NHB plans to revive home loan securitisation

April 14, 2010 - PRLog -- National Housing Bank (NHB) is planning to revive the market for securitisation of home loans to help banks and housing finance companies overcome asset-liability mismatches.

The apex institution for housing finance recently called a meeting of senior officials from various banks and housing finance companies (HFCs) to seek their views on ways to breathe fresh life into the housing loan (or residential mortgage backed) securitisation market, which has been dormant for almost three years now.

Given that the housing finance market has grown to Rs 4.50 lakh crore (CARE Ratings estimate) as of December-end 2009 and funds in excess of Rs 10 lakh crore (NHB estimate) are required to meet housing shortage of 7.4 crore units, bankers say the time is ripe to unlock liquidity by securitising pools of home loans from the loan portfolios of lenders. The liquidity generated from securitisation could be channelled to originate fresh home loans.

Transfer of mortgage debt

Securitisation of home loans is a transaction whereby mortgage debt is transferred from a lending institution (originator of loans) to a special purpose vehicle (such as NHB SPV) with the latter issuing tradable debt securities (or pass through certificates) to investors.

So, even if a quarter of the outstanding home loans of Rs 4.50 lakh crore were to be securitised, the lending institutions would have surplus of Rs 1,12,500 crore to lend to the housing sector. Moreover, lenders dependence on NHB for refinance would go down to that extent.

Banks and HFCs can address the asset-liability mismatches arising from the short-term nature of their liabilities (deposits and bonds) and long-term nature of their assets (loans including housing loans) through securitisation.

According to NHB data, since 2000, 13 HFCs and one bank have securitised housing loans aggregating Rs 862 crore through the NHB SPV Trust.

“We want to demonstrate that securitisation of housing loans under the revised Reserve Bank of India guidelines is workable and will benefit all stakeholders,” said Mr R.V. Verma, Executive Director, NHB.

To ensure that loan originators do not compromise on due diligence of assets generated for the purpose of securitisation, the RBI recently stipulated a minimum lock-in period of one year for bank loans before they are securitised. It has also laid down minimum retention criteria for the originators at 10 per cent of the pool of assets being securitised as another measure to achieve the same objective.

Mr Rajesh Mokashi, Deputy Managing Director, CARE Ratings, said securitisation of housing loans in India is a safe bet as lending institutions give loans based on borrowers' repayment capacity. Besides, lenders also ensure a healthy loan-to-value ratio.

“Unlike in the Western economies, there is no fear of sub-prime lending in India. This is a big plus factor for reviving of the residential mortgage backed securitisation (RMBS) market,” he said.

In the last couple of years, the few housing loan securitisation deals that have taken place were bilateral with no pass-through certificates (or securities) being issued.

Impediments

Some of the impediments to developing the RMBS market, according to CARE Ratings, are volatility in the pool of cash flows as the underlying housing loans may be fixed-rate loans (which could get converted into floating and vice-versa during the tenure of the loan) or floating (which are typically linked to the retail prime lending rate of the lender); lack of investor appetite for long-term investment; and lack of liquidity.

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