Japan will see its first domestically-placed public residential mortgage backed security towards the end of April in a deal from Fuji Bank worth 32.9 billion ($313 million). The deal, which is being arranged by Fuji Securities, comes after the first successful residential MBS, which was issued by Sanwa Bank in 1998 and placed internationally, and a recent privately placed, domestic residential mortgage deal from Orient Corp.

The deal will be chopped into seven tranches, the top six rated Aaa by Moody's Investors Service, and the seventh rated A2.

The deal has to cope with a problem that has restricted the development of residential mortgage securitization in Japan: the legal difficulties of transferring the security interest of the properties that back mortgages into the special purpose company.

"The problem is that for large banks loans are guaranteed by their affiliated subsidiary and therefore the rights to underlying collateral are held by the guarantor not by the bank itself and that causes a problem when you try to transfer them," said one expert in Japanese securitization.

The problem seemed to have been overcome by Sanwa's deal, which was arranged by Bear Stearns, though Bear and their lawyers decline to explain the legal steps they took to achieve a clean transfer. However, many experts in Japanese securitization believe that the transfer behind Sanwa's deal may be open to challenge.

Yu-Tsung Chang, managing director of Standard & Poor's in Tokyo, said that S&P has been approached with five or six different proposals to deal with the problem. "None of them come to a perfect solution on the surface," he said. "We are still working with the arrangers to see if the proposals work."

According to Naoki Yamauchi, managing director for Moody's in Tokyo, Fuji's transaction sidesteps the problem because it is a securitization of unsecured residential home loans guaranteed by Fuji Bank's subsidiary, with the security interest held by the guarantor. As the transaction declines any attempt to get the benefit of a security interest in the underlying properties, the rating is based on the cashflow from the loans.

Also, because the guarantor is unrated and Fuji's rating is A3, Moody's doesn't count on the recovery from the guarantor for the Aaa-rated portion of the deal and only gives slight credit to the guarantee for the A2 tranche, Yamauchi added.

The success of that strategy will only be known when the deal launches and investors get the chance to pass their judgement. MBS experts said that the deal's pricing would inevitably be affected by the lack of any recourse to the underlying properties.

An even more significant development for the future of mortgage securitization in Japan seems to be gathering pace, with the lower house of the Japanese parliament recently passing enabling legislation to allow the Government Housing Loan Corp., a state body that is the country's biggest mortgage lender, to issue its first securitization.

The GHLC has a portfolio of mortgages worth around $666 million, but any deal may still be a long way off, perhaps not until early next year, said securitization pros, as there are still several unaddressed issues. These include the fact that the body, which is overseen by the Ministry of Construction, has to take into account the political imperatives of its masters and other government departments such as the Ministry of Finance.

One of these is a desire for a deal to remain entirely in Japan (at least until the securities are sold), ruling out a Cayman Island SPC that is usual for Japanese securitizations. The use of a domestic SPC would be tricky, if not impossible, under current legislation, so there are suggestions that parliament will be asked to pass more enabling legislation.

According to Toshiro Kojima, in the GHLC's planning department, the body hopes to issue regular deals in the hope of promoting the MBS market. The first deal will be a pass-through worth 50 billion and will be backed by mortgages written from April onwards and this will be followed up with deals totaling 200 billion each year.

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