With a $75 million offer of collateralized mortgage obligations (CMOs) ready to hit the local market, The Home Mortgage Bank Trinidad and Tobago's secondary mortgage market institution is cementing its success in creating a profitable secondary mortgage system with a Caribbean flavor.
"People might be inclined to think that in small markets such as ours a vanilla type product would work," said Calder Hart, chief executive officer of the Home Mortgage Bank (HMB) in Port of Spain, Trinidad. "But we got to where we are in terms of size by issuing mortgage-backed bonds. We see a lot more potential with structured mortgage finance, particularly with CMOs, because they allow us to customize and personalize our products to cater to the needs of our investors."
Like HMB's previous CMO a $100 million deal launched earlier this year Fannie Mae and KPMG have helped to structure the transaction, but HMB will manage the placement itself. "We chose to manage the issue ourselves based on the fact that our market is small and we know the players who are interested in our products, and we've been pretty successful. Until our issues are as regular as clockwork we will continue to do so," Hart explained.
Eventually, however, Hart would like to see the transactions managed by third parties. "Once we are what Gillette is to shaving blades or what Hoover is to vacuum cleaners, once we get that brand identification, we'd like to move our transactions to the financial sector."
He expects to launch the latest CMO by December but the timing will ultimately depend on the market's mood. "If we see that people are more focused on the Christmas tree and the millennium than the market, we'll wait for next year. The timing will be an eleventh hour decision."
Not Just Beautiful Beaches
Trinidad and Tobago might be renowned for its tropical climate and pristine beaches but the country has other things to offer. "Trinidad is very advanced from a Caribbean standpoint. It enjoys a 72%
home ownership rate, a highly disciplined monetary policy and a high-quality commercial banking system," Hart said.
Such auspicious conditions have allowed the HMB to flourish. Created in 1995, the bank is a public/private institution (the country's central bank owns 15%, the social security system owns 7.5%, commercial banks have a 37.5% stake, insurance companies hold 30% and the IFC owns 10%), with a mandate to purchase mortgage portfolios, fund new mortgages as approved agents and raise capital.
By combining the U.S. and Canadian models the bank has been able to supply the local market with high quality securities. "Through our technological partnership with Fannie Mae we feel that we are giving our market place the same confidence that Fannie Mae and Freddie Mac give U.S. investors," Hart said.
Recognizing that the quality of origination and administration of mortgages are crucial for the development of a secondary mortgage market, the HMB created a process that would assist lenders at the "front-end" of the process. To do this, it established a mortgage insurance fund designed to cover outstanding loan balances and protect lenders against defaults. The premium for the insurance policy is 1.5% of the loan amount and is paid by the borrower.
"The benefit of this insurance fund is that it makes lending more secure and reduces capital requirements for lenders. At the same time, it pulls market risks and decreases the costs of mortgage financing to the borrower. From our perspective, it gives us access to a larger mortgage market, which in turn enables us to securitize and secure the income stream. In terms of default, the experience of Trinidad has been outstanding."
The interest rate risk is abated by the fact that most mortgages granted by the bank are floating rate.
Information-Based Underwriting System
The HMB is also using the advances of electronic commerce to improve the services it provides to its customers, recently developing an underwriting system through which an electronic application form is transferred to the bank on-line. It then assesses the risks and the results are relayed in seconds.
"One of the concerns that people had when we developed this system was that we had no automated credit reporting agency in Trinidad," said Hart. "So we developed our own borrower's records by using the information databases amassed by banks from credit card applications. Our scorecards are based on some non-traditional underwriting standards such as how long a person has been in his current job, employment status, position, net worth, etc."
Lessons From The Past And Plans For The Future
The HMB has not dismissed the possibility of tapping the international markets. "We would need to get a credit rating first, and we are working on that. Going international would be the next step, but since Trinidad is not a capital deficient country we feel that there is a lot of profit to be made in the local business.
"A large portion of this market is in an education process, you have to develop that core of expertise that allows you to understand the nature of your marketplace and you build from there.
"If I had a dollar for everyone that initially told me that we would fail in Trinidad I could probably be retired by now. The fact is that you have to start somewhere and you can't underestimate the potential of the market and the intelligence of people who look at something that they think can work and respond accordingly," Hart noted.