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Mortgage FinanceHome Ownership Training Workshop)
A presentation
to
The Federal Capital Territory Administration and
Federal Mortgage Bank of Nigeria
By
Sonnie AyereMD/CEO UBA Global Markets
16th of September, 2005
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Debt Capital Markets 2
Estimated Mortgage Affordability
If 13.5% of the total population can earn a monthly income of NGN60k per month upwards then.
Average House Price NGN 2,500,000.00
Loan-To-Value 95%
Amount Borrowed NGN 2,375,000.003.5
Combined Income Per Annum NGN 678,571.43
12.00
Combined Income Per Month NGN 56,547.62
135
Monthly Income in US$ 418.87$
Total Population 130,000,000.00
Amount of Eligible borrowers 17,550,000.00
% of total population 13.50%
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Debt Capital Markets 3
Estimated Nigerian Mortgage Market
Approximately NGN44 trillion could easily be the market in Nigeria
To cover the market, we would require 100 banks with NGN400bn all invested in mortgages!!
So whats all the fuss on a NGN100bn bond issue ????..its a trickle!
NB - All numbers and percentages are estimates..
Estimated Population 130,000,000.00
Estimated Working Population (%) 30%
Number of working Adults 39,000,000.00
% working adults acceptable as mortgagors (Prime / Sub-prime) 45%
Number of Adults eligible to borrow 17,550,000.00
Average House Price NGN 2,500,000.00
Possible current mortgage Market NGN 43,875,000,000,000.00
UBA's estimated balance sheet size NGN 400,000,000,000.00
Mortgage Market Cover 109.69x
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Mortgage FinanceA Market Makers Perspective
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What is a Mortgage
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Debt Capital Markets 6
What is a Mortgage Bond
A mortgage bond can simply be described as a long term borrowing by one or more
individuals where the borrowing is secured by a lien, first or otherwise over a purchased
property
Mortgage loans could be advanced from as little as 10 years and in some cases, particularly
the USA, 30 years
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Debt Capital Markets 7
General Amortisation Profile
Mortgages generally amortise, paying principal and interest over the life of the loan
240 M on th M ortage Am ort isat ion P rof ile
-
500,000.00
1,000,000.00
1,500,000.00
2,000,000.00
2,500,000.00
3,000,000.00
112
23
34
45
56
67
78
89
100
111
122
133
144
155
166
177
188
199
210
221
232
No. o f M onths
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Debt Capital Markets 9
Mortgage Amortisation Profile
Financing Institutions profits are normally front-ended as the bulk of interest is paid within
the first 10 years depending on term of loan
P rinc ip al an d Interest Am o rtisa t ion
-
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00
1 17 33 49 65 81 9 7 113 1 29 1 45 16 1 177 193 209 225
Interest
Pr inc ipa l
Month ly Amoun t
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Debt Capital Markets 10
Global View of Mortgage Market
Mortgages have existed globally in one form or the other for centuries
However, in Sub-Saharan Africa, only South Africa, Namibia, and recently Kenya to someextent can really boast of a vibrant mortgage market
Most countries across the sub-region are beginning to develop the necessary criterion to begina market
This is due to the importance we are all now realising of the correlation between havingmortgage markets and a middle class
This is due to the leverage they provide to individuals to increase their wealth
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Debt Capital Markets 11
US Debt Securities Issuance
Exponential increase in the issuance of Mortgage Backed Securities as depicted above
T o t a l is s u a n c e o f d e b t s e c u r it ie s - U S M a r k e t s
$ 0 . 0 0 b n
$ 1 0 0 0 .0 0 b n
$ 2 0 0 0 .0 0 b n
$ 3 0 0 0 .0 0 b n
$ 4 0 0 0 .0 0 b n
$ 5 0 0 0 .0 0 b n
$ 6 0 0 0 .0 0 b n
Dec
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Dec
-8
Dec
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Dec
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Dec
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Dec
-9
Dec
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Dec
-9
Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
-9
Dec
-0
Dec
-0
Dec
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Dec
-0
Dec
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Mar
-0
M u n ic i p a l
U S T re a s u ry
M o rt g a g e R e la t e d
C o rp o ra t e
F e d A g e n c i e sM o n e y M a rk e t
A s s e t B a c k e d
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Debt Capital Markets 12
Debt Securities Issuance by Agency
Exponential increase in the issuance in all Agency Mortgage Backed Securities as depicted
above
O u ts t a n d in g V o l u m e o f A g e n c y M B S
$ 0 .0 0 b n
$ 5 0 0 .0 0 b n
$ 1 0 0 0 . 0 0 b n
$ 1 5 0 0 . 0 0 b n
$ 2 0 0 0 . 0 0 b n
$ 2 5 0 0 . 0 0 b n
$ 3 0 0 0 . 0 0 b n
$ 3 5 0 0 . 0 0 b n
$ 4 0 0 0 . 0 0 b n
Dec
-8
Dec
-8
Dec
-8
Dec
-8
Dec
-8
Dec
-8
Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
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Dec
-0
Dec
-0
Dec
-0
Dec
-0
Dec
-0
G N M A
F N M A
F H L M C
T o t a l
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Debt Capital Markets 13
Positive Effects of Leverage
An example of the benefits to home buyers of using mortgage financing and its effect onindividual RoE
1333% RoE higher than if 100% equity..
