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Evaluation of the Malaysian Mortgage Corporation - Cagamas N. Kokularupan Views expressed in this paper are that of the authors and do not represent the.

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Presentation on theme: "Evaluation of the Malaysian Mortgage Corporation - Cagamas N. Kokularupan Views expressed in this paper are that of the authors and do not represent the."— Presentation transcript:

1 Evaluation of the Malaysian Mortgage Corporation - Cagamas N. Kokularupan Views expressed in this paper are that of the authors and do not represent the views of IFC/World Bank Workshop on Housing Finance June 26-29, 2011 Ulaanbaatar, Mongolia

2 2 Cagamas Liquidity Model Provide liquidity to mortgage originators at competitive prices to promote home ownership Develop the local capital market by being a credible issuer of high quality securities Purchase with Recourse Purchase without Recourse Conventional Cagamas Bonds, Cagamas RMBS, Cagamas Islamic bonds Liquidity Hedging Mechanism

3 3 Cagamas Liquidity Model Started operations in October 1987 by purchasing housing loans with recourse Purchase with recourse designed to suit local conditions and to overcome barriers that could prevent Scheme from taking off successfully Interim step towards Purchase without Recourse and Securitization

4 4 P Purchase with Recourse with Recourse House Owners Financial Institutions and Selected Corporations Cagamas Lead Managers Investors Grant loans and debts Sell loans and debts Issues debt securities Subscribe to or purchase debt securities

5 5 Types of Purchase with Recourse Purchase With Recourse Housing Loans - fixed rate (1987) - floating rate (1992) - convertible rate (1993) Islamic house financing debts (1994) Industrial property loans (1996) Hire purchase and leasing debts (1998) Islamic hire purchase debts (2002) Credit card receivables (2003) Islamic personal loans (2008)

6 6 Benefits of Purchase with Recourse Able to source long-term funds Hedge interest rate risk and liquidity risk Able to price mortgage loans competitively Proceeds from sale not subject to statutory reserve and liquidity requirements

7 7 Features of Purchase without Recourse Outright sale of housing loans to Cagamas with no recourse to default risk Cagamas rate based on cost plus basis – bond yield plus Cagamas required margin Standardized structure and documentation Cash purchase or settlement by Cagamas Banks appointed as servicer for the loans

8 8 Purchase without Recourse/Securitization Cagamas first introduced Purchase without Recourse to the financial institutions in 1999 However, financial institutions did not find it an attractive product then due to following reasons: -housing loans are good assets -excess liquidity in banking system -high risk-weighted capital adequacy ratio of banking system (12.5% in 1999) -default rates very low -foreclosure losses negligible Breakthrough for Securitization/Purchase without Recourse came in April 2004 Government of Malaysia mandated Cagamas as the vehicle to undertake securitization of the Governments staff housing loans on a scheduled basis and over a period of time 2004 – Securitization of Governments staff housing loans 2007 – Purchase without Recourse conventional mortgage loans from banks 2008 – Purchase without Recourse Islamic mortgage loans from banks 2009 – Purchase without Recourse conventional and Islamic hire purchase debts from banks

9 9 Cagamas Share of Market Loans YearMarket Share % YearMarket Share %

10 10 Key Success Factors of Cagamas Shareholding structure and composition of Board Support by Ministry of Finance, Securities Commission and Bank Negara Malaysia Proceeds of sale of housing loans to Cagamas are exempt from statutory reserves and liquidity requirements (cheaper than fixed deposits) Concessions granted to Cagamas bonds to kick start the operations High quality assets Strong risk management practices, particularly ALM Proactive approach

11 11 Concessions given to Cagamas Issuance before 4 September 2004 Issuance after 4 September 2004 Risk weight under the Risk-Weighted Capital Ratio Framework 10%20% Liquefiable assets status under the Liquidity Framework Class-1 liquefiableClass-2 liquefiable Yield slippage under the Liquidity Framework 4%6% Mode of Primary Issuance Through Principal Dealers Network Book Building Holdings by insurance companies Accorded low risk asset status Accorded credit facilities status

12 12 Cagamas Evolving Role Start-up Phase Take-off and Growth Phase Diversification Phase 2007 onwards Securitization Phase2004 to 2007 Provision of Risk Management Tools

13 : Start-up Phase The newness of its operations and its limited product line contributed to its slow progress in the early stage Client base: -Financial institutions (1987) -Government (1988) Initially, only one product - buying on fixed rate for 5 years with recourse Cagamas Evolving Role (Contd)

14 14 1 Nov 1989, introduced 7-year Cagamas Rate -to increase the Companys range of products offered to the market -to satisfy the markets demand for such longer term facilities On 24 August 1990, introduced 3-year Cagamas Rate -to cater to the demand for sale of housing loans for a period shorter than the standard 5 years With the new facility, primary lenders can sell their housing loans to Cagamas for a period that may range from 3 to 7 years Cagamas Evolving Role (Contd)

