1 The co-author is a student at the Indian Institute of Management Bangalore; the co-authori’s inspiration for this article came from a project under Prof P C Narayan on development of secondary mortgage markets in India. In the present article, the co-author’s contribution draws upon the said project work.
2 At 9th Annual Asian Real Estate Society International Conference on August 9, 2004 by HDFC Ltd
3 At 25th Congress of International Union for Housing Finance by HDFC; June 23, 2004
5 In a testimony before the House Financial Services Committee on 17th Feb 2005, Alan Greenspan remarked: “Enabling these companies to increase in size...we are placing the total financial system of the future at a substantial risk”.
6 There are several studies on the impact of securitisation on housing finance costs, to name a few: Black, Deborah G., Kenneth D. Garbade, and William L. Silber. May 1981. “The
Impact of the GNMA Pass-through Program on FHA Mortgage Costs,” Journal of
Finance, xxxvI, 2: 457-469; Greenbaum, S. and A. Thakor. September 1987. “Bank Funding Modes: Securitization versus Deposits.” Journal of Banking Finance. 11: 379-402; Kolari, James W., Donald R. Fraser, and Ali Anari. 1998. “The Effect of Securitization on Mortgage Market Yields: A Cointigration Analysis,” Journal ofReal Estate Economics, 26, 4: 677-693.
7 Pfandbriefes are bonds backed by the security of the underlying mortgage, as also by the mortgage-originator. These are issued under a special legal dispensation, which provides bankruptcy-remoteness features to the bonds. Most of the continental European countries have strong markets in pfandbriefes.
8 See, for instance, Standard and Poor’s rating volatility and default studies, which periodically reports the delinquency and recovery history of non-agency RMBS transactions.
9 Refer Exhibit 1
10 Census 2001
11 Refer Exhibit 2
12 Source: Planning Commission and National Housing Bank
13 Gain on sale is the profit that is booked, upfront, when a portfolio of assets is securitized. In accounting as in legal parlance, securitisation is a sale, and the sale might result into a gain or loss on sale. Usually, securitisation transactions result into a gain on sale, if there is a positive difference between the rate of return inherent in the mortgage pool and that in the issuance of securities – which is obviously expected. Even if the pool is sold at par, but with a contractual right to derive profit in future in form of service fees or any other retained interest, if conditions of off-balance sheet accounting are met, accounting standards will permit profit booking by bringing on books the fair value of the retained interest.
14 See, for example, Vinod Kothari; Securitisation: The Financial Instrument of the New Millennium second edition 2003
15 Ironically enough, though all securitisations, both MBS and ABS, have so far used the pass-through structure, there is no definitive tax rule or clarification that either guarantees a tax-transparent treatment to pass-through vehicles, or lays down conditions of pass-through treatment.