Role of National Housing Bank in Securitization in Reverse Mortgage

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By Accommodation Times News Service

Securitization is a complex series of financial transactions designed to maximize cash flow and reduce risk for debt originators. This condition arises when assets, receivable or financial instruments are acquired, classified into pools, or offered as collateral for third party investment, after which financial instruments are sold which are backed by the cash flow or value of the underlying assets.  Basically securitization applies to that assets which are illiquid i.e. one cannot not be sold easily. It is commonly practiced in real estate industry where it is applied to pools of leased property and in the lending industry to lender’s claims on mortgages, home equity loans and other debts. It is some associated with financial institutions convert mortgages into assets for investors to purchase.

National Housing Bank plays a very important role in starting up the Mortgage Backed Securitization (MBS) in the country. It has launched its first MBS pilot issues in August 2000 in the Indian Financial Market. Lets us a snapshot of how the residential mortgage backed securitization process of NHB by first understanding the concept and benefits of it:

Concept & Benefits: The transactions between parties in the housing finance sector can be broadly classified as those relating to ‘primary residential mortgage market’ and ‘secondary residential mortgage market’. The primary mortgage market activity mainly comprises creation of mortgages as a result of transactions between the borrowers and primary lenders. The primary lenders create mortgages against loans provided by them to the purchasers of houses. The mortgages held as assets, generate cash flows represented by repayments of both principal and interest, on the loans.

The secondary mortgage market mainly involves the conversion of mortgages into tradable financial instruments and the sale of these instruments to prospective investors. The cash flows which come as repayments from the borrowers to the originators, can be transferred to a third party with simultaneous transfer of assets to an intermediary agency (SPV) designated for the purpose of managing the bought over pool of mortgages. These cash flows are passed on to the investors by the SPV. In the process, the mortgages are converted into securities which are tradable financial instruments and sold to investors. The secondary mortgage market is thus made up of securities which are backed by mortgages (MBS) and refers to the transactions between the issuers and investors.

Once the securitized mortgages are sold by the originators viz., the primary lending institutions, they are either de-recognized in the originator’s books of account or presented in a specific manner. All future transactions in the mortgage backed financial instruments then take place in the secondary mortgage market, depending up the depth of the market. The overall liquidity in the capital market and housing finance system would increase with the number of transactions among investors in the secondary mortgagemarket.

SecuritizationBenefits

Supportive fiscal measures and the policies of Reserve Bank of India (RBI) have established a systemic framework for specialized mortgage finance in the country and the sector has been witnessing steady growth of over 28% in the past few years. In the recent past, with the emergence of the capital market as the central pool of resources for pectoral development, Securitization not only offers a viable and sustainable market oriented sourcing mechanism with the potential of integrating housing market with the domestic as well as the international capital markets, but also brings in a range of specializations, resulting in efficient and cost effective structures and practices.

  • Improves Capital Adequacy Ratio (CAR) through transfer of risk weighted assets;
  • Aids Asset Liabilities Management and helps long term source for deployment in housing sector;
  • Enables better spread management, and facilitates improvement of return on assets and return on equity;
  • Enables new source of fee based income;
THE TRANSACTION

The transaction involves:a) Assignment and Transfer of a pool of housing loans along with the underlying mortgages, from the primary lending institution to NHB.

b) Securitization of Mortgage Debt: On acquiring the pool along with the underlying mortgages, an express declaration of trust will be made by NHB in respect of the mortgage debt, appointing itself as the trustee for the benefit of the investors. Once the assets have been declared property in trust (“the Trust”), the Trust will issue PTCs to investors.


STEP NO. 1

  • Authorization for securitization by originator: Originator to obtain authorization from its relevant internal highest authority for securitization its pool of home loans.
  • Intimation to NHB : The originator (HFC / Bank) to write a formal letter to NHB indicating its intention to securitize its home loans with copies of relevant authorization of its relevant authorities (for instance Board Resolution) and proposal to go ahead with securitization of its home loan portfolio with NHB’s SPV arrangement.

STEP NO. 2

SELECTION OF POOL OF LOANS

TIME FRAME: AS PER ORIGINATOR’S CONVENIENCE

  • NHB’s Pool Selection Criteria (given separately) – the home loans should satisfy the standards for being considered for selection in the Mortgage Pool offered for securitisation.
  • Identification of Geographic Locations for Selection of Loans –To begin with, loans originated in Tamil Nadu, Gujarat (compulsory), Karnataka, Maharashtra, and West Bengal may be considered.
  • Initial Pool Size Decision (by Originator in consultation with NHB)
  • Supply of Initial Pool Information to NHB

STEP NO. 3

DUE DILIGENCE & RATING OF THE MORTGAGE POOL (may be done simultaneously)


(a)
Appointment of Rating Agency by Originator (for AAA(So) Rating) (in consultation with NHB) Supply Pool Information to Rating Agency Commencement of Rating Process Award of Rating by Rating Agency

(b) Appointment of Auditors for Due Diligence Audit of Mortgage Pool (with consultations between NHB and Originator) Verification of Mortgage Pool by Auditors for certifying Due-diligence (Auditors may be Statutory Auditors of Bank/HFC or a Chartered Accountancy Firm) Completion of Due Diligence Audit and Certification by Auditors


STEP NO. 4

(MAY BE DONE SIMULTANEOUSLY WITH STEP 5, AS OFFER DOCUMENT IS A PART OF MEMORANDUM OF AGREEMENT TO BE EXECUTED BETWEEN NHB & BANK)

  • Appointment of Issue Arranger(s) by NHB – (On consultations between NHB and Originator)
  • Preparation of Offer Document by Issue Arrangers

STEP No. 5

EXECUTION OF MEMORANDUM OF AGREEMENT WITH NHB

  • Draft Agreement to be sent from NHB to Bank/HFC
  • Finalisation of Agreement by Bank/HFC
  • Signing the Agreement by NHB and Originator


STEP NO. 6

  • ISSUE OPENS
  • RECEIPT OF APPLICATION MONEY BY NHB
  • ISSUE CLOSES
  • FINALIZATION OF ALLOTMENT BY NHB AND ISSUE ARRANGERS
  • ISSUE OF ALLOTTMENT LETTER TO INVESTORS BY NHB (IMMEDIATELY AFTER FINALIZATION OF ALLOTMENT)
  • PAYMENT OF CONSIDERATION BY NHB TO ORIGINATORS (SIMULTANEOUSLY WITH ISSUE OF ALLOTMENT LETTER TO INVESTORS)


STEP No. 7

PAY-OUTS TO INVESTORS ON STIPULATED PAY-OUT DATE(S)


STEP No. 8

DOCUMENTATION

  • Execution: deed of assignment
  • Deed of declaration of trust
  • Servicing and paying agency agreement
  • Any other document
  • Registration of Documents (Deed of Assignment and Declaration of Trust) at the Office of Sub-Registrar of Assurances

(NHB shall provide all legal and advisory support pertaining to execution of documents at Gujarat. For the purpose of local coordination at Gujarat, the Originating HFC /Bank may engage an advocate in consultation with NHB)


OTHER ACTIVITIES

  • SUBMISSION OF MONTHLY MIS REPORTS TO NHB BY S&P AGENT.
  • MONTHLY SURVEILLANCE BY CREDIT RATING AGENCY
  • SEMI-ANNUAL AUDIT REPORTS SUBMISSION BY S&P AGENT TO NHB SPV TRUST
  • PERIODIC INSPECTION AND AUDIT BY NHB SPV TRUST

to be contd…





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