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Comparison of Mortgage Backed Securitization Systems in US

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					Comparison of Mortgage-Backed
   Securitization Systems in
  US, Hong Kong and Korea



         Pamela A. Lamoreaux
             Consultant




Presentation for International MBS Seminar

Sponsored by Korea Mortgage Corporation

              Seoul, Korea




             December 20, 2000



                    1
                                                            Table of Contents
EXECUTIVE SUMMARY .................................................................................................................... 4
I. OVERVIEW ........................................................................................................................................... 8
      1. History of U.S. Securitization
      8 2. Economic Environment
      8
      3. Key Housing Numbers
      9
      4. Other Important Factors
      9
II. ENVIRONMENT SUPPORTING MBS ..................................................................................................... 11
      1. Housing Finance System                                                                                                                  ........
      11
            1. Market Players
            12
            2. Size/Growth of Mortgage Market
15
            3. Mortgage Products/Characteristics
15
        2. Regulatory Treatmen................................................................................................................ 18
        3. Legal Framework ..................................................................................................................... 21
III.       COMPOSITION AND SIXE OF SECURITIZATION MARKET .................................................................. 22
        1. Securitization in U.S. ................................................................................................................ 22
        2. Size of the Market .................................................................................................................... 23
        3. Secondary Market Institution ................................................................................................... 24
        4. Securitization in Hong Kong ..................................................................................................... 27
            1. Private Sector Transactions
            28
            2. Hong Kong Mortgage Corporation
30
            3. Impediments for Hong Kong
32
        5. Securitization in Korea ............................................................................................................. 32
            1. Private Sector Transactions
            32
            2. KoMoCo
34
            3. Other MBS Transactions
35
            4. Impediments for Korea
35
IV.SECONDARY TRADING ........................................................................................................................ 36
     1. Who are the Investors................................................................................................................ 36
     2. Investor Base Hong Kong......................................................................................................... 37
     3. Investor Base Korea................................................................................................................. 38
     4. Trading Practices...................................................................................................................... 38
            1. Hong Kong Settlement/Clearing
            39
            2. Korea Settlement/Clearing
            39
        5. Pricing
        39
            1. Hong Kong Pricing
            39




                                                                           2
            2. Korea Pricing
            40
        6. Credit Rating Agencies
        40
            1. Hong Kong
            40
            2. Korea
            41
V. ROLE OF SECONDARY MARKET............................................................................................................. 41
VI.SUMMARY .......................................................................................................................................... 42
VIII.REFERENCES.................................................................................................................................... 43

Exhibit 1: US Evolution of MBS                                                                       8
Exhibit 2: Key Economic Factors                                                                      9
Exhibit 3: Key Housing Data                                                                          9
Exhibit 4: Comparison of Building Area                                                               10
Exhibit 5: Outstanding Mortgages as % of GDP                                                         10
Exhibit 6: Comparison Market Participants                                                            11
Exhibit 7: Size of Mortgage Market                                                                                13
Exhibit 8: % Growth Residential Mortgages – Hong Kong                                                14
Exhibit 9: % Growth Residential Mortgages – Korea                                                    14
Exhibit 10:Comparison Mortgage Products/Characteristics                                              15
Exhibit 11:Comparison Regulatory Treatments                                                          19
Exhibit 12:Legal Enhancements for Consideration                                                      21
Exhibit 13:Growth in Volume Receivables                                                              23
Exhibit 14:US Credit Market                                                                          24
Exhibit 15:Market Share of Secondary Market Institutions – US                                        25
Exhibit 16:Securitization Model                                                                      26
Exhibit 17: Issues of MBS Secondary Market Institutions – US                                         26
Exhibit 18:Securitization Process – US                                                               27
Exhibit 19: 1994 Transactions – Hong Kong                                                                         28
Exhibit 20: 1997 Transactions – Hong Kong                                                                         29
Exhibit 21: Back-to-Back MBS Transaction – Hong Kong                                                 30
Exhibit 22: SPC Structure – Hong Kong                                                                31
Exhibit 23: HKMC Transactions                                                                        31
Exhibit 24: Transactions – Korea                                                                     32
Exhibit 25:KoMoCo Transactions – Korea                                                               32
Exhibit 26:KoMoCo Structure – Korea                                                                  34
Exhibit 27:Investors                                                                                 37
Exhibit 28:Investor Holdings in Hong Kong                                                            38
Exhibit 29:Security Trading Volume Korea                                                             39
Exhibit 30:Pricing Benchmark – Hong Kong                                                                          40
Exhibit 31:Pricing Benchmark – Korea                                                                 40




                                                                          3
EXECUTIVE SUMMARY



I.     Overview

The US, with its 30-year history of securitization, large market size and other unique
factors makes it difficult to compare directly with the just-developing securitization
markets in Hong Kong and Korea. However, it is useful to contrast the evolution of
securitization in the US with these two countries progress and discuss some of the key
factors that supported the phenomenal explosion of this financial tool in the US, and
highlight how it may be applicable to the development of securitization in Hong Kong and
Korea.

