RP won't follow US subprime mess
The newly bailed out US housing firms, Fannie Mae and Freddie Mac, have a Philippine version: the National Home Mortgage Finance Corporation (NHMFC).
With global markets troubled by tightening credit conditions, the announcement of the US government's takeover of two mortgage finance giants Fannie Mae and Freddie Mac came as a quick relief.
The news sparked euphoria among investors worldwide, sending equity markets sky high, with Asia surging over four percent and Europe more than three percent on September 8.
abs-cbnNEWS.com interviewed some local analysts to get their insights on how the US government's move, one of its biggest saving acts ever, would impact markets in the region, including the Philippines'.
Some said it was a positive step to prevent the deepening financial and housing weakness in the US from affecting outside markets while others cautioned it could have long-term negative impact on the world's largest economy and one of Asia's vital trading partners.
Nonetheless, they were thankful that the Philippines, unlike some countries in the region, is better equipped to weather the fallout from the mortgage problems in the US.
Renewed confidence
The bailout largely bouyed sentiment of overseas investors who dumped safe-haven government bonds to invest in riskier and higher-yielding assets.
"It puts a floor under financial markets as it serves as an assurance to global investors that the problem would be contained in the US," said Antonio Herbosa, president and chief executive officer of PNB Capital and Investment Corp.
Herbosa noted that many investors, even those in the far corners of the globe, hold securities issued by Fannie and Freddie.
An undisclosed few Philippine banks are said to have invested in bonds issued by Fannie and Freddie, too.
They were prompted to check the extent of their exposure when news came out that the two US mortgage financing companies were at risk because of dwindling capital.
The US government established Fannie and Freddie after the Depression years to stir the housing market by playing mostly a financial role.
They have no direct dealings with home buyers, but they acquire the mortgage loans availed by homebuyers in banks, in effect unloading thebanks of the risks involved in property lending so they could afford to lend some more to consumers at low rates.
Fannie and Freddie then turn around and package these mortgage loans as bonds, which are considered "safe" investments because they are guaranteed by the US government. The two have become a behemoth in the financial system. Together, they back roughly half of the $12 trillion in US mortgages.
If Fannie or Freddie were to collapse, "the mortgage crisis may prolong and banks in the US will turn insolvent," Herbosa noted, adding that investors offshore with investments in the two firms would also suffer losses.
"Liquidity would be siphoned off not just in the US but also in other parts of the world," he said.
"Businesses and consumers need access to credit to expand and spend, if they can't, it would be damaging to the economy of the US, and therefore, to economies of other countries which are largely dependent on the US," he added.
Edgar Bancod, an analyst at ATR KimEng Securities, pointed out that the rescue of the American mortgage giants was a good thing because it helps secure the availability of funds to continue to drive the market until housing prices hopefully stabilize.
"Banks need to lend to each other. Unless you have that, the wheels of the US economy are going to a halt."
However, Bancod was less optimistic that the bailout was the turning point of the credit crunch. "We can't tell yet," he said.-Judith Balea
Since Fannie and Freddie hit rock bottom following the US subprime housing mess, inevitably, there are questions on whether NHMFC, one of the key housing agencies of the government, will follow their US counterpart’s sad course.
These questions will be more pronounced by November, when NHMFC will be issuing its first investment instrument backed by a pool of housing mortgages by borrowers who are considered poor.
NHMFC will be issuing about P2.5 billion worth of Residential Mortage-backed security, the first investment instrument to be offered by the government to banks that are based on housing mortgages. It is guaranteed by the Philippine government.
However, it seems that the fears are unfounded. NHMFC operates in a different housing and financial environment as Fannie and Freddie. Filipinos are generally not as financially adventurous as the Americans.
Besides, NHMFC has already went through a subprime-like experience in the 1990’s. It was bleeding to death after the government tinkered with its original mandate of staying only as financial arm for the entire housing system in the country.
Since P150,000 to P375,000-worth of housing loans are too retail and operationally tedious for commercial banks, which are focused on the medium to high end housing sector, NHMFC became the tool to meet the housing demands of those with lower income. But it proved to be overwhelming. NHMFC financed low-cost housing to thousands of poor borrowers, but it did not screen them well nor collected the loans properly.
When uncollected housing loans, or those considered highly delinquent, reached a massive P53 billion, this big burden brought it to its knees, prompting a major restructuring in 2002.
