January 31, 2012, New Delhi

(Former GHLC: the Government Housing Loan Corporation)

Asia Pacific Union for Housing Finance

International Conference on “Growth with Stability in Affordable Housing Markets” during January 29-31, 2012 at Hotel Imperial, Janpath, New Delhi

Technical Session VII:Securitization and Secondary Mortgage Market

Masahiro Kobayashi,Chief Economist, Global Market,

Incorporated Administrative Agency Japan Housing Finance Agency (JHF)

All Rights Reserved.

2

Perspectives

• Financial Stability• Consumer Protection• Investor Confidence• Role of Government• Historical and/or Geographical Background• Implication for Pro-Poor Housing

etc.

3

Outstanding Residential Mortgage Debt and Type of Funding (as of 2010)

Trillion USD

(Source) EMF, ECBC, AFME, FRB, JHF (Note) No PLS statistics available in Japan

PLS = Private Label Securities

All Rights Reserved.

87.7817 (USD/ J PY)1.3261 (Euro/ USD)

(Currency Conversion Rate)

4

Growth of Residential Mortgage Debt Outstanding

【 Y/Y change 】 【 Index (Dec 2000=100) 】

All Rights Reserved.

(Source) EMF, FRB, JHF (Source) EMF, FRB, JHF

5

Home Price Index (2000=100)

(Source) EMF, FHFA, Real Estate Economic Institute Co., Ltd, Cabinet Office, Government of Japan

All Rights Reserved.

6

“Europe” – not same by countries, like Germany and Spain

【 Home Price Index (2000=100) 】

All Rights Reserved.

(Source) EMF (Source) EMF

【 Mortgage Debt Outstanding （ Y/Y Change ）】

“Population Bonus” – Correlation with Housing Bubble?

7

All Rights Reserved.

(Source) United Nations “World Population Prospects, the 2010 Revision”

Ratio of working force population (age 15-64) over dependent population

8

Contraction of Private Label Securities Markets in Japan and US

Trillion USD

Trillion JPY

【 Japan New Issue 】 【 US New Issue 】

（ Source) 　 Japan Securities Dealers Association

（ Source) 　 Securities Industry and Financial Markets Association

Agency = Fannie Mae, Freddie Mac, Ginnie Mae

All Rights Reserved.

9

Covered Bond Markets in Europe

BillionEuro

【 Issuance 】 【 Outstanding】

（ Source) 　 ECBC

BillionEuro

（ Source) 　 ECBC

All Rights Reserved.

10

According to European Covered Bond Council (ECBC),

“Covered bonds are debt instruments secured by a cover pool of mortgage loans (property as collateral) or public-sector debt to which investors have a preferential claim in the event of default.

While the nature of this preferential claim, as well as other safety features (asset eligibility and coverage, bankruptcy-remoteness and regulation) depends on the specific framework under which a covered bond is issued, it is the safety aspect that is common to all covered bonds. “

http://ecbc.hypo.org/Content/default.asp?PageID=504

Key features in different covered bond frameworks are available at ECBC Covered Bond Comparative Database

http://www.ecbc.eu/

What is Covered Bond?

All Rights Reserved.

All Rights Reserved.

Most European Jurisdictions introduced Covered Bond Legislations

（ Source ） vdp (The Association of German Pfandbrief Banks)

11

And new legislative initiatives are emerging in many jurisdictions around the globe.

?

All Rights Reserved.

Cover Pool Administrator

Issuing Bank

12

Stand Alone Credit of Banks

【 When Issuing bank is solvent 】

Typical Legal Framework for Covered Bonds (German Pfandbrief etc)

【 When Issuing bank becomes insolvent 】

Quality of Cover Assets

CoverAssets

CoveredBonds

Investors

OtherAssets

OtherBonds

Insolvency Administrator

OtherAssets

OtherBonds

CoverAssets

CoveredBonds

Investors

＋

In case of deficiency

Senior　UnsecuredDebt

Covered　BondMBS　

(Securitization)

Balance　Sheet　Treatment On　balance On　balance Off　balance

Priority　Claim　on　Collateral No

YesDual　

Recourse

YesSingle　

Recourse

13

Covered Bond : Hybrid Nature

All Rights Reserved.