Setting the backdrop for securitization, we will look at:

       •   History of US Securitization
       •   Economic Environment
       •   Key Housing Data
       •   Other Important Factors


II.    Environment Supporting MBS

       •   Housing Finance System

           1. Market Players
           2. Size and Growth of Mortgage Market
           3. Mortgage Products and Characteristics – which characteristics support or
              hinder development of securitization in Hong Kong and Korea

       •   Regulatory Treatment –Issues Affecting Securitization in Hong Kong

           1. If the current “interest rate price war” continues with banks the loans will
              be below market rate and not securitizable or saleable to secondary or
              other entities

       •   Regulatory Treatment – Issues Affecting Securitization in Korea

           1. Minimum denomination for clearing and settlement

       •   Legal Framework - Enhancements for Consideration in Hong Kong and Korea




                                             4
                      HONG KONG                                                      KOREA
•      The Land Registry system is cumbersome and              •   Current law does not allow KoMoCo to
       needs to be automated. The documents                        purchase mortgages and retain them in their
       (memorials and exhibits) needed to transfer the             own portfolio for securitizing in the future
       mortgages are onerous to complete and require           •   Unlike all other beneficiary certificates in
       much detailed information on each mortgage.                 Korea, the repurchase of MBS are not
       There are 7 registries and forms for all affected           permitted
       registries must be complete and accurate before         •   In order to fix the indebtedness under the Keun
       the entire transfer can be recorded. There are              mortgage the borrower must receive prior
       “stopped deed” fees for correcting any errors.              notice and give their consent to the transfer,
       The larger the transaction, the more difficult              thereby adding a significant amount of time
       the timely recording of the transfer becomes.               and cost to each transaction
                                                               •   Under current law KoMoCo must appoint a
                                                                   third party to perform due diligence, this is
                                                                   generally the role of the secondary market
                                                                   entity and again saves time and cost for the
                                                                   transaction



III.       Composition and Size of Securitization Market

           •    Growth in Volumes of Receivables
           •    Securitization in US – Size
           •    Secondary Market Institutions – US, Hong Kong and Korea
           •    New Innovations like Back-to-Back Securitization Program in Hong
           •    Major Impediments to Growth in Securitization in Hong Kong

                1. Banks are highly liquid and have no need or desire to remove high quality
                   mortgage assets from their balance sheet
                2. Current “price war” in Hong Kong is resulting in below market rate loans
                   that are difficult to securitize or sell
                3. As issuers are increasingly sensitive to the cost of funds, the recent
                   volatility in HIBOR has made pricing unattractive. The underlying assets
                   (mortgages) are tied to prime while the securitization uses HIBOR for its
                   funding. On October 23,1997 the price of the basis swap increased from
                   between 20-25 bp to around 75 bp over LIBOR. Prior to these levels,
                   transaction costs stood at between 100 bp and 120 bp, the extra 50 bp has
                   had a marked effect on the bank’s willingness to securitize their assets.
                4. As mentioned previously currently there is not much demand from
                   investors for longer-term paper, educating investors in Asia will take some
                   patience.
                5. A standard and consistent benchmark pricing mechanism for MBS is just
                   being developed

           •    Major Impediments to Growth in Securitization in Korea




                                                           5
           1. Banks are liquid and have no need or desire to remove high quality
               mortgage assets from their balance sheet at this time
           2. Overall, banks have a low concentration of their total assets in mortgage
               loans
           3. Current law does not allow for KoMoCo to buy and hold loans in its own
               portfolio for future securitization
           4. MBS are beneficiary certificates not bonds
           5. Minimum denomination for clearing and settlement amount
           6. Onerous borrower notification process
           7. Third-party due diligence required (could be done more efficiently and
               cheaper by secondary market)
           8. Levels of credit enhancement needed
           9. A standard and consistent benchmark pricing mechanism for MBS has not
               been developed
           10. Limited disclosure documentation and on-going information on current
               issues (not to international standards at this time)


