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National Housing Bank is exploring ways to incentivise housing finance companies (HFCs) to offer loans backed by mortgage guarantee. The advantage of such loans for borrowers would be higher loan-to-value or long-term fixed interest rate loans, said R V Verma, chairman, NHB.
Announcing the first mortgage guarantee transaction, between India Mortgage Guarantee Corporation (IMGC) and Dewan Housing Finance Ltd (DHFL), Verma said this would help in mitigating risk for lenders and also provide capital enhancement by reducing the requirement for provisioning and risk weights.
"Today, lenders are not going to a certain segment of borrowers. But with mortgage guarantee they can be encouraged to lend to such borrowers also,'' Verma said. Mortgage guarantee is provided only for home loans and not for loan against property or loans to builders.
Currently, the loan to value (LTV) for loans up to Rs 20 lakh is 90 per cent, for loans between Rs 20 lakh and Rs 75 lakh it is 80 per cent and for loans above Rs 75 lakh it is 75 per cent.
However, if the loans are backed by a guarantee, then the LTV can be increased to 90 per cent even for the higher ticket size loans. So, the borrower will have to put in less money. Besides, since the guarantee is for a period of 25 years, it may encourage lenders to offer long-term fixed rate loans, as they will not have to worry about mismatch in their asset-liability. In the transaction between DHFL and IMGC, a pool of Rs 37.8 crore worth of loans of DHFL has been contracted for mortgage guarantee. The pool is for priority sector loans up to Rs 25 lakh.
This offers DHFL a first-loss guarantee on its pool of priority sector housing loans.
DHFL has securitised this pool of priority sector housing loans to ICICI Bank. This guarantee has enabled DHFL to reduce the level of credit enhancement that would have otherwise been required for securitisation, thereby releasing capital that can be redeployed.
Currently, for any securitisation transaction, the originator of the pool is required to provide credit enhancement, including liquidity support in the form of cash collateral.
This being the first mortgage guarantee contract and since it was done at a pool level, DHFL is bearing the cost of the cover. But if it was a new loan, the cost of guarantee would be borne by the home loan borrower, said Amitava Mehra, CEO, IMGC. The cost will depend on the risk perception. It may be lower for better performing lenders.
For borrowers, the choice would be between choosing a mortgage with a cover which may allow a longer repayment period and loans with a higher LTV, even if they have to bear the cost of the guarantee.