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Types of Mortgages
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Debt Capital Markets 15
Types of Mortgages
Fixed Rate Mortgages (Fully Amortising)
Fixed rate coupon for the life of the mortgage
Repayments remain the same for the life of the mortgage
Generally available where you have a capital market
Financing via the capital markets can be complex for hedging reasons
Interest rate risk is borne by financing institution
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Debt Capital Markets 16
Types of Mortgages
Variable Rate Mortgages (Fully Amortising)
Repayments can vary throughout the life of the mortgage
Interest rate risk is borne by the mortgagor
Generally easy to finance via the capital markets
Easier to fund even via financing institutions balance sheet
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Debt Capital Markets 17
Types of Mortgages
Interest Only Mortgages
Repayment of principal is via a balloon payment This could be via insurance or endowment policy or alternatively pension payout
Lower payment obligations for the borrower
Back ended risk
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Debt Capital Markets 18
Types of Mortgages
Flexible Mortgages
Repayments can be variable
Redraws are allowed
Payment holidays are allowed
Further advances allowed
Interest net-off
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Debt Capital Markets 19
Types of Mortgages
Combination Mortgages
Balloon mortgages fixed rate capped periods
Refinancing risk borne by borrower
Proved very popular with first-time buyers
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Debt Capital Markets 20
Categorisation of Mortgages
Prime Mortgages
Higher income earners
No default history
Verified Income
Lower Loan-to-values
Lower interest rates
Sub-Prime Mortgages
Lower income earners
History of default / foreclosure
Self certified income
Higher Loan-to-values
Higher interest rates
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Debt Capital Markets 21
Improving Macroeconomic Stability
Consistent economic growth leading to the creation of jobs and economic prosperity
Low inflation rates
Low interest rates
Stable exchange rates
House price stability or better still, growth
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Mortgage Origination, Underwriting andServicing
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Debt Capital Markets 23
Mortgage Underwriting Eligibility Criteria
Maximum Loan-to-value
Maximum Payment-to-Income ratio
Applicant age
Type of property
Maximum Amount
Minimum Amount
Maximum Term Prepayment Penalties
Location of property
Life Insurance
Building + contents insurance
Mortgage Indemnity Guarantee insurance
Verification of income and employment
Credit Reports Fair Isaac Scores (Credit Scoring)
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Debt Capital Markets 24
Mortgage Origination
Methods of originating mortgages - sales
Direct Sales from branches / outlets
Third party sales
Call centers including cold calling
Internet
Direct mail
Mobile Phones yes!
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Debt Capital Markets 25
Mortgage Origination Process
Completed Application Form
Verification of :-
Income Employment
Stability of income
Income / expenditure statement
Property existence location / independent valuation
Title check and insurance Credit checks
Property, Life, MIG and Insurance Details
Borrower contribution received and not borrowed
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Debt Capital Markets 26
Mortgage Servicing
Perfection of Title (Deed of Trust)
Disbursement
Collection Procedures :-
Set-up standing order or direct debit instructions
Verification of contact details on-going
Setting delinquency and charge-off buckets
30 days
60 days
90 days
180 days charge-off
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Debt Capital Markets 27
Mortgage Servicing cont
Need for an executable and transparent foreclosure process
Generally speaking can be between 18 24mths (most countries)
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Debt Capital Markets 28
Key Administrative Issues Marketing, Origination and underwriting
Origination guidelines and/or policies and procedures
Underwriting guidelines and/or policies and procedures
Quality control Risk Management setting and monitoring of targets
Assignment of MIG and other insurance policies
Procedures for approval
Corporate governance re: reporting and compensation structure of underwriting
department Customer service
Collections incentive programs
Automation and use of technology
Staff experience and continuous training
Work-out reduction in timeline and incentive programs Tracking of performance delinquencies, charge-offs, static pool analysis
Disaster Recovery systems and back-up
Cost of servicing a loan
Number of loans serviced per employee
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Post Origination, underwriting andservicing
How do you finance the portfolio on an evergreen basis..?
