Evaluation of the Malaysian Mortgage Corporation - Cagamas N. Kokularupan Views expressed in this paper are that of the authors and do not represent the.

Evaluation of the MalaysianMortgage Corporation - Cagamas

N. Kokularupan

Views expressed in this paper are that of the authors and do not represent the views of IFC/World Bank

Workshop on Housing Finance

June 26-29, 2011

Ulaanbaatar, Mongolia

2

Cagamas Liquidity Model

Provide liquidity to mortgageoriginators at competitive

prices to promote home ownership

Develop the local capital market by being

a credible issuer ofhigh quality securities

Purchase with RecoursePurchase without Recourse

Conventional CagamasBonds, Cagamas RMBS,Cagamas Islamic bonds

Liquidity Hedging Mechanism

3

Cagamas Liquidity Model

• Started operations in October 1987 by purchasing housing loans with recourse

• Purchase with recourse designed to suit local conditions and to overcome barriers that could prevent Scheme from taking off successfully

• Interim step towards Purchase without Recourse and Securitization

4

P Purchase with Recourse with Recourse

House Owners

Financial Institutions

and Selected Corporations

Cagamas

Lead Managers

Investors

Grant loans and debts

Sell loans and debts

Issues debt securities

Subscribe to or purchase debt securities

5

Types of Purchase with Recourse

Purchase With Recourse

• Housing Loans

- fixed rate (1987)

- floating rate (1992)

- convertible rate (1993)

• Islamic house financing debts (1994)

• Industrial property loans (1996)

• Hire purchase and leasing debts (1998)

• Islamic hire purchase debts (2002)

• Credit card receivables (2003)

• Islamic personal loans (2008)

6

Benefits of Purchase with Recourse

• Able to source long-term funds

• Hedge interest rate risk and liquidity risk

• Able to price mortgage loans competitively

• Proceeds from sale not subject to statutory reserve and liquidity requirements

7

Features of Purchase without Recourse

• Outright sale of housing loans to Cagamas with no recourse to default risk

• Cagamas rate based on cost plus basis – bond yield plus Cagamas required margin

• Standardized structure and documentation

• Cash purchase or settlement by Cagamas

• Banks appointed as servicer for the loans

8

Purchase without Recourse/Securitization• Cagamas first introduced Purchase without Recourse to the financial

institutions in 1999

• However, financial institutions did not find it an attractive product then due to following reasons:

- housing loans are good assets

- excess liquidity in banking system

- high risk-weighted capital adequacy ratio of banking system (12.5% in 1999)

- default rates very low

- foreclosure losses negligible

• Breakthrough for Securitization/Purchase without Recourse came in April 2004

• Government of Malaysia mandated Cagamas as the vehicle to undertake securitization of the Government’s staff housing loans on a scheduled basis and over a period of time

• 2004 – Securitization of Government’s staff housing loans

• 2007 – Purchase without Recourse conventional mortgage loans from banks

• 2008 – Purchase without Recourse Islamic mortgage loans from banks

• 2009 – Purchase without Recourse conventional and Islamic hire purchase

debts from banks

9

Cagamas Share of Market Loans

Year Market Share %

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

2.0

6.1

10.0

10.8

9.3

14.2

14.2

21.2

22.8

27.2

30.8

29.6

Year Market Share %

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

21.0

18.7

14.2

11.7

10.6

9.5

9.7

7.3

11.4

11.2

10.3

8.8

10

Key Success Factors of Cagamas

• Shareholding structure and composition of Board

• Support by Ministry of Finance, Securities Commission and Bank Negara Malaysia

• Proceeds of sale of housing loans to Cagamas are exempt from statutory reserves and liquidity requirements (cheaper than fixed deposits)

• Concessions granted to Cagamas bonds to kick start the operations

• High quality assets

• Strong risk management practices, particularly ALM

• Proactive approach

11

Concessions given to Cagamas

Issuance before4 September 2004

Issuance after4 September 2004

Risk weight under the Risk-Weighted Capital Ratio Framework

10% 20%

Liquefiable assets status under the Liquidity Framework

Class-1 liquefiable Class-2 liquefiable

Yield slippage under the Liquidity Framework

4% 6%

Mode of Primary Issuance

Through Principal Dealers’ Network

Book Building

Holdings by insurance companies

Accorded low risk asset status

Accorded credit facilities status

12

Cagamas Evolving Role

1987-1991 Start-up Phase

1992-1997 Take-off and Growth Phase

1998-2003 Diversification Phase

2007 onwards

Securitization Phase 2004 to 2007

Provision of Risk Management Tools

13

1987-1991: Start-up Phase1987-1991: Start-up Phase

• The newness of its operations and its limited product line contributed to its slow progress in the early stage

