Japan's Government Housing Loan Corporation (GHLC), the state-run agency that accounts for over 30% of the country's mortgage origination, is to undergo a major overhaul, scheduled to be completed by the end of the 2006 financial year.

The Home Affairs Ministry is finalizing the details on a plan that will leave GHLC an independent entity, assisting private mortgage providers solely through securitization. At present, GHLC also has sizeable loan portfolios that are not securitized. The Ministry is due to present its proposals in a session of DIET (Japan's national legislature) early next year.

The reorganization will likely occur in two stages. In order for the independent agency to have no debts at its inception in 2006, the government wants to inject around Y500 billion (US$4.5 billion) of tax revenues - spread over a 5-10 year period - to cover loan defaults. This would be the first time tax funds would be used for bad loans. Previously they have been used only to finance low-interest rate mortgages.

A decision on whether the government will able to increase the tax burden by such an amount will be made at the end of the year. With the economy finally showing improvement, even the slightest tax increase will draw fire from opposition parties, although it is doubtful that it will prevent the plan from going ahead.

Once the independent company is established, the government will take over all existing GHLC assets and liabilities during phase two. From then on, the agency will fund all new mortgage origination and acquisition entirely through MBS issuance.

Steps are already being taken to broaden the mortgages eligible for GHLC's MBS program. In the institution's provisional budget for 2005, the maximum individual loan permitted for securitization will be increased to Y80 million from Y50 million. Additionally, loans for older properties - rather than just new housing - will become eligible as well.

The budget also indicates GHLC will increase MBS issuance to Y2.05 trillion in 2005, up from Y1.5 trillion scheduled for 2004.

Meanwhile, the 22nd transaction issued out of GHLC's trust program - created in 2001 by Mitsubishi Trust and Banking Corp. - was completed at the end of August. The Y30 billion deal, rated AAA by Standard & Poor's and backed by 1,837 loans worth Y32.9 billion, offers a fixed coupon of 1.87%, around 26 basis points over 10-year government paper.

Given the general lack of transparency in the Japanese market, it is refreshing that another government agency - the Japan Finance Corporation for Small and Medium Enterprise (JASME) - also decided to disclose pricing details on its debut securitization, issued through the Wakaba special purpose company.

JASME's 3.2-year offering - a Y22.6 billion synthetic CBO backed by a reference portfolio of 372 bonds - priced at 20 basis points over 3-month Tibor. Mizuho Securities and Merrill Lynch acted as joint managers on the transaction, the first issued out of a program that JASME hopes will raise Y150 billion in 2004.

Japan thrives in September

After the annual summer lull, September looks to be shaping up as a bumper month for Japanese securitization. Hokuto Bank, with assets totaling Y1.2 trillion and headquartered in Akita-City, last week launched a Y24.9 billion RMBS out of the Komachi Trust. Mizuho Securities is handling the transaction.

On the same day, Chiba Kogyo Bank launched its own Y52 billion MBS deal via the Cosmos Mortgage Trust. Both will be private placement offerings.

Shifting asset classes, Tokyo-based consumer finance company, Sanwa Finance, is set to issue a Y12 billion deal backed by unsecured consumer loans. HypoVereinsbank is arranging the 8.5-year transaction, which features Y10.4 billion of senior notes and a Y1.6 billion sub-piece. The senior tranche is rated Aa2'/'AA' by Moody's Investor's Service and S&P, respectively, with the latter also rating the junior bonds single-A.

Joining in the fun will be Orient Corporation (Orico), one of Japan's biggest consumer finance firms, with Y4.2 trillion in assets. Orico will issue Y45 billion of fixed rate ABS backed by loan card and credit card receivables, another private placement led by Mizuho. Closing is set for September 28.

The 5.5-year issue comprises Y37.9 billion of class-A bonds, rated triple-A by Moody's and S&P, and a Baa2'/'BBB' rated Y7.1 billion junior tranche, equivalent to 12.1% subordination.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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