The next country in Asia to be a prime candidate for residential mortgage securitization is Singapore, according to a special report issued last week from Duff & Phelps Credit Rating Co.

Because residential mortgages tend to be a low credit-risk product, they have been a natural choice for kick-starting the securitization process in many countries, the report said. Additionally, investor preferences to consider relatively safer asset classes in a country before investing into the riskier ones contributes to making residential mortgages key candidates for securitization.

"This is especially relevant in Singapore," said Chandrakant Mohanty, a Duff & Phelps assistant vice president who is responsible for assessing mortgage-backed transactions in Asia. "The low probability of default for residential mortgages is due to the availability of the Central Provident Fund (CPF), a government-established savings program that allows Singaporeans to set aside money that can be used for repayment of mortgages."

Further, the rating agency views the low historical mortgage default rates and the low borrower credit-risk in Singapore as being very positive credit features for a securitization transaction, Mohanty said.

"However, such transactions have not taken off due to structuring issues related to the second lien status of the lending banks to the CPF," added Vivek Goyal, head of Duff & Phelps, Singapore.

According to the report, though the interest rate environment has been on a downward trend since the early 1980s, the Asian crisis forced an increase in interest rates. However, since the 1998 fourth quarter, interest rates have been declining in response to the improving economic environment and specific initiatives by the government to stimulate growth.

The low credit risk of the residential mortgage business has made the market very competitive and banks have continually engaged in rate cuts to attract prospective home-buyers, the rating agency said.

Another feature of mortgages in Singapore is the flexibility that lending banks have in calling back the mortgage loan upon default by the borrower on other facilities with the bank. This makes a securitization structure prone to greater risks and the option would have to be relinquished by the originator upon sale of the mortgages.

Banks also charge a prepayment penalty in case the loan is partially/fully repaid within the first few years (usually five) and varies from 1% to 1.5%, the report noted.

Moreover, the country's securitization effort has already started; Pidemco Land, a property developer with ties to the Singapore government, has launched what it claims is the city-state's first securitization backed by the sale proceeds of residential apartment units.

A special purpose corporation wholly owned by Pidemco called Silverlac Investments issued S$100 million of three-year, 4.75% fixed-rate bonds, said John Pang, head of securitization at Tokyo-Mitsubishi International (Singapore), arranger of the transaction.

The unrated deal was sold to domestic investors, who took comfort from the fact that the bonds were fully secured by consumer-originated receivables, as well as an undertaking by Pidemco to meet cost overruns during development. The underlying assets are progress payments, which homeowners pay in installments until construction of the building is completed. Roughly 95% of the units in the development have been sold, he added.

"[ABS] is new, but investors liked the innovation and the quality of the structure. They were happy about the yield and understood the cashflow and security behind the transaction," commented Pang, adding that TMI was pursuing similar projects in Singapore.

Securitization is still very new in Singapore, where only a few property-backed transactions have been completed to date. There are several key legal and structural requirements in a securitization that are normally incorporated to protect investors and issuers, including a bankruptcy-remote, independent SPV to issue the bonds. That Silverlac is wholly owned by the originator indicates that Singapore's ABS market is still evolving, pointed out Christopher Chau, director of international structured finance at Fitch IBCA in Hong Kong.

"Even though this is not a full-blown securitization, it's still a first step in the development of Singapore's market. It may have also achieved the same objectives of balance sheet management and cost of financing for the originator," he added.

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