V.     Secondary Trading

       •   Who are the Investors?
       •   Size of Holdings
       •   Trading Practices
       •   Pricing
       •   Credit Rating Agencies


VI.    Role of Secondary Market

The role the Secondary Market Corporations (Fannie Mae, Freddie Mac and Ginnie Mae)
has played in the explosion of securitization in the US is indisputable. They’re long
histories and sound business models have also contributed in large part to the development
of these financial tools in other countries. It is no coincidence that Hong Kong and Korea
both have fledgling mortgage corporations (Hong Kong Mortgage Corporation and
KoMoCo) who promise to act as the catalyst for development of MBS in their respective
countries in a similar manner. While not every country has the pre-conditions necessary to
adequately support these types of institutions, there are several important roles these two
institutions and others can play, such as:

A.     Standardization of origination and servicing guidelines for the mortgage lending
       community, whether they sell to the secondary market or not. Standardization of
       various legal and operational forms associated with mortgage lending (i.e.
       mortgage deed, valuation form, appraisal form, loan application form) making
       securitization easier and will help bring them to international standards



                                            6
B.         Liquidity to market –1) provide source of liquidity and balance sheet management
           to primary mortgage market, 2) consistent issuers in the market, 3) new product
           innovations, 4) standardization all greatly enhance the liquidity of MBS
C.         Guaranty – can be lower cost than other credit enhancements
D.         Innovative products (i.e. fixed rate mortgages, mortgage insurance)
E.         Set benchmark price – make markets, standardize pricing methodology
F.         Investor education – very important in emerging markets
G.         Portfolio lending - having the ability to purchase and retain mortgages from
           various lenders and aggregate them to create larger and more liquid MBS
H.         Broaden investor base – 1) develop products to meet specific needs of investors,
           2) various structures can be developed, 3)can develop new markets such as retail
           investors
I.         Efficiencies – 1) creates efficiencies for primary market in origination and servicing
           of mortgages, 2) development of technological capabilities in regards to mortgages
           and securitization, 3)master SPV(trust) to reduce cost and time


VI.        SUMMARY

In terms of residential mortgage securitization, clearly the US is a model for all others to
emulate. At least in the opinion of this author, the prognosis for both Hong Kong and
Korea in developing robust securitization markets is good. Undoubtedly, the continued
rebound in their economies and financial sectors after the Asian Crisis is paramount. While
there are uncertainties and issues and obstacles as highlighted throughout this paper, there
are several reasons for this optimism, which include:


      a)   Sound macroeconomic fundamentals
      b)   Well-capitalized and strong primary market players
      c)   Positive regulatory/legal environment
      d)   Fast pace of change in capital market development
      e)   Active and strong secondary market institutions




                                                 7
     COMPARISON OF MORTGAGE-BACKED SECURITIZATION SYSTEM:
                   U.S., HONG KONG AND KOREA



I.     OVERVIEW

The US, with its 30-year history of securitization, large market size and other unique
factors makes it difficult to compare directly with the just-developing securitization
markets in Hong Kong and Korea. However, it is useful to contrast the evolution of
securitization in the US with these two countries progress and discuss some of the key
factors that supported the phenomenal explosion of this financial tool in the US, and
highlight how it may be applicable to the development of securitization in Hong Kong and
Korea.

History of U.S. Securitization – Since the early 19080’s securitization of residential
mortgages has been a chief funding mechanism for financial institutions in the US, but the
market has evolved and expanded for 30 years. The following Exhibit 1 shows the major
milestones in the growth of the US securitization system.




                                                 Exhibit 1
                                      Evolution of U.S. Securitization
                                                        Targeted
                                                        Amortization         TAC
                                                        Class


                             FIRST
                           FREDDIE                                                     SMBS
                            MAC PTR                   Planned
               GNMA                                                    PAC              -IO
                             ISSUE          FIRST     Amortization
               Pool # 1                                                                 -PO
                                           FANNIE     Class
                PTR                        MAE PTR
                                            ISSUE                                     Stripped MBS
              US Govt
              Guarantees    BANK
                              OF            PRIVATE
                           AMERICA                            CMO                    REMIC
                                          PLACEMENT
              Adjustable     PTR              MBB
              Rate                           ISSUES
                           Non- US                          Sequential pay
              Mortgages                                     Plain Vanilla          Real Estate Mortgage
                           Govt
              Introduced   Guarantees                                              Investment Conduit




                1970         1971             1981            1983                    1986           1989     1993


                                          US $11                                             US $914           US
                                           BN                                                   BN          1.5 TRIL




                                                        8
Economic Environment – The US has been experiencing positive economic growth for
several years while Hong Kong and Korea are rebounding positively from the Asian
Financial Crisis of 1997 as shown in Exhibit 2.


