The development of Hong Kong Mortgage

Corporation Limited (HKMC)

Agenda Introduction Current development Future development Conclusion MC Questions

Introduction

Background of HKMC

established in March 1997

supply of mortgage financing in Hong Kong

majority of mortgage loans are in floating rate terms

not exposed to any substantial interest rate risk, but subject to other funding risks

Background of HKMC (cont.)

initial capital of HK$1 billion from the Exchange Fund

primary objective is to promote the development of the secondary mortgage market in Hong Kong

can sell their mortgage loans in the secondary market to raise liquidity

Functions of HKMC

Stability of the banking sector

Fund supply for mortgages

Promotion for the debt securities market

Current development

Mortgage-Backed Securities

17th November 2005

HK$1 billion MBS

Under the US$3 billion Bauhinia Mortgage-Backed Securitization Programme

Target : institutional investors

Mortgage loans : from HKHA

Mortgage-Backed Securities (cont.)

The price of the MBS issue is at par

Two classes of notes

- Class A-1 notes (HK$400 million)

- Class A-2 notes (HK$600 million)

Mortgage-Backed Securities (cont.)

Class A-1 notes

- coupon rate : 4.73% (Fixed rate)

- maturity : three years

- stable return

Mortgage-Backed Securities (cont.)

Class A-2 notes

- coupon rate : 1-month HIBOR+0.18% (Floating rate)

- unstable investment yield

Mortgage-Backed Securities (cont.)

Both classes of notes

- repay principal and interest on time

Notes rating

- Standard & Poor's : AA-minus

- Moody's Investors Service : Aa3

10-Year Fixed Rate Mortgage Scheme

3rd November 2005

Under the Corporation’s Fixed Adjustable Rate Mortgage (FARM) Programme

Mortgage loans :

- fixed-rate period from 1 year to 10 years

Six participating banks

10-Year Fixed Rate Mortgage Scheme (cont.)

Extend the loan tenor

- from 5 years to 10 years

Fixed-rate period:

- 1, 2, 3, 5, 7 and 10 years

LTV : 95%

10-Year Fixed Rate Mortgage Scheme (cont.)

Mortgage Rate : Fixed during the period

protect borrowers against any future

volatility in interest rates during the

entire period

End of the fixed-rate period 2 choices:

- re-fixing the mortgage rate

- floating rate of Prime - 2.25% per annum

10-Year Fixed Rate Mortgage Scheme (cont.)

FARM Period Mortgage Rate(% per annum)

Mortgage Rate after FARM Period

(% per annum)

1 5.00%

Prevailing fixed rateOR

Prime - 2.25% per annum

2 5.10%

3 5.20%

5 5.40%

7 5.50%

10 5.60%

10-Year Fixed Rate Mortgage Scheme (cont.)

Long-term mortgage rates are attractive

- e.g.

- prime rate 7.5%

- floating mortgage rate of Prime-2.25% 5.25%

Higher than the fixed mortgage rate up to 3 years offered under the special scheme

10-Year Fixed Rate Mortgage Scheme (cont.)

Triple-win situation

- Homebuyers :

additional choice of mortgage financing

- Participating banks :

procuring new mortgage businesses

- HKMC :

diversify the mortgage portfolio

HK$20 Billion Retail Bond Issuance Programme

Issued date: 1 August, 2005 The issuer’s credit rating:

- Moody’s: Aa3/A1

- S&P: AA-/A+ Four series of notes issued 17 Placing Banks to distribute the Issue to

retail investors

HK$20 Billion Retail Bond Issuance Programme (cont.)

The followings are the coupons of the four series of notes:

Currency Tenor Coupon (payable semi-annually)

HKD (Series A) 1-year 3.00%

HKD (Series B) 3-year 3.50%

USD (Series C) 1-year 3.10%

USD (Series D) 1-year extendable for 1 year and further extendable for 1 year

3.10% for first year3.50% for second year4.00% for third year

HK$20 Billion Retail Bond Issuance Programme (cont.)

Series A and B:

- Denomination: HK$50,000

- Application Price: 102% of the principal amount of the notes

Series C and D:

- Denomination: US$5,000

- Application Price: 100% of the principal amount of the notes

Interest for all four series were payable semi-annually

HK$20 Billion Retail Bond Issuance Programme (cont.) Benefits: - Provided investors to achieve a balanced

investment portfolio and stable interest income

- Wide distribution network to reach out effectively to retail investors

HK$20 Billion Retail Bond Issuance Programme (cont.)

Benefits: - Variety in currency, tenor and return to

provide investment choices to retail investors

- Established market making arrangement to facilitate transactions in the secondary market

HK$20 Billion Retail Bond Issuance Programme (cont.)

The issue obtained a satisfactory subscription result with a total application amount of HK$625 million

HKD 1-year notes (HKMC102) HK$177.7 million

HKD 3-year notes (HKMC311) HK$306.0 million

USD 1-year notes (HKMC103) US$10.7 million

USD 1-year extendable notes (extendable for 1 year and further extendable for 1 year) (HKMC312E)

US$7.5 million

Future Development

Reverse Mortgage Scheme

Home equity conversion mortgages Instead of making regular for the loan Receives a regular monthly installment When dies, repossess and sell the property Surplus → return to the homeowner's estate

Reverse Mortgage Scheme (cont.)

The feasibility is quite low Monthly payout is relatively low

∴ not too attractive Not too many HK people are familiar May be launched if matures

Future Business

Continue to launch 10-year Fixed Rate Mortgage Scheme

Launch Retail Bonds Issuance Programme Provide a better network and market-making

mechanism for the retail bonds Further develop MBS, MIP and retail bonds Develop mortgage-based and debt securities

market

Conclusion

Conclusion Aim: Mortgage financing market in HK

grows healthily Continue to meet its business targets Meet the needs of banking sectors and

homeowners Promote the development of the debt market

MC Questions

What is(are) the function(s) of HKMC?

A. Stability of the banking sector

B. Fund supply for mortgages

C. Promotion the debt securities market

D. All of the above

If the investors want to have a stable return, which class of note do they buy under the new issued MBS?

A. Class A-1 notes (fixed rate)

B. Class A-2 notes (floating rate)

C. (A) & (B)

D. None of the above

What is(are) the triple-win situation(s) of the 10 years Fixed-rate Mortgage Scheme?

A. provides an additional choice of mortgage financing

B. provides an effective avenue for procuring new mortgage businesses

C. diversify the mortgage portfolio

D. All of the above