The race to win the mandate to securitize residential mortgages for Japanese state-owned mortgage lender, the Government Housing Loan Corp., is warming up, with around 20 firms involved in the bidding.

Foreign and domestic investment banks and local securities firms have begun to team up into consortia, said bankers in Tokyo, in the hope that a mix of local knowledge and foreign MBS expertise will win the day.

Such a tactic would deal with the fact that while the GHLC and the Ministry of Finance are likely to want foreign banks to be involved - no locals can match the foreigners in expertise and experience of MBS deals - it may also be politically difficult to award the mandate exclusively to a foreign firm.

One market pro said that at least some of the teams will comprise a Western investment bank, a local trust bank and a local securities house, with each bringing complementary skills.

Investment banks that have already structured Japanese residential MBS deals will be hoping that their experience will give them an advantage. Bear Stearns, Morgan Stanley Dean Witter and Fuji Securities have put together public deals, while Greenwich NatWest and DKB Securities have arranged private placements.

The GHLC has told banks that it wants a fixed rate, monthly-pay pass through-type structure, news that may have led to quiet smirks at Morgan Stanley. The U.S. giant is the only bank to have arranged such a transaction in Japan, in a deal for Mitsubishi Trust & Banking that got a good reception when it came to market in May (ASRI 5/8/2000 p. 1 and 6/5/2000 p. 6).

Bankers in Japan declined to pick a likely winner, apart from noting that the banks that have already closed RMBS deals will be strong contenders, as will Nikko Salomon Smith Barney, which already boasts a powerful combination of East and West.

A decision is expected this week and the deal should be in the market before March next year, possibly even before the end of the calendar year.

A panel of experts attending a conference on Japanese property securitization in Tokyo organized by IMN/Fabozzi, had no doubt of the importance of the GHLC's inaugural deal and the issuance program that is expected to follow.

After all, said Chandrakant Moharty, assistant vice president at Fitch IBCA, the GHLC issues 40% of all mortgages in Japan and with the pending changes to its current funding system - which sees retail postal savings accounts channeled to the body - it will need to access the markets regularly.

He added that MBS deals from the GHLC will be free of many of the problems that have made life difficult for arrangers of deals backed by mortgages issued by commercial banks: the GHLC has undisputed first liens on the properties that back its loans; there are fewer problems of set-off and co-mingling because the body does not take deposits; plus there is the added advantage of government support.

Yu-Tsung Chang, managing director at Standard & Poor's, added that the mortgages that the GHLC writes are also much less complicated than those on offer from the commercial banks.

While this will make a GHLC transaction less tricky than those that have come to market so far, it is also likely to lead to the development of two distinct markets: one for GHLC issued MBS and the other for MBS issued by commercial banks, he said. He acknowledged that a GHLC deal will provide something of a benchmark for the wider MBS market but cautioned against assuming that the comparison is precise.

"The market is looking for the GHLC to offer some prepayment benchmarks, but while I think it is useful to get that data, it will be concerning if we only use the GHLC data for the other deals," Chang said. "The products each offer are very different and have different prepayment characteristics."

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