Wednesday, January 24, 2007 Osmeña: Need for innovation in mortgage system By Antonio V. Osmeña Estatements
TODAY'S rapid growth in homeownership and mortgage needs some innovation to make cheaper loans available to more Filipinos.
Mortgage markets are classified into primary and secondary. The primary market is made up of lenders who supply funds directly to borrowers, bear the risks associated with long-term financing, and hold the mortgage until the debt obligation is discharged.
The secondary market is composed of lenders who seek an outlet (employment) for their funds, but are neither equipped nor willing to originate or derive the mortgage debts.
These lenders merely buy mortgages as long-term or temporary investments to compete with other types of securities, such as government or corporate bonds.
Today, Denmark has one of the world’s best-run mortgage markets. Danish mortgages — like those in America, but unlike mortgages in other rich countries — make it easy for borrowers to repay their loans early if they wish.
The combination of fixed interest rates and an option to prepay helps shield borrowers from interest-rate risks. If rates rise after they buy a home, they are protected by the fixed interest rate; if rates fall, they can take out a new mortgage at a lower rate and prepay the old one.
The system is, in many ways, better than America’s, especially as a template for emerging economies like the Philippines. Its mortgage must be financed through the issuing of bonds that adhere to the “balance principle;” the maturity and cash flows of the bonds must match those of the underlying loans almost perfectly.
The bonds are callable to reflect the pre-payment risk of the underlying mortgages.
Denmark’s approach allows mortgage-backed securities into large pools which make them more liquid and attractive to investors.
Besides increasing liquidity, standardization also makes it easier for investors who buy the bonds to forecast and deal with prepayment risk.
The system efficiently separates the business mortgage lending from the ultimate investors — such as pension funds and insurers — who supply the funds by purchasing the mortgage-backed bonds.
Denmark’s mortgage lenders compete on their ability to distribute and service the loans; this specialized competition has helped drive down costs.
It is high time for the Philippine’s financial institutions to adopt the mortgage bond system.
Many economists have touted the Danish mortgage bond approach as an ideal model for emerging-market mortgages.
Totalkredit (a big Danish mortgage lender) and VP Securities Services (Denmark’s central securities depository) can supply many of the software systems.
Mexico is about to become the first country to give it a try; its first mortgage-backed security was issued in December 2003, and for several years, the government has been working with private parties to prepare the ground for a system that would imitate the Danish approach.
The George Soros Foundation, a non-profit organization created by the hedge fund investor of that name, teamed up with Hipotecaria Credito y Casa, one of Mexico’s niche mortgage lenders, to set up a company called HiTo, which will create a Danish-style bridge between mortgage lending and the bond market.
Nothing, however, is certain whether this Danish mortgage bond approach would work in our country.
Most importantly, it should allow borrowers to tap the Philippine’s developing capital market more easily, and help pension funds for its long-term liabilities since local currency assets in which to invest are not attractive.
The mortgage bond approach could have saved the pre-need plan from collapse since the investment is callable.
