Hong Kong's residential MBS market is likely to stay quiet for the next year or so and things will not be much busier for commercial MBS, agreed panelists at a recent securitization conference in Hong Kong.
With liquidity abundant and bank financing cheap, there is no demand for securitization as a way to raise finance, said panelists at the conference arranged by Insight. Combine this with the residential mortgage price war that local banks are currently engaged in - meaning that mortgages being written at the moment will not have enough margin to pay MBS investors - and things look bleak indeed.
"I don't think that the picture [for residential MBS] is rosy at all this year," said Pamela Lamoreaux, senior vice president of Hong Kong's secondary mortgage body, the Hong Kong Mortgage Corp.
Lamoreaux explained that the price war is caused by local banks desperately chasing the relatively few borrowers willing to take out new mortgages (rather than refinance old ones) as Hong Kong has still not fully recovered from the aftermath of the Asian crisis and unemployment is still relatively high. Indeed, figures just released by the Hong Kong Monetary Authority show that despite the price war mortgage origination fell by 5.2% in February from already low figures the month before.
The squeeze on mortgage lending is exacerbated by the banks' wariness to get back into the previous mainstays of their business, such as corporate and syndicated lending, autoloans or financing the purchase of taxi licenses, added Andrew Bruce, managing director of Macquarie Securitisation H.K., the local branch of the Australian securitization specialist.
And if you can't re-lend the proceeds of a securitization, whether it is more expensive than bank lending or not, why do it at all, other panelists asked.
The pull back from non-mortgage lending and the desperation to lend to house buyers may finally be the salvation of residential MBS in Hong Kong, however, as banks and regulators may eventually start to worry about overexposure to one sector.
Before the onset of the regional financial crisis, banks were - at least in theory - restricted by the HKMA to having no more than 40% exposure to property-related loans, but this regulation was cancelled in July 1998. While the rule had been widely ignored, securitization pros hoped that it would be one incentive for banks to examine securitization as a way to continue mortgage lending without flouting the rule too blatantly.
Since the restriction was withdrawn (a decision the HKMA may come to regret, said one expert) many banks' exposures have soared above 40% and for some it is as high as 60% and more, the experts said. Shareholders and internal risk managers may soon become concerned about that risk, leading to a pressure to securitize or to sell mortgages to the HKMC.
Even it that happens, the panelists acknowledged that Hong Kong residential mortgage deals would still be tricky. The huge levels of prepayments the market is currently seeing - up to 60% in some pools, according to Lamoreaux - as mortgage holders take advantage of the deals on offer is likely to discourage MBS investors.
The news is marginally better for commercial MBS, which has been Hong Kong's most active securitization sector for the past two years. Though, as Merrill Lynch's head of real estate debt in Hong Kong, Razi Amin, noted, the same problem of abundant liquidity and cheap syndicated lending applies.
The top property developers and property companies have little motivation to do CMBS deals, agreed Don Tang, of Deutsche Bank's Asian securitization team, but the second- and third-tier firms, who can't get access to cheap bank financing, may be more interested.
SG Asia, for example, won a hard-fought mandate to arrange a CMBS for Paliburg, backed by two developments. The local currency deal could be worth up to HK$2 billion (US$257 million) and is expected to be placed in the local bank market, bankers said.