Standards to be set for debt paper

IN a key step towards encouraging the development of the debt markets the Monetary Authority has set out its objectives in establishing a fully fledged domestic mortgage securitisation market.

A minimum credit standard will be created in this innovative debt product sector under a mortgage securitisation blueprint being put together to ensure the territory gets the best internationally recognised credit rating possible for these instruments, standardised documentation and sufficient liquidity to attract major investors.

Andrew Sheng, deputy chief executive of the authority, said yesterday a working party on mortgage securitisation was aiming to enhance the credit standard of these instruments.

It is studying the requirements and procedures of rating agencies so that the underlying asset quality of the instruments would qualify for quality investment grade ratings.

''We are looking at the possibility of harmonising credit standards, taking into account the factors that a rating agency would consider in evaluating a mortgage portfolio such as the loan to valuation ratio, profile of the borrowers and the seasoning, which is the period that the loan has been kept before being securitised,'' said Mr Sheng.

The minimum credit standard will be similar to the conforming loan standard of the Federal National Mortgage Association in the United States.

''If these papers have better quality, they will be better received,'' Mr Sheng said.

Furthermore, the authority aims to foster secondary market liquidity, a crucial factor in the development of this new debt product.

Also being looked at by the working party are subjects likely to have an impact on the transaction cost such as stamp duties, rating fees and service fees of the originating banks.

''There are concerns that harmonising the various types of instruments may cut down [on] innovations. But if the documentation can be standardised, it will help the issuers, investors and credit-rating agencies - and the trading,'' Mr Sheng said.

He also said that it was beneficial for the long-term development of the market.

On the issuers' side, the authority is looking at both the legal and regulatory implications for banks securitising their mortgage portfolio, such as whether the loans would be offloaded from their balance sheets without recourse.

The working group, chaired by the authority, consists of lawyers, investment bankers, capital market practitioners, representatives from the retail banking side and an insurance company representing the investor community.

The authority met representatives from the Capital Market Association earlier this week and explained its stance on this emerging product.

''Mortgage securitisation is a highly technical subject that needs to be understood properly. We should not just adopt international standards but should design ways to ensure a healthy and robust development,'' Mr Sheng said.

The working group is drawing references from the market development of mortgage-backed securities in the US, Australia and Britain.

Not only are banks keen to spread their risk by securitising a portion of their mortgage assets, property developers are eager to offload their mortgage financing from their loan books, according to a merchant banker.

Nan Fung, a privatised property developer, went to the market for a $500 million loan with the backing of its mortgage portfolio as collateral.

However, Mr Sheng said the authority was looking at securitised papers issued by banks only.