Typical Comparison of MBS vs Covered Bond

14

　 MBS Covered Bond

HistorySince 1970 Since 1770US Origine German Origine

Balance Sheet Treatment of Assets

Off-Balance On-Balance（ Static Pool ） （ Dynamic Pool ）

Credit Risk of the BorrowersTransferred to Investors

Retained by Issuers(→5% retention ）

Moral HazardMore Likely Less Likely

（ Originate to Distribute Model ） （ Originate to Hold Model ）

Loan Modification Difficult Easy

Market Condition Almost Collapsed Relatively Stable

Regulatory Treatment Unfavorable Preferential

ALM RiskTransferred to Investors

Remains with Issuers（ Option Premium is included ）

All Rights Reserved.

15

Mortgage Product vis-à-vis Funding Tool

MortgageProduct

ARMAdjustable　RateMortgage

Hybrid　ARMFRM

Fixed　RateMortgage

(Image)

Suited　Funding　Tool Deposit Senior　Unsecured　DebtCovered　Bond

MBS(Mortgage　Backed　Securities)

Interest　Risk Born　byBorrower

Shared　byBorrower　and　Bank

Transfrered　toInvestors

Prepayment　Risk N/A Shared　byBorrower　and　Bank

Transfrered　toInvestors

Nomiral　Rate Low Moderate High

Typical　Case UK,　Spain　and　many　othersUS　SubprimeGermanyFrance　etc

US　ConformingJ HF　F35Denmark

All Rights Reserved.

16

Bullet　(Straight　Bond) Pass-through (with Amortization and prepayment)

On-B

alance

Pfandbrief　 Germany（ ）Cédulas　Hipotecarias Spain（ ）

J HF　MBS J apan（ ）Særligt　Dækkede　Obligationer　 Denmark（ ）

Fannie　Mae　MBS Freddie　Mac　PC US、 （ ）

Off-Balance

Obligations　Foncières France（ ）Obbligazioni　Bancarie　Garantite Italy（ ）

Ginnie　Mae　MBS US（ ）Private　Label　Securities US（ ）Master- Trust　MBS　(UK)

Patern　of　Cash　Flow

Balance　Sheet　T

reatment　of　A

ssets

Diversification of MBS and Covered Bond from the Perspectives of Cash Flow and Balance Sheet Treatment

All Rights Reserved.

Securitization and secondary mortgage market – historical perspective

17

All Rights Reserved.

• Historical developments of the securitization and secondary mortgage market in the US and Japan are in opposite order. In the US, secondary market developed in the 1930’s followed by the securitization in 1970’s. In Japan, securitization started in late 1990’s to liquidate outstanding portfolio followed by development of secondary market in the early 2000’s. This means that development of securitization and secondary mortgage market are not necessarily interrelated.

1934 1938 1970 1971 1977 1981

FHA Fannie Mae Fannie MaeGinnie Mae Freddie Mac BOA

Secondary Market Operation Securitization (OTD)

1997 1999 2001 2003 2007

HTB Sanwa GHLC GHLC JHF

Securitization (OTH)Secondary Market Operation

And Securitization (OTD)

Role that central banks has played in the mortgage market during the Crisis

18

All Rights Reserved.

• FRB purchased Agency MBS up to 1.25 trillion USD. US Treasury injected capital to Fannie and Freddie amouting169 billion USD so far.

• ECB purchased covered bond 60 billion Euro so far and announced to purchase another 40 billion.

• Bank of Japan purchased no JHF MBS so far.]

What is the opportunity cost?

Share of Central Bank purchase per outstanding balance

Challenges to Covered Bond Legislation in emerging countries

• Structural Subordination

Deposit Insurance, Senior Unsecured Debt etc.←Cap ？• Conflict with Existing Bankruptcy Protection Code

Bankruptcy Remoteness• Investor Confidence

Possibility of Spread Tightening• Regulatory Framework

Rationale for Preferential Treatments• Practical Designing

Type of Asset Class, Type of Issuer 　 etc.

　　　　← 　 Reference: ECBC Label Initiativehttp://intranet.hypo.org/docs/1/FCJJPFKBNDNGPDLLGGADEJCFPDWY9DBYB1TE4Q/EMF/Docs/DLS/2011-00105.pdf

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

←Is 30+ year Fixed Rate Mortgage Necessary?

