issued 17 Placing Banks to distribute the Issue to retail investors

21. HK$20 Billion Retail Bond Issuance Programme (cont.) The followings are the coupons of the four series of notes: CurrencyTenorCoupon (payable semi- annually) HKD (Series A)1-year3.00% HKD (Series B)3-year3.50% USD (Series C)1-year3.10% USD (Series D)1-year extendable for 1 year and further extendable for 1 year 3.10% for first year 3.50% for second year 4.00% for third year

22. HK$20 Billion Retail Bond Issuance Programme (cont.) Series A and B: - Denomination: HK$50,000 - Application Price: 102% of the principal amount of the notes Series C and D: - Denomination: US$5,000 - Application Price: 100% of the principal amount of the notes Interest for all four series were payable semi-annually

23. HK$20 Billion Retail Bond Issuance Programme (cont.) Benefits: - Provided investors to achieve a balanced investment portfolio and stable interest income - Wide distribution network to reach out effectively to retail investors

24. HK$20 Billion Retail Bond Issuance Programme (cont.) Benefits: - Variety in currency, tenor and return to provide investment choices to retail investors - Established market making arrangement to facilitate transactions in the secondary market

25. HK$20 Billion Retail Bond Issuance Programme (cont.) The issue obtained a satisfactory subscription result with a total application amount of HK$625 million HKD 1-year notes (HKMC102)HK$177.7 million HKD 3-year notes (HKMC311)HK$306.0 million USD 1-year notes (HKMC103)US$10.7 million USD 1-year extendable notes (extendable for 1 year and further extendable for 1 year) (HKMC312E) US$7.5 million

26. Future Development

27. Reverse Mortgage Scheme Home equity conversion mortgages Instead of making regular for the loan Receives a regular monthly installment When dies, repossess and sell the property Surplus → return to the homeowner's estate

28. Reverse Mortgage Scheme (cont.) The feasibility is quite low Monthly payout is relatively low ∴ not too attractive Not too many HK people are familiar May be launched if matures

29. Future Business Continue to launch 10-year Fixed Rate Mortgage Scheme Launch Retail Bonds Issuance Programme Provide a better network and market-making mechanism for the retail bonds Further develop MBS, MIP and retail bonds Develop mortgage-based and debt securities market

30. Conclusion

31. Aim: Mortgage financing market in HK grows healthily Continue to meet its business targets Meet the needs of banking sectors and homeowners Promote the development of the debt market

32. MC Questions

33. What is(are) the function(s) of HKMC? A. Stability of the banking sector B. Fund supply for mortgages C. Promotion the debt securities market D. All of the above

34. If the investors want to have a stable return, which class of note do they buy under the new issued MBS? A. Class A-1 notes (fixed rate) B. Class A-2 notes (floating rate) C. (A) & (B) D. None of the above

35. What is(are) the triple-win situation(s) of the 10 years Fixed-rate Mortgage Scheme? A. provides an additional choice of mortgage financing B. provides an effective avenue for procuring new mortgage businesses C. diversify the mortgage portfolio D. All of the above