                                        Exhibit 2
                                 Key Economic Indicators

  COUNTRY           POPULATION             GDP               CPI          UNEMPLOYMENT
                     (in millions)        2Q 2000          2 Q 2000           2Q 2000
                      Year 2000
US                       250.4              5.6%             3.7%                 4.0%
Hong Kong                  6.7             10.4%            (2.7%)                4.8%
South Korea               47.2              3.6%             2.2%                 5.4%


Key Housing Numbers - Due to the size of its population and robust economy the US is
enjoying good growth in their housing stock and new mortgage loans being originated as reflected
in Exhibit 3


                                           Exhibit 3
                                       Key Housing Data

     COUNTRY            HOUSING STARTS             NEW MORTGAGE              BASE RATES
                            2Q 2000                  ORIGINATION             MORTGAGES
                            (000’S)                 (US$ BILLIONS)             2Q 2000
                                                        2Q 2000
US                              1,605                    276 bn           30-year Fixed Rate:
                                                                          8.3%
                                                                          1-Year Adjustable:
                                                                          7.0%
Hong Kong                                                 8 bn                Prime: 8.0%
South Korea                      142                      5 bn


Other Important Factors - which include:

        •   The age mix in these three countries bodes well for an increased demand in housing.
            The largest group in all cases is the 20-40 year-olds, the groups most likely to
            experience salary increases and have growing children that may need more space.
            This “upwardly mobile” group should be trading up to larger and more expensive
            housing, particularly if the economies are doing well.
        •   Both Hong Kong and Korea have a healthy savings rate at 32% and 25% respectively,
            with the US lower at around 20%.



                                               9
          •       In the case of Hong Kong and Korea there is pent-up demand for housing as shown in
                  Exhibit 4.

                                                               Exhibit 4
                                                 Comparison of Build-up Area Per Person

   Hong Kong
                      28
         Seoul         31

     Shanghai          35
                                                          Hong Kong and Korea have
                            43
       Tianjin
                                                             pent-up demand
    Guangzhou                49

       Moscow                    55

       Beijing                        69

 St. Petersburg                             92

     Singapore                              93

         Paris                                    123

     Bangkok                                              173

  Johannesburg                                                  190

           NY                                                                    257

   Washington                                                                                                  480


                       0                   50       100     150            200         250   300   350   400     450   500



Source: “Measuring Constraints on Land Supply: The Case of Hong Kong, Bertaud, 1997
Alain



          •       For Hong Kong and Korea the total of outstanding mortgages as compared to the
                  GDP would suggest potential for growth as compared to the US and other countries
                  as shown in the following Exhibit 5.




                                                                      10
                               Exhibit 5
                      OUTSTANDING MORTGAGES AS
                              % OF GDP
                         Percentage


                    6000%             54                               56
                                                                            %
                    5000%

                    4000%                                33                                                              31
                    3000%                                                                                                                           23

                    2000%                                                                    14                                                                                              13                             11
                    1000%                                                                                                                                                    5
                                                                                                                                                                                                                                               1
                       0%
                                                                       .
                                 SA                  N
                                                              U.
                                                                   K                     A                               G
                                                                                                                                           SI
                                                                                                                                                A
                                                                                                                                                                    SI
                                                                                                                                                                         A
                                                                                                                                                                                            ND                         ES
                                                                                                                                                                                                                                           A
                             U                  PA                                  RE                               N                                                                                                                IN
                                           JA                                   O                            K
                                                                                                                 O
                                                                                                                                      AY                       NE                      LA                         IN
                                                                                                                                                                                                                                 CH                *Estimated
                                                                            K                                                                                                     AI                         PP
                                                                                                         G                       AL                        O                                             I
                                                                                                 O
                                                                                                     N                       M                      I   ND                   TH                       IL
                                                                                             H                                                                                                   PH




II.     ENVIRONMENT SUPPORTING DEVELOPMENT OF SECURITIZATION

Assuming the macroeconomic picture is sound as highlighted in the previous section, there are
several other areas that are important to nurture the growth of securitization. In this paper we will
discuss aspects of the housing finance system and the legal/regulatory framework that can either
be an incentive for securitization or create obstacles/challenges which will be highlighted in the
case of each country.