• Client base:

- Financial institutions (1987)

- Government (1988)

• Initially, only one product - buying on fixed rate for 5 years with recourse

Cagamas Evolving Role (Contd)

14

• 1 Nov 1989, introduced 7-year Cagamas Rate

- to increase the Company’s range of products offered to the

market

- to satisfy the market’s demand for such longer term facilities

• On 24 August 1990, introduced 3-year Cagamas Rate

- to cater to the demand for sale of housing loans for a period shorter than the standard 5 years

• With the new facility, primary lenders can sell their housing loans to Cagamas for a period that may range from 3 to 7 years

Cagamas Evolving Role (Contd)

15

• First five years - low volumes of housing loans purchased

- unfamiliarity with Cagamas’ operations and the

advantages of selling housing loans to Cagamas

- interest rates were declining rapidly

• Outstanding loans held by Cagamas (1987-91)

As at end Housing Loans(RM million)

1987 407

1988 1,396

1989 2,490

1990 3,082

1991 3,060

Cagamas Evolving Role (Contd)

16

• From 1992 - active marketing and introduction of new products

• Widening of client base to include selected corporations

• Extended its range of products on with recourse basis

- Floating rate housing loans (1992)

- Convertible rate housing loans (1993)

- Islamic house financing debts (1994)

- Industrial property loans (1996)

1992-1997: Take-off and Growth Phase1992-1997: Take-off and Growth Phase

Cagamas Evolving Role (Contd)

17

• Outstanding loans and debts held by Cagamas (1992-97)

As atend

RM million % RM million % RM million % RM million %

1992 5,345 100.0 5,345 100.0

1993 6,076 100.0 6,076 100.0

1994 9,915 99.7 29 0.3 9,944 100.0

1995 11,854 99.8 28 0.2 11,882 100.0

1996 16,086 99.7 56 0.3 16,142 100.0

1997 21,317 96.7 85 0.4 643 2.9 22,045 100.0

HousingLoans

Islamic House FinancingDebts Loans

TotalIndustrial Property

Cagamas Evolving Role (Contd)

18

Purchase With Recourse

• Hire purchase and leasing debts (1998)

- serves as a hedging mechanism for such debts which are granted on a fixed rate basis

• Islamic hire purchase debts (2002)

- provides Islamic institutions with an avenue to raise fixed rate funds at low cost to hedge their fixed rate assets

• Credit card receivables (2003)

- allows the sellers to diversify their funding resources

1998-2003: Diversification Phase1998-2003: Diversification Phase

Cagamas Evolving Role (Contd)

19

• Diversification into non-mortgage products has prevented the Company’s balance sheet from decreasing

• Outstanding loans and debts held by Cagamas (1998-2003)As atend

RM million % RM million % RM million % RM million % RM million % RM million %

1998 21,363 95.1 150 0.7 762 3.4 200 0.9 22,475 100.0

1999 17,493 86.9 120 0.6 868 4.3 1,659 8.2 20,140 100.0

2000 17,803 79.4 213 1.0 550 2.5 3,844 17.2 22,410 100.0

2001 15,309 68.8 143 0.6 377 1.7 6,437 28.9 22,266 100.0

2002 14,579 56.0 244 0.9 238 0.9 10,513 40.4 459.0 1.8 26,033 100.0

2003 15,140 55.4 345 1.3 55 0.2 11,236 41.1 563.0 2.1 27,339 100.0

Loans Financing Debts Loans Leasing Debts Purchase DebtsHousing Islamic House Industrial Property TotalHire Purchase and Islamic Hire

Cagamas Evolving Role (Contd)

20

• Purchase of housing loans on without recourse basis

- introduced in March 1999 in tandem with the thrust towards asset-backed securitization

• However, there was no urgency for the financial institutions to securitize their housing loans

- housing loans are good quality assets

- excess liquidity in the banking system

- high risk-weighted capital adequacy ratio of the banking system [12.5% (1999), 13.1% (2005)]

- housing loans are deemed to be high quality assets since their default rates are very low and foreclosure losses are negligible

2004 : Securitization Phase2004 : Securitization Phase

Cagamas Evolving Role (Contd)

21

• The breakthrough for the Scheme came in April 2004 when

the Government of Malaysia mandated Cagamas as the

vehicle to undertake the securitization of the Government’s

staff housing loans (GSHL) on a scheduled basis and over

a period of time

Cagamas Evolving Role (Contd)

22

Cagamas Evolving Role (Contd)

