IN a move that will shake up the local mortgage business, US financial giant General Electric Capital will set up a special mortgage servicing company with a local property developer to provide financing for flat buyers. The joint-venture company, in which GE Capital will take a majority stake, will securitise, on an ongoing basis, the mortgage loans it takes on or obtains from the property developer into triple-A rated papers and sell them to US investors. 'With the triple-A rating, the papers can easily be sold to US investors,' said Michael Pralle, president of GE Capital East Asia. 'The mortgage-backed securities [MBS] market will be opened up drastically.' The papers issued by the company will enjoy a higher rating than the A sovereign ceiling rating for Hong Kong because they will be guaranteed by GE Capital which is triple-A rated by both Standard & Poor's and Moody's International. Not only will the MBS market be developed, this innovative idea will deal a severe blow to the local banks' role as major mortgage lender. 'It will open up a new channel of financing and will disintermediate the banks, taking away some of their business,' he said. He added that the discussion was at an advanced stage and the plan would take off by the middle of next year. The mortgage servicing company, apart from handling the billing and collection of mortgage loans, will possibly warehouse a portion of the loan on its balance sheet while constantly shedding off others in the form of securitised papers. 'It will act as an ongoing conduit for various pools of mortgage loans,' Mr Pralle said. As the company will pull together different mortgage pools in various geographical locations, the concentration risk will be reduced, he said. Coupled with a higher rating, the papers should be more popular than the previous ones issued and sold to regional investors. 'There is a limited appetite for mortgage paper in the region, but the appetite for triple-A paper is huge,' he said. The joint-venture will be a finance company taking no deposits from the public and therefore will not be regulated by the Hong Kong Monetary Authority, the territory's central bank. It will be the first of its kind in Hong Kong. While it is new in the local context, it is actually a transfer of expertise from the US to Hong Kong. GE Capital has securitised about US$80 billion mortgage loans using the same approach in the US. But MBS in Hong Kong can be two to 21/2 times more profitable than in the US because the gross margin here is much higher. 'I am confident that it will be at least as profitable as in the States which recorded a 1.6 per cent return on assets and 16 per cent return on equity,' he said. So far, Bank of America (Asia), Citibank and Cheung Kong have securitised their mortgage portfolios, with only moderate results. GE Capital, with diversified financial services, is ranked among the top 10 largest companies in the US, comparable to Coca-Cola.