April 12, 2013

(Former GHLC: the Government Housing Loan Corporation)

APUHF, New Delhi, India

International Conference on Housing : An Engine for Inclusive Growth

Session Housing Finance Post Sub-prime Ⅶ

Masahiro Kobayashi,Chief Economist, Global Market,

Survey and Research Department,

Japan Housing Finance Agency (JHF)

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Perspectives on Responsible Lending and Sustainable Funding

Borrowers Lenders

SPVs Investors

MBS(Private Label Securities)

Irresponsible Lending

Risk Transfer

Credit Loss

Restore Underwriting Criteria - Ability to Repay Restore Investor Confidence - Risk Retention

Misalignment of Incentive Structure under “Originate to Distribute (OTD) Model”

Dodd Frank(Qualified Mortgage, QRM, etc) , FSB Principles for Sound Residential Mortgage Underwriting Practices ･･･

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Outstanding Balance of MBS in the US and Japan

(Source) FRB (Source) Bank of Japan

US Japan

Private Label Securities (PLS) markets are shrinking both in the US and in Japan.

(trillion USD) (trillion JPY)

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Challenges to Covered Bond Legislation in emerging countries

• Structural Subordination

Deposit Insurance, Senior Unsecured Debt etc.←Bail-in?

Cyprus!!!!!• Conflict with Existing Bankruptcy Protection Code

Asset Encumbrance, Bankruptcy Remoteness• Investor Confidence

Possibility of Spread Tightening• Regulatory Framework

Rationale for Preferential Treatments• Practical Designing

Type of Asset Class, Type of Issuer 　 etc.

← 　 ECBC Label Initiative

Further, Can Covered Bond provide 30 year+ Fixed Rate Mortgage?

←FHFA Strategic Plan in the US prefers standardized Securitization

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Type of Mortgage Products in the US

(Source) Freddie Mac

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Type of Mortgage Products in Japan

(Source) JHF

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Yield of 10 Year Government Bond of Japan

(Source) Ministry of Finance

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Risks in Mortgage Lending and their interrelation

Credit Risk

Market Risk

Probability of Default

Loss Given Default

Liquidity Risk

Interest Rate Risk

Prepayment Risk

■Risk transferred to investors when securitized

■Risk transferred in PLS

■Risk retained by Agency in Agency MBS

■Fair value hedge needed by issuing MBS

■Cash flow hedge needed to avoid disintermediation

Payment Shock on ARM transmitted to default on those loans, transforming Market Risk to Credit Risk

Default – Foreclosure – Distressed Sales

Speed of prepayment affects Exposure at Defaults (EAD)

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Payment Shock on 2/28 ARM

(Source) FRB

FF rate became higher at the time of interest rate reset

Origination

Reset on 2/28

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Mortgage Delinquencies by Loan Type in the US

(Source) Mortgage Bankers Association

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Delinquencies on subprime ARM picked up earlier than Unemployment

(Source) US Department of Labor, Mortgage Bankers Association

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DTI and LTV

DTI LTV

Probability of Default Loss Given Default

Borrower’s personal ability to repay Property’s price

Recourse Non - recource

Strategic Default in the US

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Strategic Default in the US

(Source) Realty Trac, Inc., Standard and Poor’s

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LTV in the US

(Source) Fannie Mae

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DTI and LTV in Japan

(Source) JHF

Weighted Average DTI Weighted Average LTV

(note) Only for JHF borrowers

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Tightening of credit conditions when housing price is declining

(Source) FRB “Senior Loan Officer Opinion Survey on Bank Lending Practices”

These materials have been prepared for the sole purpose of providing information to our investors and not as an offer, sale or inducement to buy or sell bonds.

We urge investors when they are making investment decisions regarding bonds to carefully confirm details of the conditions, content, and structure of the final products in the latest product prospectus prepared for the issuance of the relevant bonds as well as any other most recent available information and accordingly assume personal responsibility for their decisions.

(Former the Government Housing Loan Corporation)

Thank you for your attention.