Is Pakistan ready for securities backed by mortgage?

Published June 30, 2021
Mortgage-backed securities are blamed for the 2008 global financial crisis. — Reuters/File
Mortgage-backed securities are blamed for the 2008 global financial crisis. — Reuters/File

KARACHI: With housing finance gradually picking up the pace amid the government’s push to promote homeownership, Pakistan Mortgage Refinance Company (PMRC) is expecting to issue its first mortgaged-backed bond in the next couple of years.

“Eventually, we want to buy out the banks’ housing portfolios, securitise them and package them for onwards sales in the bond market,” said PMRC CEO Mudassir H. Khan in a recent interview to Dawn.

PMRC is one-of-a-kind government-backed company that provides long-term liquidity to banks that are primary mortgage lenders.

“We’re waiting for the banks to build their mortgage portfolios to a level where they’ll need to carve them out of their balance sheets in order to curb the concentration of risk,” he said.

Banks don’t like to part with their funds for 15-20 years, which is the typical length of a home loan. So they originate these loans and subsequently sell them to companies like PMRC. In return, they receive fresh liquidity to issue more mortgages.

Internationally, refinance companies turn these loans into mortgage-backed securities (MBS) and float them in the bond market. Bondholders then receive their returns as homeowners make regular mortgage payments.

“I don’t see (mass-level) securitisation happening in the next three to five years. But we want to do a transaction in the next couple of years with at least one bank depending on the nature of its portfolio,” he added.

MBS are blamed for the 2008 global financial crisis. Mortgage-originating banks in the United States lowered their standards and extended home loans to subprime borrowers. These loans were then packaged as MBS and sold to investors around the world. Homeowners then defaulted on their payments, triggering a global financial crisis.

Mr Khan said a stringent legal framework with standardised loan application and approval processes will accompany the securitisation of mortgages. “We won’t securitise low-income housing loans. We’ll securitise other loans but use the proceeds to promote low-income mortgages. We’ll ensure that people trust the paper issued by PMRC. We won’t sell anything that’s prone to default,” he said.

For its first securitisation-related transaction, PMRC is looking for a “safe” portfolio of at least Rs1 billion that ideally has home loans extended to government employees. “The risk will be smaller. It’ll be easier for investors to assess and take exposure. But if I take a low-income loan portfolio, people won’t understand the risk and pricing will go up. That won’t serve our purpose. The money we’ll raise will then be deployed again in home financing,” he said.

The bonds will be tradeable in the secondary market just like the units of mutual funds, he said, adding that PMRC doesn’t want to sell to corporates only.

As for its current operations, the PMRC CEO said it is doing pre-financing transactions with both Islamic and conventional banks.

In simple words, it means PMRC gives upfront money at a discount to mortgage-originating banks on the condition that they’ll use the same to extend home loans to low- and middle-income segments.

“We also encourage them to do fixed-rate lending, which makes the loan affordable for the end consumer,” he said.

According to Mr Khan, “discount” means commercial banks can access funds through PMRC at a rate that’s lower than the PKRV rate, which is the revaluation rate determined at the end of each day on government securities traded in the secondary market. PMRC has extended long-term loans to banks at a rate that was up to three percentage points lower than the going PKRV.

PMRC’s advances grew 16.3 per cent on a quarterly basis to Rs17.4 billion at the end of March. Its quarterly net profit was Rs291m, down 28pc from a year ago. The company recorded a more than 100pc increase in advances in 2020.

PMRC has 14-15 clients, including banks, non-banking institutions, modarabas, microfinance banks and House Building Finance Company, the only specialised housing bank in the country.

Published in Dawn, June 30th, 2021

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