Morgan Stanley Dean Witter has started marketing a domestic residential mortgage securitization for Mitsubishi Trust & Banking, in a deal that the U.S. bank hopes will prove its credentials to the Government Housing Loan Corp., Japan's state-owned mortgage lender, which is close to selecting an arranger for its inaugural mortgage deal.
The Mitsubishi deal, which will be worth 33 billion ($304 million) and come via a Cayman Island SPC called MTBC Housing Loan Corp., is expected to close in the last week of May. The senior tranche will be worth 30 billion and is expected to be rated triple-A. There will also be two junior pieces each worth 1.5 billion, which should receive ratings of double-A/single-A and triple-B. According to the deal's registration with the Ministry of Finance, it will be rated by Standard & Poor's, Moody's Investors Service and Japan Credit Rating.
The pass-through deal will only be the third public RMBS deal from Japan, after an international deal arranged by Bear Stearns for Sanwa Bank in May last year (ASRI 5/31/1999 p. 10) and a recent domestic deal from Fuji Bank, arranged by Fuji Securities (ASRI 4/24/2000 p.7). There have also been at least two privately placed RMBS deals (see p. 6).
Morgan Stanley and Mitsubishi have announced that they will both make an effort to provide a level of information and market making unusual in the Japanese securitization business in an effort to foster a liquid secondary market. Between them they will provide details on the underlying portfolio performance, including historic and projected pre-payment rates and defaults, while Morgan Stanley will offer daily bid-offer spreads.
"We're really trying to develop a market that is transparent and provides as much knowledge as is available to, say, U.S. or U.K. investors in similar assets," said Douglas Kennedy, an executive director in Morgan Stanley's securitized products team in Tokyo. "It's only a first step, but it is a step in the right direction."
Morgan Stanley also hopes that it has solved two other problems that have held back the development of the Japanese RMBS market: the difficulties of modeling prepayments and the problem of transferring the security interest of the underlying properties into the SPV along with the mortgages.
Modeling prepayments can be tricky in any MBS, but in Japan the problem is compounded by the complexity of the mortgages "The loans here can go from fixed to floating and then back to fixed and even go off on to a different basis," Kennedy said. "They also have prepayment options and step-up options. This means that they are a pretty mixed portfolio in terms of hedging and projections, so the modeling is particularly challenging."
He added that the pass-through structure, which sees cashflow passed straight on to investors, deals with most of the trickiness involved in unpredictable prepayments.
The difficulty of transferring the security interest of the underlying properties into the SPV along with the mortgages arises because mortgages issued by the major Japanese banks and trust companies are guaranteed by affiliated guarantors, with the affiliates having the first lien on the underlying properties, making a clean transfer difficult.
It seemed that this problem was solved in the Sanwa transaction, but the solution was not universally accepted by securitization pros in Japan, and the deal from Fuji was forced into the economically inefficient decision of only attempting to get partial credit for the underlying properties (ASRI 4/10/2000 p.1).
As Morgan Stanley cannot issue its offering circular until the 15-working day review period after registering the deal with the Ministry of Finance has elapsed, it is not clear how the bank and its lawyers have solved the difficulty. However it is solved - assuming that this time the solution is universally accepted - it will be a significant step-forward for the market and may set in train the burgeoning market that was expected but did not materialize after the Sanwa deal.
That problem will not be a factor for whichever arranger wins the mandate from the GHLC, in what is certain to be the most hard-fought mandate scrap in the Japanese market this year. The GHLC has a mortgage portfolio equivalent to $666 billion and controls around 70% of the market, but as it holds an undisputed first lien on the mortgages it issues, the problem of mortgage guarantors muddying the waters does not arise.
The body's first deal, which it hopes to launch by the end of the year, is set to be a pass-through worth around 50 billion. A decision on the mandate is expected in June
"We hope that demonstrating our capability to not only do a transaction successfully, but also showing the commitment of supporting it afterwards, in addition to our historical presence in the U.S. and Europe, will be received positively by the GHLC," Kennedy said.
Market pros in Japan think it likely that the GHLC will find it politically difficult to award the mandate to a foreign firm, rather than a domestic house, and for this reason expect that there will be some teaming up between Western and local banks.
The deal will be followed by issuance worth around 200 billion every year.
Experts said that the MBS program is vital to the future of the body because of pending reforms to its funding, which come via the zaito program, a system which channels money from consumer postal savings accounts held at the Ministry of Posts and Telecommunications. That system is set to be scrapped and GHLC will become responsible for its own funding.
In a further significant development, the Construction Ministry is studying a plan that would see the GHLC acting more like secondary mortgage bodies elsewhere, such as Fannie Mae. The plan calls for the body to purchase loans from smaller private-sector banks and parcel them into securitizations.