First Securitization Deal with the GovernmentFirst Securitization Deal with the Government

• 20 October 2004

- RM1,936 million of pensioners’ housing loans and the issuance of RM1,555 million in nominal value RMBS

- Represents Malaysia’s first transaction, backed by residential mortgages

• Attracted RM11.1 billion in book size (RM2.2 billion from offshore investors, RM8.9 billion domestic investors)

• At the cut-off rates, book size remained substantial at RM10.6 billion giving an over-subscription rate of 5.6 times

Tenure

(Years)

Issue Amount

(RM million)

Maturity

Date

Coupon Rate

(%)

Spread over MGS

(basis points)

3

5

7

10

580

340

290

345

19-Oct-2007

20-Oct-2009

20-Oct-2011

20-Oct-2014

3.70

4.30

4.95

5.50

18

26

38

45

23

Cagamas Evolving Role (Contd)

2007 Onwards: Provision of Risk Management Tools2007 Onwards: Provision of Risk Management Tools

• Due to excess liquidity, the banks do not require a liquidity tool. Instead, with Basel II, banks were looking for risk management tools

• Thus, Cagamas enhanced the Purchase with Recourse to create the Purchase without Recourse – risk management tool for banks

• 2007 – Purchase without Recourse Conventional mortgage loans from banks

• 2008 – Purchase without Recourse Islamic mortgage debts from banks

• 2009 – Purchase without Recourse Conventional and Islamic Hire Purchase Debts from banks

24

Assets of Cagamas

2005

RM bil

2006

RM bil

2007

RM bil

2008

RM bil

2009

RM bil

2010

RM bil

PWR Conventional MLs

PWR Islamic MLs

PWOR Conventional MLs

PWOR Islamic MLs

Government’s Securitization

(Conventional MLs)

Government’s Securitization (Islamic MLs)

Sub total MLs

11.4

0.7

-

-

3.3

2.1

17.5

8.7

0.6

-

-

3.1

2.0

14.4

9.9

2.7

2.5

-

5.3

4.1

24.5

8.0

2.4

4.8

2.2

4.9

4.0

26.3

3.9

1.8

12.2

8.0

-

-

25.9

3.9

0.5

11.4

7.7

-

-

23.5

PWR Conventional HPLs

PWR Islamic HPLs

PWR Islamic Personal Financing

PWOR Conventional HPLs

PWOR Islamic HPLs

Sub total MLs

9.7

2.0

-

-

-

11.7

7.2

4.6

-

-

-

11.8

3.4

4.3

-

-

-

7.7

1.7

2.8

0.4

-

-

4.9

0.8

1.7

1.0

0.003

0.03

3.5

0.4

2.6

3.7

0.0008

0.03

6.7

Grand Total 29.2 26.2 32.2 31.2 29.4 30.2

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Types of Bonds

End 2010

RM Million

Fixed Rate Bonds

Medium Term Notes

Commercial Papers

Residential Mortgage Backed Securities

Secured Credit Linked Notes

Islamic Securities

Islamic Residential Mortgage Backed Securities

Total

480

9,420

35

4,115

150

10,535

3,365

______

28,100

26

Holders of Cagamas Group Debt Securities

2006

RM million %

2007

RM million %

2008

RM million %

2009

RM million %

2010

RM million %

Banking Institutions

Insurance Companies

and Investment Funds

Government Funds and

Trusts

Non-resident Investors

Individuals

Other Corporations

10,772 39.8

4,976 18.4

9,124 33.7

872 3.2

- -

1,307 4.8

14,844 45.4

6,246 19.1

9,573 29.3

556 1.7

- -

1,476 4.5

14,797 47.7

7,298 23.5

7,344 23.7

171 0.6

- -

1,435 4.6

10,752 36.67

8,336 28.43

8,393 28.62

186 0.63

3 0.01

1,655 5.64

10,837 38.57

8,281 29.47

7,523 26.77

146 0.52

3 0.01

1,310 4.66

Total 27,050 100 32,695 100 31,045 100 29,325 100 28,100 100

27

Total Outstanding Debt Market Securities

Instruments 2006 2007 2008 2009 2010

Malaysian Government Securities

Khazanah Bonds

Other Quasi-Government

e.g. Multilaterial Development Financial Institutions

Cagamas Group Debt Securities

Private Debt Securities

48.8

2.3

3.9

5.9

39.1

52.5

1.9

3.6

5.9

36.1

47.7

1.9

3.9

5.7

40.8

49.7

2.1

4.7

4.7

38.8

51.0

2.0

4.7

4.2

38.1

Total 100.0 100.0 100.0 100.0 100.0

% of total issuance outstanding