Housing Finance System – The following section will provide information on the housing
finance systems, particularly in regards to their impact on securitization.

1. Market Players


                                                  Exhibit 6
                                  Comparison of Mortgage Market Participants

  COUNTRY            TYPES/NUMBER OF                                                                                                                     SECONDARY                                                                                       IMPACT ON
                        INSTITUTIONS                                                                                                                       MARKET                                                                                      SECURITIZATION
                            END 1999
US                a) Commercial Banks – [ ]                                                                                       Very mature and                                                                                                  •      Large base of
                  b) Savings/Loans – [ ]                                                                                          efficient secondary                                                                                                     mortgage providers
                  c) Mortgage Banks [         ]–                                                                                  market with 3 major                                                                                              •      High origination
                  d) Non-deposit taking                                                                                           players:                                                                                                                volume
                     institutions that sell all or                                                                                                                                                                                                 •      Mortgage bankers
                     most of their origination to                                                                                 •                      Fannie Mae                                                                                       need the secondary
                     the secondary market)                                                                                        •                      Freddie Mac                                                                                      market institution
                  e) Finance Companies – [ ]                                                                                      •                      Ginnie Mae                                                                                •      Good competition
                                                                                                                                                                                                                                                   •      Consolidation of
                  High percentage of institutions                                                                                 Fannie Mae and Freddie                                                                                                  industry been going
                  provide mortgages


                                                                                                                         11
            provide mortgages                   Mae securitize/purchase        on for past several
                                                private sector loans           years
                                                primarily , Ginnie Mae
                                                securitizes government
                                                guaranteed loans
HONG KONG   Authorised Institutions with the    • Hong Kong                •   Limited number of
            Hong Kong Monetary Authority            Mortgage                   mortgage providers
            -                                       Corporation            •   High concentration
                                                    (HKMC) was                 with top banks
            a)  Licensed Banks - [180 (149          created in 1997.       •   Only Authorised
                incorporated outside HK)            This government-           Institutions can do
            b) Restricted License Banks             owned entity is now        business with
                [66 (27 incorporated outside        fully operational          secondary market
                of HK)                              and having a               corporation
            c) Deposit-taking Companies             positive impact on     •   No mortgage
                – [116 (2 incorporated              the financial sector       bankers to provide
                outside HK)                         by:                        source of business
             Others –                                                          to secondary
             a) Finance Companies               •   Purchasing                 market
             b) Money Lenders                       mortgages for own
                                                    portfolio
            About 44 institutions provide       •   Issuing Pass-
            residential mortgages                   through MBS
                                                •   Issuing several
                                                    unsecured corporate
                                                    debt programs
                                                •   Creating successful
                                                    Mortgage-Insurance
                                                    Scheme
                                                •   Developing fixed-
                                                    rate loan program
KOREA       11 Domestic Banks –                 •   Korea Mortgage         •   Limited number of
            a) H&CB                                 Corporation                mortgage
            b) Kookmin Bank                         (KoMoCo) was               originators
            c) Korea Exchange Bank                  created in 1999 and    •   Limited volume of
            d) Chohung Bank                         is still developing        mortgage loan in
            e) Hanvit Bank                          its operations.            the past few years
            f) Hana Bank                            Highlights for 2000    •   Mortgages highly
            g) Shinhan Bank                         include:                   concentrated in one
            h) Hanmi Bank                                                      bank
            i) Korea First Bank                 •   Issuance of US $1.3    •   Deregulation
            j) Seoul Bank                           bn of MBS (not             happening within
            k) Peace Bank                           pass-through)              financial sector
                                                    collateralized by      •   Consolidation of
            Finance Companies                       public sector loans        banks/institutions
                                                    granted by the         •   Vast differences in
            Specialty Finance Companies –           National Housing           financial health
            mortgage bankers                        Fund and serviced          and underwriting
                                                    by H&CB                    criteria among
            Insurance Companies                 •   Signed equity              different types of
                                                    transaction with IFC       institutions
            National Housing Fund                   Corporation and        •   No program yet for
                                                    Merrill Lynch in           mortgage bankers
                                                    October

                                               12
                Agriculture Cooperative              October                    to sell loans to the
                Federation                       •   Signed Technical           secondary market
                                                     Assistance
                Domestic Foreign Banks (i.e.         Agreement with
                HSBC, Citibank)                      Merrill Lynch with
                                                     TA to be provided
                                                     by Countrywide,
                                                     Fannie Mae and
                                                     Merrill Lynch




2. Size/Growth of Mortgage Markets – Residential Mortgages (not Commercial Loans)

The size of the mortgage markets are dramatically different, however clearly the efficiency,
liquidity and new product innovations brought to the US market by the secondary market
institutions has had a positive effect on increasing the percentage of overall mortgages that
have been securitized as shown in the following table.