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Mortgage FinancingPart 2
Transforming the dream into reality
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Debt Capital Markets 31
How to Finance Mortgages
Core deposits
Tier II Capital issuance of 10yr non-call 5yr bonds typical in the United Kingdom
Warehouse and subsequent take-out financing
Residential Mortgage Backed Securitisation
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Debt Capital Markets 32
An Example of Traditional Bank Funding Sources
Traditionally, banks funded mortgages using core deposits however, to reduce asset/liability
mismatch
Banks funded mortgages with a combination of short term deposits and issuance of medium
term debt
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Debt Capital Markets 33
Financial Intermediation
Origination of mortgages financed via funding from a warehouse line
Mortgages are originated under a homogeneous criteria
Draw-down of warehouse lines are repaid via a refinancing into longer term securities
Longer term securities issued using securitisation
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A primer onResidential Mortgage Backed Securitisation
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Debt Capital Markets 35
Securitisation
What is Securitisation ?
Securitisation is the raising of debt secured on the cashflow and/or collateral value of aselected pool of assets
Securitisation debt is non-recourse to the originator, so that investors depend solely on the
performance of the assets and are insulated from the financial condition of the originator
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Debt Capital Markets 36
What is Securitisation cont
Pure asset securitisation is generally achieved by legally and economically isolating the
receivables / assets from the balance sheet of the originator
This is achieved by what is commonly referred to as a True Sale of the assets or receivables
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Debt Capital Markets 37
Range of Debt Markets
Actively
Traded
bonds
Commercial
Paper
Non tradable
Private Placements
Public
issue
Tradable
Private Placements
Illiquid Highly liquid
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Debt Capital Markets 38
Range of Assets
Generally, any asset that produces a certain level of predictable cashflow can be securitised
Both short-term (e.g. trade credit ) and long-term (residential mortgages) can be securitised Even up to rights to receive flows e.g. Airline ticket receivables etc
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Debt Capital Markets 39
Range of Assets cont
Examples of asset types that have been securitised
Residential and Commercial Mortgages Auto / Equipment / Aircraft Leases
Credit Card Receivables
Auto and Consumer Loans
Bank and Corporate Debt
Trade Receivables
Export and Domestic Corporate Receivables
Air Ticket Receivables
Workers Remittances
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Debt Capital Markets 40
Typical Structure of a Securitisation
Subordinated
or Mezzanine
Investor
SeniorInvestors
Sale & Service of
Receivables
Debt Service
Debt Service
Purchase
Receivables
Sell ABS
Retain Residual Interest (First Loss)
SPVSpecial Purpose
Issuing Vehicle
Receivables
Pool
Sr. ABS
(AAA)
Mezz. ABS
(BBB/BB)
Jr. ABS
(Equity)
Sell ABS
Seller, Servicer
Receivables
Pool
Assets Liabilities
Assets Liabilities
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Debt Capital Markets 41
Key Elements of Securitisation
In-depth knowledge of the assets
Isolation / transfer of assets
Servicing
Credit Rating (Domestic or International)
Legalese and Deal Documentation
Placement
Monitoring
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Debt Capital Markets 42
Basic Transfer Mechanism
Accounts
Receivable
Accounts
Receivable
SPONSORING COMPANY
Sale or Assignment
ISSUES
ASSET-BACKED
SECURITIES
SPECIAL PURPOSE
VEHICLE
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Debt Capital Markets 43
Methods of Asset Transfer
Novation An arrangement that involves the termination of the existing contract and the
writing of a new one
Sub-Participation Funded or Unfunded - Involves one party depositing monies which may
only be repaid when the underlying assets pays or unfunded when the related loan is drawn or
the the asset defaults
Assignment Full transfer of the assets to the assignee
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Debt Capital Markets 44
Case StudyUBA GROUP Securitise its Mortgages
Some factors need to be in place before a securitisation can occur. Some of which
are:-
Corporate commitment
Management depth
Track Record (Loan Administration)
Internal systems (originating, servicing, and collection) Available and up to date information (company and collateral)
Origination capacity
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Debt Capital Markets 45
Other factors necessary are :-
Clear and enforceable foreclosure Laws
Enforceable eviction policies
Ability to perfect interest quickly
At least a 5 year fixed rate government curve the longer the better
Electronic payment systems e.g. direct debits
Initial Contract and Receivable
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Debt Capital Markets 46
Initial Contract and Receivable
HomeownersWith loans from UBA
UBA
Loan Agreement
Principal & Interest
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Debt Capital Markets 47
Transfer of Receivables to SPV
Homeowners
UBA
Principal &
Interest
UBA
Mortgage ReceivablesFunding Trust
Investors
proceeds
Sale of Assets
proceeds
Mortgage Backed
Securities
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Debt Capital Markets 48
Independent Trustee appointed & reallocation of
cashflow
Homeowners
UBA
Principal &
Interest
UBA Mortgage
ReceivablesFunding Trust - A
Investors
proceeds
Sale of Assets
proceeds
Mortgage Backed
Securities
TrusteePrincipal &
Interest
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Debt Capital Markets 49
Allocation of Excess Spread
Homeowners
UBA
Principal &
Interest
UBA Mortgage
