APUHF, New Delhi, India
April 12, 2013
International Conference on Housing :
An Engine for Inclusive Growth
Session Ⅶ Housing Finance Post Sub-prime
Masahiro Kobayashi,
Chief Economist, Global Market,
Survey and Research Department,
Japan Housing Finance Agency (JHF)
(Former GHLC: the Government Housing Loan Corporation)
All Rights Reserved.
Perspectives on Responsible Lending and Sustainable Funding
Misalignment of Incentive Structure under “Originate to Distribute (OTD) Model”
Irresponsible Lending
Borrowers
Lenders
Risk Transfer
Credit Loss
SPVs
Investors
MBS
(Private Label Securities)
Restore Underwriting Criteria - Ability to Repay
Restore Investor Confidence - Risk Retention
Dodd Frank(Qualified Mortgage, QRM, etc) , FSB Principles for Sound Residential Mortgage Underwriting Practices･･･
All Rights Reserved.
2
Outstanding Balance of MBS in the US and Japan
Private Label Securities (PLS) markets are shrinking both in the US and in Japan.
US
Japan
(trillion USD)
(trillion JPY)
(Source) FRB
(Source) Bank of Japan
All Rights Reserved.
3
Challenges to Covered Bond Legislation in emerging countries
• Structural Subordination
Deposit Insurance, Senior Unsecured Debt etc.←Bail-in?
Cyprus!!!!!
• Conflict with Existing Bankruptcy Protection Code
Asset Encumbrance, Bankruptcy Remoteness
• Investor Confidence
Possibility of Spread Tightening
• Regulatory Framework
Rationale for Preferential Treatments
• Practical Designing
Type of Asset Class, Type of Issuer etc.
← ECBC Label Initiative
Further, Can Covered Bond provide 30 year+ Fixed Rate Mortgage?
←FHFA Strategic Plan in the US prefers standardized Securitization
All Rights Reserved.
All Rights Reserved.
4
Type of Mortgage Products in the US
(Source) Freddie Mac
All Rights Reserved.
5
Type of Mortgage Products in Japan
(Source) JHF
All Rights Reserved.
6
Yield of 10 Year Government Bond of Japan
(Source) Ministry of Finance
All Rights Reserved.
7
Risks in Mortgage Lending and their interrelation
Probability of Default
Default – Foreclosure –
Distressed Sales
Credit Risk
■Risk transferred in PLS
Payment Shock on
ARM transmitted to
default on those loans,
transforming Market
Risk to Credit Risk
Loss Given Default
■Risk retained by
Agency in Agency MBS
Interest Rate Risk
■Cash flow hedge needed to avoid disintermediation
Market Risk
Prepayment Risk
■Fair value hedge needed by issuing MBS
■Risk transferred to
investors when securitized
Speed of prepayment
affects Exposure at
Defaults (EAD)
Liquidity Risk
All Rights Reserved.
8
Payment Shock on 2/28 ARM
FF rate became higher at the time of interest rate reset
Reset on 2/28
Origination
(Source) FRB
All Rights Reserved.
9
Mortgage Delinquencies by Loan Type in the US
(Source) Mortgage Bankers Association
All Rights Reserved.
10
Delinquencies on subprime ARM picked up earlier than Unemployment
(Source) US Department of Labor, Mortgage Bankers Association
All Rights Reserved.
11
DTI and LTV
DTI
LTV
Probability of Default
Loss Given Default
Borrower’s personal ability to repay
Property’s price
Recourse
Non - recource
Strategic Default in the US
All Rights Reserved.
12
Strategic Default in the US
(Source) Realty Trac, Inc., Standard and Poor’s
All Rights Reserved.
13
LTV in the US
(Source) Fannie Mae
All Rights Reserved.
14
DTI and LTV in Japan
Weighted Average DTI
Weighted Average LTV
(note) Only for JHF borrowers
(Source) JHF
All Rights Reserved.
15
Tightening of credit conditions when housing price is declining
(Source) FRB “Senior Loan Officer Opinion Survey on Bank Lending Practices”
All Rights Reserved.
16
Thank you for your attention.
(Former the Government Housing Loan Corporation)
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.