Fast forward to 2008. It has recovered lost ground and ready to be more or less like Fannie and Freddie. How? By being active in the secondary mortgage market.
Secondary mortgage market
The financial scheme called secondary mortgage market in the financial sector’s lingo is supposed to unlock opportunities in banks and among house builders so they could sell more residential properties at interest rates affordable especially to the low income masses.
It works this way: The banks and residential property developers lend to house buyers. Since the banks and developers cannot lend to more aspiring house buyers if they have to carry big chunks of these housing loans or mortgages in their financial books, NHMFC comes to the rescue by buying these mortgages from the banks.
NHMFC then turns these mortgages around, then securitize or document them as financial currencies that they could then sell as bonds to potential investors. They are like financial intermediaries between people who would like to park their money in bonds and housing loan borrowers who signed a mortgage document where they promise to pay in a future date.
NHMFC, however, started out in the eighties with a social function: to make housing affordable to the masses by tapping funds from the capital market to buy and sell mortgages.
However, since housing for the poor is a highly politicized activity, there were efforts to pump-prime the housing market during the Aquino up to the Ramos administration.
Three government managed funds, the Government Service Insurance System (GSIS), Social Security System (SSS) and the Pag-Ibig Fund, were then instructed to set aside a portion of their members’ contributions and allotted them to NHMFC through a housing-for-the-poor program, called Unified Housing Loan Program (UHLP). The P43 billion from the three became NHMFC’s seed money to directly lend to the poor.
Between 1988 and 1996, NHMFC directly lent about 220,000 housing loans to poor borrowers.
It was doomed from the start. NHMFC--not immune to coaxing from politicians who peppered the housing agency with requests to accommodate their poor constituents, and from scheming housing developers, some of them fly-by-night ones--was terrible at screening borrowers.
NHMFC also proved to be a poor loan collector. When it stopped entertaining new loan applications in 1996, collection levels dipped alarmingly below 65 percent. It was bleeding. About P30 billion worth of accounts were considered “highly delinquent.” It needed to be restructured.
Healthy asset pool
In other words, NHMFC was stuck with collecting, then eventually restructuring, the 220,000 mortgages it could not collect. It is only this November 2008 that it could truly become what it was meant to be.
NHMFC’s maiden bond issue, which will be rated by local firm, Philratings, will be underwritten by Standard Chartered Bank, with Ernst & Young and its local auditing partner, SGV, as the financial advisors.
The bond issue will be based on “highly seasoned” 15,000 housing mortgages, which the borrowers have been paying up-to-date. Since NHMFC’s housing loans usually last for 25 years, this means these mortgages backing the bonds have had 10 years of good payment record.
This makes the Filipino borrowers different from their American counterparts. The US subprime mess came about because the bonds were partly based even on mortgages that are beyond the value of the property that was bought through credit. The housing mess exposed the fact that these are dud loans when the credit risks became too apparent and each layer tumbled like house of cards.
“These mortgages are not the same as those that backed Fannie Mae and Freddie Mac,” said Daisy Dulay, the operations head for securitization for NHMFC.
“The borrowers have been at it for more than 10 years already. At the same time, the houses they got in 1996 at P150,000 to P375,000 are now worth P1 to P3 million. They would definitely want to keep that asset because it already appreciated tremendously,” Dulay added.
In other words, there is a real asset with real value behind NHMFC’s bond issue.
Setting standards
The maiden bond issue was postponed several times because part of NHMFC’s restructuring program was to sell the 220,000 highly delinquent mortgage accounts to a special purpose vehicle, namely the Deutsche Bank Real Estate Global Opportunities.
The bad loans sale to Deutsche was valued at a whopping P42 billion. It was the first bad loans sale in the Philippines.
The maiden bond issue, also set to be a pioneering one in the country’s financial market, is expected to create secondary mortgage experts within the NHMFC as an institution, since in the succeeding rounds, it will already start buying mortgages from commercial banks so they too could free up their books and expand their housing loan portfolio.
While this will initially be felt on the level of the financial institutions, the public, especially those who aspire to buy their own homes, will also soon feel the impact.
NHMFC’s maiden bond offer is expected to set the standards both for the underwriters of these instruments and in the documentary requirements to borrowers. Home buyers will eventually have to fill up just one set of forms and fulfill similar sets of requirements whether they are availing housing loans from a commercial bank, a financial institution, or on the in-house financing scheme of the property developer.
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