Securitisation 2005 - RMBS spotlight on GHLC
RMBS has played a predominant role in the expansion of Japan’s securitisation market over the past two years. While private sector issuance led the surge in fiscal-year 2004, attention has turned toward the public sector for 2005, starting with the Government Housing Loan Corp. Nick Herbert and Julia Okuda examine the prospects.
Government Housing Loan Corp’s (GHLC) presence in securitisation is on a growth path. It has relaxed its definitions as to what constitutes an eligible mortgage loan for use in securitisation, while a need to repay the loans extended to it from the government's FILP programme promises an additional wave of issuance over the coming years.
GHLC's plan to become an "administrative institution" during FY2006 is contributing to a policy change. In its new guise, the GHLC will not participate in the mortgage loan market as a direct lender but will pursue its shift to buying loans originated through the private sector.
That process has already begun. In March, at its regular monthly issuance, some 92% of the collateral came in the form of loans purchased from the market.
It is also in the process of increasing its overall issuance. In 2004, GHLC issued an average ¥30bn a month whereas in 2005 that financing target increases to around ¥100bn per month. To compensate for its additional borrowing plans – and its forthcoming reliance on the private sector for collateral – it has relaxed its criteria for selecting loans eligible to be securitised.
Previously, loans from the private sector for use in GHLC’s securitisation enterprise were restricted to new, owner-occupied housing of a certain size. Since March 2005, it has been willing to include mortgages on previously owned houses – those for loans on property extended to family members. The restriction on size has also been relaxed, which has effectively reduced the maturity range of mortgages it will accept – from 20–35 years to 15–35 years.
This prospect of increased issuance has affected the launch spreads on GHLC's deals. In April, it issued Series 30 (¥96.6bn) some 5bp wider than it achieved on its previous, yet smaller, Series 29. Its latest deal is talked at 40bp–42bp over JGBs, another 2bp–4bp wider again.
Although issue sizes and spreads have increased, there has been no corresponding rise in secondary market turnover. "Some are constrained by their systems to buying [pass-through bonds] at par." said Chinatsu Hani at Merrill Lynch.
Volumes are also impeded due to the lack of a recognised pricing rationale between brokers. "These bonds are pass-thru in nature and their WAL are dependent upon different prepayment parameters and model assumptions provided by different brokers," said Hideaki Numata at Mizuho Securities.
In the US, market practice has been to establish a common language known as PSA (prepayment speed assumption) – a percentage expression of the relationship between the actual and expected CPR.
Bankers have been in discussion with GHLC on this matter and expect it to adopt a Japanese version of PSA in the near future.
More market impact deriving from the impending redundancy of GHLC's mandate is its obligation to repay loans established through the FILP. It is accepting pre-payment of loans with no interest charges. GHLC plans to finance this ¥1.1trn of debt with a separate securitisation programme using MBS backed by its portfolio of seasoned loans – loans it originated itself some four or five years ago.
Using loans would result in slightly shorter maturities than on the borrower's existing programme, and bankers say GHLC is aiming for the seven-year spot. It will also mean tighter pricing since there is more history in the loans and there would be less pre-payment risk.
The shorter maturity should also expand the investor base to include banks, and targeting these investors could also lead to product innovation. "Regional banks prefer short-dated, floating-rate assets," said Hani. "Eventually, we are likely to see repackaged deals, either from the originators or the investment banks."
Yet, as GHLC's increased RMBS issuance arises in the context of FILP reform – rather than on a commitment to broaden the market – its influence on the private sector has been minimal.
Plenty of suggestions are at hand. "Tapping into a broader investor base, broader disclosure and origination of primary CMOs, should be beneficial to market growth," said Mizuho's Takahiro Oishi. "In the loan origination/servicing arena, acquisition of loans at discount (which is prohibited under current eligibility criteria) and providing marketability of mortgage servicing rights should also be beneficial to market development."