Role of National Housing Bank in Reverse Mortgage

By Accommodation Times News Service

Contd from 1st part…

NHB Foray’s into the field of securitization


Support to Mortgage Backed Securitization has been a major policy initiative of the Government     as manifested in its National Housing and Habitat Policy announced in 1998. The policy has enjoined upon National Housing Bank (NHB) to play a lead role in starting mortgage backed securitization and development of a secondary mortgage market in the country. A major milestone in creating a framework for such transactions has been the amendment of the National Housing Bank Act, 1987 by the Government of India. The National Housing Bank (Amendment) Act, 2000 has come into force from June 12, 2000, which, inter alia, provides for creating Special Purpose Vehicle (SPV) Trust by NHB for taking up such transactions and issuing MBS in various forms.


Enabling Provisions in NHB Act for Mortgage Backed Securitization and Secondary Market Development:

In terms of Section 14 (ea) of the said Act, NHB has been specifically authorized to purchase, sell, or otherwise deal in any loans or advances secured by mortgage or charge on the immovable property relating to Scheduled Banks or Housing Finance Institutions (HFIs);

Section 14 (eb) of the NHB Act allows NHB to create one or more Trusts and transfer loans or advances together with or without securities therefore to such Trust(s) for consideration;

As per Section 14 (ec), NHB is authorized to set aside loans or advances, and issue or sell Mortgage Backed Securities (MBS) based on such loans or advances so set aside, in the form of debt obligations, Trust Certificates of beneficial interest or other instruments whatever name called, and to act as Trustee for the holders of such securities.

Section 18A of the NHB Act facilitates the transfer of MBS issued by National Housing Bank to securitize the loans granted by Scheduled Banks and HFIs, without Compulsory Registration, both at the time of issue of securities by NHB and at the time of their transfer by the investors.

Further, in order to instill confidence among the investors in the securities issued by NHB, the Bank acting as a trustee or otherwise in the transaction relating to securitization of loans has been authorized to recover the dues as arrears of land revenue in terms of Section 18B of the NHB Act.
Speedier Foreclosure Mechanism:

To provide for introduction of a speedier recovery mechanism a new chapter (VA) has been added to the NHB Act. This chapter provides for appointment of recovery officers of approved institutions and procedures for the recovery of housing loan dues from defaulting borrowers. This chapter also proposes for establishment of appellate tribunal to hear appeals against the orders of recovery officers.

The dues of defaulting borrowers of Scheduled Banks are also included for the purpose of recovery process under Chapter VA of the NHB Act. Besides, in terms of Section 36C of the NHB Act, Scheduled Banks have been defined as approved institutions, which imply that officers of scheduled banks would also be eligible for being appointed as recovery officers.

Securitization is relatively a new concept in the Indian Financial Market. The origin of securitization can be traced to 1991 when the first deal was structured in India. Since then there have been isolated deals in the areas of auto loans, credit card and other receivables of various organizations. Considering the potential of the Indian market, this growth is modest. The investors in the securities have all been institutional players and almost all the securitized debt pools have been privately placed with single investors who have held them till maturity. Secondary trading in these instruments has not yet begun.

In the field of Mortgage backed securitization, NHB launched the pilot issues of RMBS in August 2000. Since then there have been other issuances of RMBS by Banks and Financial Institutions. NHB has so far launched ten issues of RMBS with total loan size of Rs.665 crore. NHB has been working towards development of systems and building of institutions in order to make the RMBS market sustainable in the long run. In this process, NHB’s efforts are directed at equipping the market participants with adequate understanding of the RMBS products and generating sufficient awareness about the issues, risks and benefits associated with the RMBS instruments as also gradually widening the investor base, which is essential for a successful secondary mortgage market in the country. Further, the introduction of Mortgage Backed Securitization will help develop a long-term debt market in India as also in the evolution of the Indian financial & capital market.

Considering that development of secondary mortgage market in India will largely depend on a sustainable securitization transaction mechanism, it has been NHB’s efforts to address issues relating to mortgage backed securitization and evolve suitable securitization transaction structures within the existing legal and regulatory framework and at the same time, make the transactions simple and viable so that the product finds acceptability in the market.

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