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Mortgage agencies – complements or alternatives?

05 March 2019
Richard Kemmish

Many Asian countries have developed national mortgage agencies to facilitate home loans. Despite many initially looking to the US for inspiration they are surprisingly diverse. But what are the implications for the development of covered bonds in Asia?

Now I’m the first to admit that I am no expert on the subject of national mortgage agencies. If I’m honest about it I – like many in the covered bond world – view such agencies as competition for covered bonds, state subsidised (more or less explicitly) and, if they have any role in the development of bond markets, biased towards the development of securitisations rather than covered bonds.

It is impossible to consider national mortgage agencies without looking at the US model on which they were all based. So why are their business models (and degrees of effectiveness) so diverse in Asia? There is an analogy to the covered bond market here. Many new covered bond jurisdictions copied the Pfandbrief model, but they copied an outdated Pfandbrief model (pre-2005 when it was a special bank based system) and they copied it without regard to national specificities in countries very different from Germany.

When adapting the US model to Asia, it goes without saying that that what was appropriate for the US during the 1930s was hardly appropriate for the needs of Asia in the 1980s. Furthermore, it was the pre-crisis model of Fannie Mae and Freddie Mac that was copied: complementary to private label securitizations, taking on repayment risk – and therefore encouraging long dated mortgages – and government ‘sponsored’, not government guaranteed.   Before the crisis many observers lovingly pointed out that in the US the agencies ‘only’ received a subsidy of 20 basis points of GDP from the tax payer and were not, absolutely not underwritten by the tax payer. No question of that. Until they failed and were bailed out by $200bn (its ironic that one of the reasons that the US model hasn’t been reformed is that the agencies are now paying this back).

Whether you are considering a national mortgage agency as an alternative to covered bonds (as many central Asian markets currently are), or considering whether an existing agency is compatible with the development of a covered bond market, there are a small number of key questions to ask.

Firstly, do mortgage agencies nationalise risks that should be borne by the capital markets? It always struck me as odd that the world’s greatest champion of free markets should effectively nationalise nearly half of the credit and prepayment risk in it’s largest consumer loan market. In most Asian mortgage agencies this is copied de facto, although whether that is by government / central bank ownership, and implicit or explicit guarantees of bonds varies greatly. Cagamas Berhad stands out as an honourable exception (with just 20% ‘state’ ownership via the Central Bank of Malaysia).

If you are, are you ‘pricing out’ private sector alternatives such as covered bonds?

Secondly, what is the business of a mortgage agency? In the wholesale market, do they issue their own securities (like Cagamas) or provide credit support for other securities (or both, or neither)? Do they participate directly in the retail market? Or partner up with private sector banks? Or buy or fund the mortgages from the originators?     

If they are issuers in their own right, this could be incompatible with the development of covered bonds – pricing them out. If they facilitate private sector issuance – for example by taking some of the risk – then they can be as complementary to covered bonds as synthetic securitisations.

Finally, do they have a remit to develop local bond markets? This is the area where the potential co-operation between agencies and covered bonds seems greatest. There is no reason – other than pre-crisis history – why the securitisation market should be the beneficiary of this. European entities such as CRH or Pfandbriefzentral – national mortgage agencies in all but name – are covered bond issuers: risk is not transferred to investors, they are subject to special supervision, their assets are in accordance with CRR article 129. Mortgage agencies can embrace the covered bond model.

Like I said, I’m no expert on Asian mortgage agencies but I’m looking forward to hearing from people that are at the Euromoney/ECBC Asian Covered Bond Forum next week.

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