Nhb Mulls Market-Making In Housing Loan Receivables

The National Housing Bank (NHB), the housing finance regulator, is mulling the possibility of evolving market-making mechanism for the securitised paper representing underlying housing loan receivables.

The objective is to create a secondary market for trading these instruments which at present does not exist.

NHB is examining the model of trading in the government securities market, whereby the primary dealers (PDs) are given refinance by the Reserve Bank of India (RBI) in lieu of their participation (market-making) in the market.

The housing finance regulator, similarly, could also give refinance to institutional players for actively participating in evolving a secondary market for mortgage-backed securities (MBS), according to sources in the know of developments.

 

MBS are as good as government securities as the assets are cherry-picked (only AAA rated assets) from housing finance companies, pooled together and sold off to institutional investors such as banks, insurance companies and mutual funds by a special purpose vehicle created for the purpose.

Investors hold pass through certificates (PTCs) that is issued by a special purpose vehicle created for the purpose representing underlying assets.

Having a secondary market for MBS will enable investors enter and exit the market depending on their interest rate expectations, just as it happens in the government securities market.

"Though a housing finance company may be rated only 'A' but its pool of housing loan receivables can be rated 'AAA', the highest rating, thereby making it possible to pool together assets of different firms having different ratings," sources said.

Securitisation has been a boon for housing finance companies as it augments their resources by immediately rendering them liquid upon selling off the housing loans to an SPV, reduces their cost of capital and does away with provisioning as the risk weighted assets (in this case housing loans) are converted into cash for conducting fresh business.

NHB took up the role of a special purpose vehicle (SPV) in the two MBS transactions it has conducted so far over the last one year.

The first deal involved pooling together housing loan receivables of HDFC (Rs 59.70 crore) and LIC Housing Finance (Rs 43.84 crore) and issuing seven year PTCs to investors at 11.80 per cent.

The second deal involved pooling together loan receivables of CanFin Homes (Rs 44.85 crore) and LIC HF (Rs 46.84 crore) and issuing PTCs of seven years maturity at 10.25 per cent.

The average maturity of these PTCs actually works out to four years as both the interest and a portion of the principal are paid out on a monthly basis to the investors.