ReceivablesFunding Trust - A
Investors
proceeds
Sale of Assets
proceeds
Mortgage Backed
Securities
TrusteePrincipal &
Interest
Excess Spread +
Servicing Fees
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Debt Capital Markets 50
Introduction of a Swap counter-party and Guarantor
Homeowners
UBA
Principal &
Interest
UBA Mortgage
ReceivablesFunding Trust - A
Investors
proceeds
Sale of Assets
proceeds
Mortgage Backed
Securities
TrusteePrincipal &
Interest
Excess Spread +
Servicing Fees SwapCounter party
Financial
Guarantor
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Debt Capital Markets 51
Other form of Credit Enhancement considered
Homeowners
UBA
Principal &
Interest
UBA Mortgage
ReceivablesFunding Trust - A
Investors
proceeds
Sale of Assets
proceeds
Mortgage Backed
Securities
TrusteePrincipal &
Interest
Excess Spread +
Servicing Fees SwapCounter party
Financial
Guarantor
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Debt Capital Markets 52
Use of Senior/subordinated Structure
Homeowners
UBA
Principal &
Interest
UBA Mortgage
ReceivablesFunding Trust - A
Investors
proceeds
Sale of Assets
proceeds
Mortgage Backed
Securities
TrusteePrincipal &
Interest
Excess Spread +
Servicing Fees SwapCounter party
AAA
Senior
BBB
Mezzanine
Equity
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Debt Capital Markets 53
Senior Subordinate Structure
This is the most common kind of structure /credit enhancement for the following reasons :-
Internal credit enhancement and therefore, generally speaking, the cheapest form of
credit enhancement
However, the ability to calculate the expected loss of each tranche and size and size the
required credit enhancement is imperative
The adviser and rating agency is usually responsible for this work
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Debt Capital Markets 54
Typical Senior/Sub structure example
As noted above, the cost of funding to the issuer is close to the interest rate of the AAA
bond
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Legal, Regulatory and Taxation Issues
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Debt Capital Markets 56
Legal and Regulatory
Legal
Asset Transfer
The Special Purpose Entity or Vehicle
Bankruptcy Remoteness
Regulation
Taxation
Stamp Duty / Transfer
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Debt Capital Markets 57
Conditions for True Sale
Transfer must be a true sale, or its legal equivalent. If originator is only pledging the assets to
secure a debt, then it becomes a collaterised financing in which the originator would stay
directly indebted to investor
The assets must be owned by a special purpose entity, whose ownership of the sold assets will
in all probability survive the bankruptcy of the originator/seller
Actual ownership of the special purpose vehicle must be independent of the originator
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Debt Capital Markets 58
Confirmation of a asset sale
The treatment and form of the transaction
The influence the seller has on the assets after the sale
The extent and nature of benefits transferred via the sale
The purchase price
Notification (if necessary) to underlying borrowers when assets are sold
Title ownership
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Debt Capital Markets 59
The Special Purpose Vehicle
Generally set up by the originator with ownership vested in a charitable trust
Commonly set up in tax havens
Mauritius
Cayman Islands
Jersey
Apart from legally isolating the assets it also helps to avoid double taxation and hence reduce
the expenses (if any) of the trust
Cost of set-up an SPV is low
h k
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Debt Capital Markets 60
Why Bankruptcy Remote
Only assets in the SPV are available to protect and pay investors
No need for protection from creditors
All obligations are limited to those available from the assets
No recourse to the originator
The vehicle can only receive the assets as purchased and issue notes or certificates
Hence, probability of Bankruptcy is remote
l i
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Debt Capital Markets 61
Regulation
Bank Regulators will place a strong emphasis on the the amount of regulatory capital
accorded to the transaction
For instance, regulators in certain countries will insist that issuing bank hold 100% Risk
Weighted Capital to Equity portion of the transaction *
This will differ from country to country and will normally be defined by the securitisation
laws of the country
*FASB 46 ? Consolidation of VIEs - Somewhat mitigated by QSPE under FAS 140
C B l II P l
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Debt Capital Markets 62
Current Basel II Proposals
Strong incentive for banks to issue or invest in higher rated debt given the penal capital weights allocable tobonds below investment grade
SPV T ti
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Debt Capital Markets 63
SPV Taxation
Generally speaking, the Special purpose Entities are carefully structured to ensure that its
income is offset by its expenses so that little or no tax is incurred
Tax incentives are however provided to special assets classes e.g. most countries exempt the
transfer of mortgages from Stamp Duty
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Current Market Constraints&
Some Suggestions
P i M t M k t K C t C t i t
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Debt Capital Markets 65
Primary Mortgage Market Key Current Constraints
Lack of long term domestic currency denominated debt
Difficultly in implementing the current foreclosure law
Lengthy title perfection process
Governors consent
Multiple and expensive stamp duty rates (especially at state level)
Monetary and fiscal volatility
Lack of mortgage-able properties
Weak or non-existent underwriting skills
No government incentives at the primary mortgage level
Practical Solutions
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Debt Capital Markets 66
Practical Solutions
Issuance of long term debt by banks to manage the asset-liability mis-match.
