The Hindu Business Line : Mortgage-backed securities

THE fledgling secondary market for residential mortgage-backed securities (MBS) is set to get a boost with home loan refinancier National Housing Bank donning the garb of marketmaker for such securities. An NHB official today said that the bank will fully guarantee the securities and offer two-way quotes.

An MBS is a representative security of a pool of housing loans, usually clubbed and sold by a home loan financier.

NHB has decided to provide 100 per cent guarantee for both principal and interest to investors in MBS.

The guarantee will provide credit enhancement to the MBS structure, helping secure better rating for the instrument and finer pricing for originators, a bank release said.

The NHB official said that the absence of an exit option for investors had severely limited the development of this market. A top official of a large private bank that is active in the securitisation market said that NHB's move would help deepen the market. "The move by the refinancier will help improve liquidity and pricing for originators," he added.

A developed secondary market is expected to supplement the primary home loan market and result in generation of increased volumes of home loans, said an official with a leading housing finance company.

NHB will also provide refinance to the issuers of securities to the extent of 50 per cent of the size of the subordinate MBS, thus improving liquidity for issuers.

The refinancier itself will invest more in MBS. The bank can invest up to 25 per cent of the issue size or a maximum of Rs 25 crore in a single MBS issue, an option rarely exercised until now.

NHB has also constituted an MBS Trust Supervision Committee comprising external experts to supervise MBS issues in which it acts as Trustee.

Since its first securitisation deal in 2000, NHB has completed 10 MBS transactions involving 36,000 individual housing loans amounting to Rs 665 crore originated by six housing finance companies and one bank. NHB plans to develop the Indian MBS market on the line of the one in the US but adapted to Indian legal and regulatory environment, said an NHB official. The Indian MBS market currently is worth about Rs 3,000 crore.

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