The Hong Kong Mortgage Corp. (HKMC) launched its very first mortgage-backed securitization recently - a HK$1 billion ($129 million) issue backed by housing loans originated by Dao Heng Bank.

Under the program, the HKMC will buy about HK$1 billion of residential mortgage loans from Dao Heng and sell the pool to HKMC Funding Corp. (1) Ltd., a bankruptcy-remote special purpose vehicle, which will then issue MBS back to the bank.

Dao Heng purchased a total of four pools, all of which were priced at 110 basis points below prime, or 7.4% on the launch date. Two pools worth HK$372 million and HK$78 million each had a 15-year maturity, while the other two, worth HK$453 million and HK$103 million, each had 30-year maturities. All of the issues carry the HKMC's guaranty for timely payment of principal and interest, but not against prepayment risk.

Though Dao Heng has the option to sell its own MBS, it will keep them on its own balance sheet for now, since doing so will free up capital. That's because MBS guaranteed by the HKMC carries a 20% risk weighting for capital adequacy treatment, instead of the usual 50% risk weighting for mortgage loans.

Most Hong Kong banks are unlikely to take advantage of the HKMC program, given that most of them have no shortage of cash and are fighting to increase their residential mortgage concentrations, noted sources. Still, "what the HKMC is doing now is how Freddie Mac and Ginnie Mae got started in the U.S. It's a great step forward for the local market," said one analyst.

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