Adopt new foreclosure law and implementation Ethiopian model Give notice in papers
and to individuals after the charge-off period
Titling process to be re-engineered removal of governors consent is critical
Universal stamp duty rate only applicable on the primary sale of residential or commercial
property
Continued fiscal and monetary discipline by the authorities
Practical Solutions
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Debt Capital Markets 67
Practical Solutions cont
Empower National builders association to have stringent standards. Key is to improve build
quality of homes secured by long term mortgages (Implications for foreclosure costs)
Tax relief on mortgage interest payments Eradication of multiple stamp duty rates and the reduction in current rate on residential
property sale
Increased capacity, technical assistance and training
Credit underwriting and systems Collections (wide spread direct debit accounts) / Monitoring
Recovery REO properties
Implementation
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Debt Capital Markets 68
Implementation cont
We need to propose a new foreclosure law similar to that of the Ethiopian model. The
advantage of this is also public persona issues.
Alternatively, implement property courts in all states similar to that practiced in sayPakistan
In summary there are many models available to choose from worldwide
Key to this, is the need to implement a fast, efficient and transparent process that works for
the country
Implementation
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Debt Capital Markets 69
Implementation cont
We need to execute the re-engineering of the current tilting process key sticking point will
be the governors consent issue.
We need to execute the removal of multiple stamp duty and the lowering of the rate. This can
be encompassed in the new titling regulation or appropriate regulation
Implementation t
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Debt Capital Markets 70
Implementation cont
MoF and CBN to continue fiscal and monetary policies that impart discipline into the
management of the economy going forward We need to continue to lobby appropriate
authorities
National Home Builders Association to provide quality assurance to buyers and such buyers
can sue a developer and/or association via the property court (to speedup procedure) for poor
construction quality
Implementation cont
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Debt Capital Markets 71
Implementation cont
Banks and Non-Bank Financial Institutions to invest in Training, systems etc.
Housing Finance courses
Beef-up collections teams and systems to minimise delinquencies andcharge-offs
Recovery teams to be put in place to reduce loss severity
Research and data collection and monitoring teams to be put in place in
preparation for future capital markets issuances
Case Study - Housing Finance
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Debt Capital Markets 72
Case Study Housing Finance
Example
STAGE 1
Initially, a financial intermediary provides a mortgage to an individual say at 80% LTVThe financial intermediary is more comfortable lending fully secured by the propertyAs the property and loan seasons, a relationship and credit payment history is built by the intermediary
STAGE 2
Hence
Conclusion
Pension Reforms that mobilize domestic long term capital can be a strong catalyst for sustainable growth
Financial Intermediary Indiviual
provides mortgage loan
Financial Intermediary
Consumer Loan
Car Loan
Other types of Loans
Indiviual
IndiviualTotal Networth as a
result of term financing
availability
IndiviualTotal Networth without
term financing
availability
Summary Key Obstacles and solutions
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Debt Capital Markets 73
Summary Key Obstacles and solutions
Foreclosure Law to be reworked, committee in place
High Stamp Duty rates new regime to be advised & adopted
Cumbersome Titling Process to be re-engineered
Governors Consent to be discarded
High interest rates already being addressed via DMO
Lack of long term money already being addressed via DMO
Government Yield Curve already being addressed via DMO
Securitisation Law for Nigeria to be put in place, committee in place
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We are getting there
Thank You
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