Hopes rise on home loans

HOME buyers could benefit from cheaper loans when the Government sets up a mortgage corporation.

The Financial Secretary said there was a strong case for establishing such a body and hoped to see preparations start as soon as possible once the feasibility study and subsequent market consultations were completed.

The Government has sought the help of the largest mortgage corporation in the world, the US-based Federal National Mortgage Association, commonly known as Fannie Mae.

'Fannie Mae was chosen because it is the largest in the world and the most profitable,' a government source said.

Fannie Mae officials visited Hong Kong in January for a few days and would come up with a preliminary report soon, the source added.

With the help of the report, the Hong Kong Monetary Authority will prepare a detailed proposal for consultation with the banking community, capital market participants and other relevant parties.

A mortgage corporation buys mortgages from banks and then issues debt securities to investors.

The structure of the securities matches the interest rate and maturity of the underlying mortgages.

The process, known as mortgage securitisation, helps off-load banks' long-term loans, relieving them of the risks of using short-term deposits to support the mortgage loans.

These long-term assets can then be transferred to long-term funding institutions such as pension funds and insurance companies.

That indirectly reduces an element of instability in the banking sector.

To home buyers, the expected increase in availability of mortgage funds should theoretically result in a lower mortgage rate.

As banks are able to reduce the risks involved in taking on mortgage loans, because they have the option of selling them, the pricing of such loans should come down to reflect these lower risks.

Banks in Hong Kong have traditionally relied on mortgage loans for business. Such loans make up 21.2 per cent of total domestic loans.

If loans to finance property development and investments are included, property-related transactions as a whole account for 38.4 per cent of loans.

It is believed the Government is reviewing the likelihood of doomsday scenarios which might drag the corporation into financial problems.

'In the 1980s, the US Fannie Mae was losing US$1 million [HK$7.72 million] every day,' the government source said.

'We have to understand why such corporations run into problems.' The Government needs to establish the extent of its financial commitment.

Meetings have been held between government branches to assess the feasibility of the plan since the monetary authority issued a report on the secondary mortgage market last June.