15 15 First five years - low volumes of housing loans purchased - unfamiliarity with Cagamas operations and the advantages of selling housing loans to Cagamas -interest rates were declining rapidly Outstanding loans held by Cagamas ( ) Cagamas Evolving Role (Contd)

16 16 From active marketing and introduction of new products Widening of client base to include selected corporations Extended its range of products on with recourse basis -Floating rate housing loans (1992) -Convertible rate housing loans (1993) -Islamic house financing debts (1994) -Industrial property loans (1996) : Take-off and Growth Phase Cagamas Evolving Role (Contd)

17 17 Outstanding loans and debts held by Cagamas ( ) Cagamas Evolving Role (Contd)

18 18 Purchase With Recourse Hire purchase and leasing debts (1998) -serves as a hedging mechanism for such debts which are granted on a fixed rate basis Islamic hire purchase debts (2002) -provides Islamic institutions with an avenue to raise fixed rate funds at low cost to hedge their fixed rate assets Credit card receivables (2003) -allows the sellers to diversify their funding resources : Diversification Phase Cagamas Evolving Role (Contd)

19 19 Diversification into non-mortgage products has prevented the Companys balance sheet from decreasing Outstanding loans and debts held by Cagamas ( ) Cagamas Evolving Role (Contd)

20 20 Purchase of housing loans on without recourse basis -introduced in March 1999 in tandem with the thrust towards asset-backed securitization However, there was no urgency for the financial institutions to securitize their housing loans -housing loans are good quality assets -excess liquidity in the banking system -high risk-weighted capital adequacy ratio of the banking system [12.5% (1999), 13.1% (2005)] -housing loans are deemed to be high quality assets since their default rates are very low and foreclosure losses are negligible 2004 : Securitization Phase Cagamas Evolving Role (Contd)

21 21 The breakthrough for the Scheme came in April 2004 when the Government of Malaysia mandated Cagamas as the vehicle to undertake the securitization of the Governments staff housing loans (GSHL) on a scheduled basis and over a period of time Cagamas Evolving Role (Contd)

22 22 Cagamas Evolving Role (Contd) First Securitization Deal with the Government 20 October RM1,936 million of pensioners housing loans and the issuance of RM1,555 million in nominal value RMBS -Represents Malaysias first transaction, backed by residential mortgages Attracted RM11.1 billion in book size (RM2.2 billion from offshore investors, RM8.9 billion domestic investors) At the cut-off rates, book size remained substantial at RM10.6 billion giving an over-subscription rate of 5.6 times Tenure (Years) Issue Amount (RM million) Maturity Date Coupon Rate (%) Spread over MGS (basis points) Oct Oct Oct Oct

23 23 Cagamas Evolving Role (Contd) 2007 Onwards: Provision of Risk Management Tools Due to excess liquidity, the banks do not require a liquidity tool. Instead, with Basel II, banks were looking for risk management tools Thus, Cagamas enhanced the Purchase with Recourse to create the Purchase without Recourse – risk management tool for banks 2007 – Purchase without Recourse Conventional mortgage loans from banks 2008 – Purchase without Recourse Islamic mortgage debts from banks 2009 – Purchase without Recourse Conventional and Islamic Hire Purchase Debts from banks

24 24 Assets of Cagamas 2005 RM bil 2006 RM bil 2007 RM bil 2008 RM bil 2009 RM bil 2010 RM bil PWR Conventional MLs PWR Islamic MLs PWOR Conventional MLs PWOR Islamic MLs Governments Securitization (Conventional MLs) Governments Securitization (Islamic MLs) Sub total MLs PWR Conventional HPLs PWR Islamic HPLs PWR Islamic Personal Financing PWOR Conventional HPLs PWOR Islamic HPLs Sub total MLs Grand Total

25 25 Types of Bonds End 2010 RM Million Fixed Rate Bonds Medium Term Notes Commercial Papers Residential Mortgage Backed Securities Secured Credit Linked Notes Islamic Securities Islamic Residential Mortgage Backed Securities Total 480 9, , ,535 3,365 ______ 28,100

26 26 Holders of Cagamas Group Debt Securities 2006 RM million % 2007 RM million % 2008 RM million % 2009 RM million % 2010 RM million % Banking Institutions Insurance Companies and Investment Funds Government Funds and Trusts Non-resident Investors Individuals Other Corporations 10, , , , , , , , , , , , , , , , , , , , Total27, , , , ,

27 27 Total Outstanding Debt Market Securities Instruments Malaysian Government Securities Khazanah Bonds Other Quasi-Government e.g. Multilaterial Development Financial Institutions Cagamas Group Debt Securities Private Debt Securities Total100.0 % of total issuance outstanding


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