Development of rmbs market in India: Issues and Concerns

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5.2MBS in USA

Mortgage related debt is the most dominant debt category in the US debt market. If we consider the bond market in entirety and include municipal bonds, treasury securities, mortgage related securities, corporate debt, federal agencies debt, short term debt and asset based securitization, and compare the performance of mortgage related debt, then we see that the percentage of mortgage related debt in the total outstanding debt has increased from 8.11% in 1985 to 23.51% in Q2 2004, making it the most dominant debt category. At Q2 2004, total outstanding mortgage related debt was 142.67% of the total outstanding US treasury debt and 117.23% of the total outstanding corporate debt (Refer Exhibit 3 for details). The mortgage backed securities have clearly seen a tremendous growth over the years, to now become the leader the debt market. The total outstanding mortgage related debt at Q2 2004 stood at USD 5358 billion dollars.
Another indication of the dominance of MBS in the US debt market is their daily trading volume compared to other debt securities. The average daily trading volume of MBS in April 2004 was 307.36% of the agency securities and 1226.74% of the corporate securities. The average daily trading volume of MBS in US debt market in 2004 has been in the range of 245% - 307% with respect to agency securities and around 1000% with respect to corporate securities. The average daily trading volume of MBS in April 2004 stood at USD 243 billion dollars. (Refer Exhibit 4 for details)

6Advantages of Having A Secondary Market for Mortgages In India

A vibrant secondary mortgages market in India will benefit all the stakeholders in the mortgage chain. This includes issuers, investors, borrowers and mortgage finance industry as a whole. It will also improve the housing situation and socio-economic situation in the country. The introduction of MBS can improve housing affordability, increase the flow of funds to the housing sector and better allocate the risks inherent in housing finance. It will also benefit lot of other industries that depend upon housing sector in one way or the other.

In this paper we will identify the main benefits of secondary market for the main stakeholders in the value chain.
Benefits to issuers

  • Reduction in cost of funding, as explained earlier.

  • Capping of credit risk – the risk in case of securitisation transactions is capped to the extent of credit enhancements provided by the originator

  • Elimination of asset liability mismatches, both in terms of maturities and interest risks

  • Increase in liquidity and funding appetite by creating an additional avenue

  • With more efficient use of owned capital, the issuer is enable to create higher effective leverage – which promotes RoE, hence market capitalization.

Benefits to investors

  • Attractive rate of return on investment in a highly-rated instrument, with excellent track record of rating resilience and recovery rates

  • Portfolio diversification both geographically and economically

  • Socially responsible investing

  • Ability to buy tranches that matches their appetite

  • Alternative to investment in government bonds and corporate bonds

Benefits to borrowers

  • Reduction in cost of mortgage finance

  • Greater availability of funds

  • Availability of funding for lower income groups

  • Creation of formalized credit scoring systems which ultimately result into a decentralized, formula-driven approach to mortgage origination and makes the process extremely fast
  • On a higher level of development, integrating the origination process with the securitisation process, whereby the mortgage originator matures into a mere originator-cum-servicer, for a much smaller agency cost, and therefore, much lower lending costs.

Benefits to mortgage industry

  • Specialization of mortgage related service providers leading to reduction of costs and improvements in efficiency

  • Lender access to alternative funding sources

  • Improved sustainability of longer term housing funding through long term debt market with reforms of contractual savings institutions like pension funds and insurance companies

  • Potentially larger investor-base

  • Lenders able to broaden target market, through risk sharing

  • Long term debt market funding can help smooth housing cycles

  • Improved standardization and supervision of real state loans, improve transparency and security for borrowers and lenders

7Analysis of the problems of Indian RMBS Market and Recommendations

A vibrant secondary market can turn out as an efficient, low cost and stable way of raising money and managing cash flows in the overall mortgages market. This can be achieved due to economies in raising money “wholesale” in the capital markets, in processing the purchase and servicing of large numbers of mortgage loans, and in managing risks, through diversification.
In this section, we analyze the factors that stifle, either by their presence or in absence, the development of the RMBS market in India. While on our analysis, we also discount some of the commonly-cited factors which are not really stumbling blocks and which may be allowed to be developed either by the market forces or over the long run.

7.1Development of specialised servicers: not an immediate need

Quite often, one of the factors cited for development of the RMBS market is the existence of “specialized servicers”. The phenomenon obviously comes from the US market where securitisation has developed to an extent where the several components of a mortgage loan are completely unbundled – the origination done by originators who are wide-spread geographically, the servicing done by servicers who are technology and infrastructure-rich, and the funding done by the capital markets. To an extent, the risks are sucked out by insurance companies and other credit enhancers.
While this is the wish list of any country wanting to develop securitisation, such a specialized framework is certainly not a pre-requisite. Specialization itself is a by-product of development – putting specialized agencies as a pre-requisite for development is like putting the cart before the horse. If securitisation market develops, the need for outsourcing of the servicing function will be felt, and in India, there is no dearth of outsourcing potentials.

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