Developing MBS in the Philippines

(SPT) Amount Cash flow source Term Guarantor Legal ... •Despite the passage of the Securitization Act in 2004, MBS in the Philippines is still in its ...

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Developing MBS in the Philippines Dr. Felixberto Bustos, Jr. NHMFC President CREBA 8th Monthly Business Meeting August 29, 2013

NATIONAL HOME MORTGAGE FINANCE CORPORATION

Outline • • • • •

Brief Background on NHMFC Future Projects Overview of MBS in the Philippines Challenges in Developing MBS in the Philippines Key Success Factors for Securitization

NATIONAL HOME MORTGAGE FINANCE CORPORATION

Brief Background on NHMFC Creation

• 1977 (through PD 1267)

Key Policy Roles

• Major secondary government mortgage institution • Mandated to operate a viable housing finance system by enhancing and ensuring liquidity in the housing sector

Key Programs

• Housing Loan Receivables Purchase Program (HLRPP) • Bahay Bonds (Securitization)

NATIONAL HOME MORTGAGE FINANCE CORPORATION

Future Project: Bahay Bonds 3 Target Issue Size

• PhP500M

Target Issue Date

• Last quarter of 2013

Asset Pool

• Low cost and socialized housing loans

Proposed Transaction Structure

• 50% Senior A Notes (for retail investors) • 30% Senior B Notes (for institutional investors) • 20% Subordinated Notes (to be kept by NHMFC)

NATIONAL HOME MORTGAGE FINANCE CORPORATION

Future Project: CMP Bonds • Community Mortgage Program (CMP) ▫ A mortgage financing program which assists legally organized associations of residents of “depressed” areas to own the lots they occupy, providing them security of tenure and eventually improve their neighborhood and homes to the extent of their affordability • CMP is a program of SHFC, a subsidiary of NHMFC

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Features of the CMP Bonds Target Issue Size

• PhP2.2B

Target Issue Date

• Last quarter of 2013

Asset Pool

• CMP Loans

Proposed Transaction Structure

• 80% Senior Notes • 20% Junior Notes

An alternative mode of compliance to Section 18 of UDHA

NATIONAL HOME MORTGAGE FINANCE CORPORATION

Urban Development and Housing Act • Section 18 of UDHA refers to Balanced Housing Development which requires developers of proposed subdivision projects to develop an area for socialized housing equivalent to at least 20% of the total subdivision area or total subdivision project cost within the same city or municipality • Under Sec 5.3 of HLURB MC No. 5 (Series of 2013), the purchase of CMP asset-backed securities shall be deemed as compliance to UDHA Section 18 NATIONAL HOME MORTGAGE FINANCE CORPORATION

MBS in the Philippines • Legal framework: Securitization Act of 2004 • Government institutions that play a major role: Bureau of Treasury, Securities and Exchange Commission, Bangko Sentral ng Pilipinas , Home Guaranty Corporation, Bureau of Internal Revenue, National Home Mortgage Finance Corporation

NATIONAL HOME MORTGAGE FINANCE CORPORATION

Government Institution

Role in MBS

Bureau of Treasury

Oversees the trading of government securities specifically the auction of government securities and the accreditation and evaluation of government securities dealers

Securities and Exchange Commission

Supervises over-the-counter securities trading as well as other players in the securities industry including brokers and dealers

Bangko Sentral ng Pilipinas

Supervises securities transactions of banks (whether a bank is the originator, trustee or issuer)

Home Guaranty Corporation

Provides guarantees to MBS issued in the Philippines

Bureau of Internal Revenue

Assesses and collects all national internal revenue taxes, fees and charges including income tax of SPEs, withholding tax of yield or income, etc.

National Home Mortgage Finance Corporation

Major government secondary mortgage institution intended to develop the secondary mortgage market in the Philippines NATIONAL HOME MORTGAGE FINANCE CORPORATION

Philippine Experience of MBS Issuances Date

Originator

Issuer (SPT)

Amount

1994

Developers

HGC

P 21B

1997

HDMF

HDMF

P 436M

1997

Ayala Life Sta Lucia

2009

NHMFC & UHLP

2012

NHMFC & UHLP

Cash flow source

Legal Framework

Term

Guarantor

1994-2004

HGC

SEC

1997-2006

HGC

SEC

1997-2007 1998-2001

HGC

SEC and BSP

P 2.06B

NHMFC prime accounts

HGC

RA 9267 (Securitization Act of 2004)

P 604M

NHMFC Prime & restructured accounts

HGC

RA 9267

P 93M P 300M

Raw Land HDMF Home loans Seasoned mortgages (at least 2 years amortizing)

Source: Ballesteros, M. and Dulay, D (2013). “Developing Mortgage-Backed Securitization (MBS) for the Underserved Housing Market in the Philippines” (Unpublished)

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Challenges in Developing MBS in the Philippines • Despite the passage of the Securitization Act in 2004, MBS in the Philippines is still in its infancy stage: ▫ Volume of mortgages securitized is small ▫ Institutions providing securitization services are mostly government-controlled banks or finance corporations ▫ MBS are mostly sold to institutional investors

