The first mortgage-backed security in India looks to be nearing completion and is set for launch towards the end of July, market pros in India said.

The transaction is backed by assets originated by the Housing Development Finance Corp. and comes via India's governing body for housing finance, the National Housing Bank, , which is leading efforts to foster mortgage-backed securities and a secondary mortgage market.

The deal, which was first mooted in June 1998 (ASRI 6/15/1998 p.1) and has been delayed several times (ASRI 1/17/2000 p. 2), will be worth around Rs600 million ($13.4 million) and has won AAA ratings from the Credit Rating Information Services of India Ltd., the local affiliate of Standard & Poor's. Local investment banks SBI Capital Markets and ICICI Securities are arranging the transaction.

The residential mortgages that back the deal will be transferred from the HDFC to the NHB, which will act as the special purpose vehicle. The ratings are based on overcollateralization of around 36% and a structure that puts aside excess spread in order to meet payments to investors if necessary.

The coupon on the notes, which have a seven-year maturity, will be around 12.5% to 13%, while the weighted average coupon on the underlying loans is 14.5%.

There is an extra level of credit enhancement in a guarantee of principal and interest from the AAA-rated HDFC.

Investors will also be able to take comfort from the quality of the mortgage pools. "Despite the inherent legal hurdles and delays in the legal system, in particular the difficulties of foreclosure, the portfolio has performed very well, with very low loan losses," said Crisil analyst, Y. Ramesh. "For example, delays of more than two quarters are only 0.9%"

The mortgaged properties themselves are located in the four Indian states that have cut the generally high level of stamp duty prevalent in other areas of the country: Karnataka, Gujurat, Tamil Nadu and Maharastra.

The deal will be only be the first of a series sponsored by the NHB, which has ambitions to become the Fannie Mae of India. Deals backed by assets originated by LIC Housing Finance and Dewan Housing Finance have been structured and rated and are simply waiting in line. Canfin Homes is also readying a transaction.

When the market finally gets going, the potential is significant, even if the first deals will be small, as housing finance in India is growing quickly and will need to access funds at an alarming rate.

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