The Japanese mortgage-backed securities market left 2000 as an infant and entered 2001 as an adult. The rapidly growing MBS market is expected to offer public issuance on a quarterly basis beginning in March.

The Government Housing Loan Corporation (GHLC), a government-sponsored entity created in 1950 which holds about 67 trillion, or 37%, of Japan's residential mortgages, is structuring a program similar to U.S. agency passthroughs.

GHLC has decided to issue MBS because the government is pushing for the institution to fund itself, as opposed to the postal savings, life insurance and pension programs that have provided most of GHLC's funding.

The 50 billion offering scheduled for March will be the first of quarterly 50 billion offerings for the year. The fixed-rate passthroughs will have a final maturity of 35 years, with the coupon no higher than the lowest rate in the pool. Loans may be placed in the pool if they were originated between April 20 and June 30, 2000, and may be replaced with a loan originated within the same time period if a loan becomes delinquent for four months.

According to Art Frank, head of MBS research at Nomura Securities in New York, the GHLC MBS will not be backed by the credit of the Japanese government, so credit enhancement would be required to receive a high rating from S&P and R&I. The investor would accept the prepayment risk.

Frank noted that not all details of the program has been disclosed, and he is anticipating the release of five years of GHLC prepayment history to provide a detailed analysis of Japanese mortgage prepayment patters.

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