Securitization of Residential Mortgages

Securitization of Residential Mortgages - Transcript

A case on
Securitization of Residential Mortgages
NHB HDFC Securitisation Deal
Ashish Choraria
Securitization Overview
We shall not cease from exploration and the end of all our exploring will be to find ourselves where we started and to know the place for the first time T S Eliot
Securitisation takes us to the same age old concept of division of ownership and risk with external stakeholders Asset Securitization represents the new age financial engineering of converting future receivables into present cash flows Although not a new concept as such it has taken Indian markets some time to adept to the mechanism of conversion of illiquid assets on balance sheet to present cash inflow Securitization involves creation of a separate pool of assets or receivables and issuing capital market securities out of the created assets Thus the pool of assets acts as a backing for the securities issued to the capital market investors
The originator sells assets to a Special purpose vehicle which in turn issues capital market securities and sells to the investors The money received is used to pay the originator subject to the credit arrangements The obligor is the ultimate debtor for the receivables who was liable to pay to the originator The interest and principal on the securities issues to the investors are serviced from the payments made by obligors
In Indian context the market for securitization is still nascent and not many deals have been structured In fact most of the deals have been out from the public domain and have been structured between financial institutions themselves
The following diagram shows the growth of Securitisation in India
The NHB Experience First RMBS Securitization deal in India
The assets to be pooled in case of mortgage backed securitization can be residential or commercial Residential Mortgage Backed securitization is considered to be the mother of all securitizations RMBS have been present in various structural forms in USA from last century For the first time in India National Housing Bank securitized the residential Mortgages originated by HDFC The deal was hovered around by many controversies related to taxation stamp duties etc A pool comprising of 8329 housing loans was created with an asset size of 88 31 crores
NHB s RMBS Institutional Structure
i Originator HDFC
ii Special Purpose Vehicle NHB SPV Trust s
iii Trustee National Housing Bank
iv Issuer NHB SPV Trust s
v Servicer Payments HDFC
vi Loan Administrator Custody of Documents Collections Recovery Management Enforcements HDFC
viii Financial Structuring Legal Documentation NHB
ix Issue Arrangers Merchant Banking Institutions
The above securitization transactions of NHB involved assignment of retail housing loans from the HDFC to NHB The loans repayable in equated monthly instalments EMIs were packaged and offered to investors as Pass through Certificates PTCs by NHB acting as Issuer and Trustee The housing loans which constitute the receivables to be securitized are held by a Special Purpose Vehicle SPV in the nature of a trust declared by NHB The PTCs are in the nature of trust certificates and represent proportionate undivided beneficial interest in the pool of housing loans
Structure of the Deal
Asset size of 88 31 crores was backed to create 2 types of securities The first one was Class A Notes worth 59 7 crores on which there was an interest payment of 11 85 along with principal amortization in 84 months as and when collected Class B notes which were akin to equity interest were given the rights to residual cash flows after servicing of class A notes and principal amortization after 84 months These notes were retained by HDFC itself
Credit Enhancements
The over all rating of the issued instruments was AAA So by Crisil The credit enhancement mechanism was twofold
HDFC itself subscribed to Class B notes whose principal repayment was deferred after 84 months Also these notes were to receive any residual left after payment of interest to Class A notes Thus there was sufficient protection provided to these instruments
The second Credit enhancement was in form of a liquidity facility such that any shortfall in the scheduled payments on principal will be drawn out of HDFC s liquidity facility and any surplus remaining for any month will be first used to defray HDFC for the amount extended in pursuance of this guarantee This guarantee was limited to 11 million
Types of Instruments
SPV NHB SPV Trust HP1
Issue Open Date 22 Aug 00
Issue Close Date 29 Aug 00
No of Loans 8329
Principal Outstanding 88 31
Issue Size 59 7
MBS Coupon 11 85 p a
Credit Enhance ment A B Structure Guarantee
Rating AAA So by CRISIL
As mentioned above there were two types of instruments issued under the SPV The structure was of Pass through nature The A class notes were given an interest rate of 11 85 On the other hand HDFC retained the right to receive any residual amount remained after payment of servicing fees credit rating fees and servicing of class A notes Class A notes were rated AAA SO by Crisil Class B were more of the nature of Equity trench where in HDFC retained the right to receive residual amount along with the risk of taking the first loss and principal amortization after 84 months
Performance of the Structure
The over all collections from the pool were highly satisfactory with most of the assets collected by the end of 5th year of the transaction The prepayment rate was as high as 4 70 Monthly leading to a faster prepayment of principal This also ensured payment of principal of B Class holders before the scheduled time after 84 months In fact a prepayment penalty was paid in both the cases Surprisingly HDFC the originator in the transaction and the retainer of B Class securities got a yield of 21 7 from the securities This was majorly due to the prepayment by the pool holders leading to faster amortization of principal HDFC also earned servicing fees in this transaction Thus the benefits to HDFC were in following respects
Structuring transaction in such a manner that the securities issued to outsiders are highly credit enhanced and a low rate of interest has to be given The rate of interest in this occasion was 11 85 Thus when HDFC retained the remaining amount in its portfolio it also retained the right to receive any surplus yield in the portfolio over and above 11 85 This resulted in Yield on HDFC s equity tranche to the extent of 21 10
The second advantage would be by utilizing the amount received on sale of A Class securities HDFC has to earn over 12 42 on this amount so as to earn over the opportunity cost of selling this asset block to NHB
Average Pool Yield Per annum 16 58
Average PTC A Yield p a 12 42
Average PTC B Yield p a 21 10

Prepayment rate monthly 4 70


Annexure 1
Pool Performance 31st December 2005
I Total Pool Collections 109 73

II Total Payouts

A Payouts to PTC A
Principal Scheduled 13 62
Interest 11 69
Prepayment 45 16
Prepayment Penalty 0 24

B Payout to Servicers
Trustee NHB 0 16
Guarantee fee NHB 0 00
Servicing Paying Agent 0 39
Rating Agency 0 03

C Payout to PTC B
Prepayment 27 02
Prepayment Penalty 0 14
Residual Income 11 28

Total Payouts A B C 109 73

Q If capital adequacy norms as suggested by BIS come into force HDFC will suffer much higher capital erosion than would have been the case if the receivables stayed on HDFC s books Why did HDFC went for such a structured deal
Q What is the role of NHB in the over all transaction
Q Prepayment risk has been very high in this deal What measured could have been taken to deal with this risk effectively
Q Comment on the High yield earned by HDFC on the Class B notes
References
http nhb org in Financial nhbs experiences htm
HYPERLINK http www vinodkothari com secindia htm http www vinodkothari com secindia htm
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