19

All Rights Reserved.

20

Gov’t BondPrice Decline

Income Loss

Bank Capital

RestrictLending

Recession

DeteriorateFiscal Position

Cut Expenditure

Fair Value Loss Increase Debt Service

Hard to injectDamage

Deleverage

TightenUnderwritingCriteria

DeteriorateAsset Quality

Reduce Tax Revenue

Fiscal Consolidation

【 Banking Sector 】 【 Public Sector 】

【 Real Economy 】

Reduce Aggregate DemandsLess Money Supply

Adverse Feedback Loop in Europe – Interaction between Gov’t and BKs

Risk Premium

All Rights Reserved.

21

Reform of Japanese Mortgage Market

GHLC

Borrowers

Fixed Rate Mortgage

Treasury

Loan with Prepayment Penalty

GOJSubsidies

BanksARM

DepositorsDeposit

JHF

Borrowers

Investors

BanksARM

DepositorsDeposit

Banks and Mortgage Banks

MBS

F35

20thCentury

21stCentury Sell Loans to JHF35 year Fixed Rate Mortgage

Adjustable Rate Mortgage

Government of Japan

GHLC: Government Housing Loan CorporationJHF: Japan Housing Finance Agency

Mortgage Backed Security

Est 1950

Est 2007

All Rights Reserved.

22

Before an Beneficiary Certificate Trigger EventBefore an Beneficiary Certificate Trigger Event

Investors

Make timely payment of both principal and interest based on JHF’s responsibility

Trust banks

Trust asset

JHF MBS

JHF

Loans to be securitized Proceeds from

the trust loan pool are passed along as the repayment of the MBS principal.

JHF MBS –similarity with Covered Bond

After an Beneficiary Certificate Trigger EventAfter an Beneficiary Certificate Trigger Event

Dividend based on beneficiary right

JHF

Occurrence of event causing a beneficiary interest

JHF MBS

Beneficiary(investors)

Beneficiary right

Trust bank

Trust asset

Note :Beneficiary certificate trigger events1. The obligor of the JHF MBS becomes a joint stock corporation or a legal entity to

which file for corporate reorganization or other similar bankruptcy proceedings can be applied

2. The failure by JHF to fulfill a payment obligation with respect to the MBS is not cured within 7 days

JHF MBS is an asset-backed Zaito bondBefore any beneficiary certificate trigger event , interest and principal are paid by JHF, as if MBS is a corporate bonds

The credit of JHF MBS is supported by both the credit of JHF and the credit of housing loan pool Due to Japanese government's policy to maintain flexibility against the borrowers, JHF will recognize the housing loans

on the balance sheet even after the MBS is issued After an beneficiary certificate trigger event , JHF MBS, a Zaito bond, will be replaced with the beneficiary right Risk weight of JHF MBS, as a Zaito bond is 10% under standardized approach By selecting a corporate bond format, JHF contributes to the development of secondary markets

All Rights Reserved.

23

JHF MBS – 　 similar legal framework not applicable to other institutions

Legal　Status

Main　business

Ownership

Appilcability　ofBancruptcyProceedings

1950

Incorporated　Administrative　Agency　(J HF)Special　Public　Corporation　(GHLC)

Not　applicable　to　other　institutions

Mortgage　Origination　(Funding　:　Treasury　Borrowing) Secondary　Market　Operation　(Funding　:　MBS)

Amendment　to　GHLC　Law

GHLC　MBS　Structure,　including　Asset　Seggregationin　case　of　insolvency　or　privatization　etc.,　introduced

No　(No　article　pertaining　to　insolvency　of　GHLC)No,　but　if　privatized,

possible　depending　on　legal　framework

Same　legal　framework　inherited

100%　Owned　by　the　Government　of　J apan

1999 2007

All Rights Reserved.

24

Collateral for Monthly and S-Series MBS

All Rights Reserved.

25

Issuance Volume of JHF MBS – Record High in April 2011 – 6.2 billion USD equivalent

Billion USD

(Source) JHF

All Rights Reserved.

26

Nominal Coupon of JHF MBS and its Spread to 10 year JGB

(Source) JHF

All Rights Reserved.

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.