NATIONAL HOME MORTGAGE FINANCE CORPORATION

Key Success Factors for Securitization 1. Funding A. External sources a. HDMF b. DBM c. IFC or other multilateral agencies

B. Internal sources a. No or less interest to funders b. No or less taxes c. No or less dividends NATIONAL HOME MORTGAGE FINANCE CORPORATION

Estimated Available Funds to Cover Personal, Maintenance and Other Operating Expenses and Securitization Activities Item

Value (in 000 Pesos)

Income from Collection and Other Operations

2,436,542

100%

Deduct Servicing Cost to Funders

1,733,343

71%

Income after Servicing Cost

703,199

29%

Tax (30%) on Income and Other Receipts

135,649

6%

Income after Tax

567,550

23%

Imposed NG Dividends

42,000

2%

525,550

21%

Remaining Available Fund

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Required NHMFC Funding to Help Address Housing Need Depending on the assumption used, NHMFC will need an additional cumulative funding of PhP4B-33B for 2013-2017. Extraction rate

RELs as % of outstanding loans 20%

17.21%-19.52%

16.16%

100%

4B

8B

10B

80%

4B

9B

15B

52%

5B

14B

33B

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2013

2014

2015

2016

2017

17.21%

17.76%

18.33%

18.92%

19.52%

Housing Starts (net of can’t afford, high end segments)

126.90B

127.67B

127.98B

128.06B

128.44B

Housing Starts (net of contribution from other agencies)

69.79B

70.22B

70.39B

70.43B

70.64B

Bank RELs

53.32B

59.24B

65.82B

73.12B

81.24B

Financial need outside banking

16.47B

13.04B

6.63B

0

0

No. of securitization

1

2

2

3

3

MBS volume needed

8.24B

6.52B

3.32B

0

0

0

6.59B

5.22B

3.89B

1.99B

Required additional funding for MBS (1)

8.24B

0

0

0

0

Net proceeds from securitization (1)

6.59B

5.22B

2.65B

3.11B

1.59B

Required additional funding for MBS (2)

0

1.23B

0

0

0

Net proceeds from securitization (2)

0

5.22B

2.65B

2.49B

1.27B

0

0

1.99B

1.02B

Assumption on REL as % of Loans

Initial fund for securitization

Required additional funding for MBS (3) Net proceeds from securitization (3) Fund at the end of the year

6.59B

5.22B

3.89B

1.99BB

1.02B

Cumulative MBS funding needed

8.24B

9.47B

9.47B

9.47B

9.47B

Projected Contribution in Addressing the Housing Need

2013

2014

2015

2016

2017

5.66%

9.14%

4.65%

6.65%

3.39%

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Key Success Factors for Securitization 2. Extraction rate ▫

Extraction rate is NOT recovery rate 

▫ ▫

It should not be misunderstood with losses

Fund that can be utilized readily for subsequent securitizations Grows over time

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Extraction rate Extraction rate is affected by the following factors: • Supply of securitizable accounts • Quality of accounts ▫ Will banks be willing to let go of their ‘good’ accounts? ▫ NHMFC might be constrained to highly delinquent accounts?

• Professional market for subordinate tranches

NATIONAL HOME MORTGAGE FINANCE CORPORATION

Sample calculation of Extraction Rate Bahay Bonds 1 Item

Amount

Portfolio Size

2, 060, 898, 053.43

100%

Junior bonds

310, 898, 053.43

15.09%

Expenses (Financial advisory fee, rating fee, underwriting fee, legal fee, Tax reserve, liquidity reserve, commingle reserve, etc.)

318, 447, 220.70

15.45%

1, 431, 552, 779.30

69.46%

Net proceeds Portfolio size

69.46%

Net proceeds Extraction rate

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Key Success Factors for Securitization 3. Leverage A. Faster due diligence a. Uniform forms  For the borrowers: Simplify the process of applying for housing loans  For lending institutions: Streamline the review and due diligence process for housing loans  For regulatory agencies: Ensure the quality of mortgages

b. Sharing of credit files c. Sharing of valuation NATIONAL HOME MORTGAGE FINANCE CORPORATION

Key Success Factors for Securitization 3. Leverage B. One-stop shop a. NHMFC’s exemption from SEC’s registration and reporting requirements and fees b. Tax exemption for investor’s yield or income from any low-cost or socialized housing-related ABS issued by NHMFC or through a special purpose entity under the Securitization Act c. Reactivation of NHMFC Guarantee NATIONAL HOME MORTGAGE FINANCE CORPORATION

Key Success Factors for Securitization 3. Leverage C. Others a. NHMFC may accept equity participation from other financial institutions or from other private investors and multilateral agencies if it would serve the public interest

NATIONAL HOME MORTGAGE FINANCE CORPORATION

NATIONAL HOME MORTGAGE FINANCE CORPORATION