                                    Exhibit 7
         Size of Mortgage Market (Private and Public), % of Securitization
     COUNTRY          PRIVATE SECTOR             PUBLIC SECTOR                    AMOUNT
                     US $ OUTSTANDING          US$ OUTSTANDING                SECURITIZED
US                  As of 12/1999:             As of 12/1999:             As of 12/1999:
                          $[2.9] trillion           $[1.0 trillion}       ${2.5 trillion]

                                                                          50% of residential
                                                                          mortgages are securitized
HONG KONG           As of 9/2000:              As of 9/2000:              As of 9/2000:
                           $[67] billion             $[10] billion        a) $[1.2] bn private
                                                                              sector deals
                                                                          b) $[500 ] million
                                                                              HKMC

                                                                          2.0% of residential
                                                                          mortgages are securitized
KOREA               As of 6/2000:              As of 6/2000:              As of 12/2000:
                            $21 billion               $33 billion         a) $1.27 bn (public
                                                                              sector loans done by
                                                                              KoMoCo)
                                                                          b) $70 million (private
                                                                              sector)

                                                                          2.3% of residential
                                                                          mortgages are securitized




                                               13
The growth of the residential mortgage portfolio is important to increased securitization in
Hong Kong and Korea, as the outstanding balance of mortgages is still quite small.



                                        Exhibit 8
                                       Hong Kong
                        Percentage of Growth Residential Mortgage
                         Percentage
                             (%)
                 70

                 60           61

                 50

                 40

                 30                      28                                30
                                                                                                                  25
                 20
                                                                                          18                                       18
                                                                                                                                           15
                 10                                            12                                     10                                           10
                                                   6
                    0
                          1981        1983      1985    1987           1989          1991      1993         1997                1998    1999    2000




In the case of Hong Kong, the percentage of growth from year to year has been growing
steadily. However, in 1998 the banks began to compete fiercely for the limited amount of
mortgage business, which caused the prepayment rates to increase dramatically, thereby
causing the net growth to slow down as demonstrated in the following Exhibit 8.
In the case of Korea, there has been a slow pace of growth since 1992 with a decrease in
1997 and 1998 during the IMF Crisis. The volume has been increasing again since 1998,
particularly in the private sector, and the full year for 2000 is expected to be about the
same or slightly higher than 1999. As rates have been very stable in Korea, there have not
been significant prepayments like in Hong Kong.



                                                           Exhibit 9
                                             Growth of Public and Private Mortgages
                                                   Korea (1992 - May 2000)
                                                                                                                                                Number Loans
                        10,000                                                                                                            500000
                         9,000                                                                                                            450000
                         8,000                                                                                                            400000
                         7,000                                                                                                            350000
            Won (000)




                         6,000                                                                                                            300000
                         5,000                                                                                                            250000
                         4,000                                                                                                            200000
                         3,000                                                                                                            150000
                         2,000                                                                                                            100000
                         1,000                                                                                                            50000
                             0                                                                                                            0
                                         1992

                                                 1992

                                                        1994

                                                                    1995

                                                                              1996

                                                                                       1997

                                                                                               1998

                                                                                                           1999




                                                                                     14
                                                                                                                   2000 - May
3. Mortgage Products/Characteristics –

The types of mortgage products offered in the primary market as well as some of their
specific characteristics have a significant impact on the securitizability of the mortgages as
well as the type of MBS structure that will work best (i.e. pass-through vs. mortgage-
backed bonds which is described in more detail in subsequent sections). Some of the more
important aspects that impact securitization are detailed in the following table.




                                   Exhibit 10
                Comparison of Mortgage Products and Characteristics


         COUNTRY                 PRODUCT DESCRIPTIONS                   IMPACT OF MORTGAGE
                                                                         CHARACTERISTICS ON
                                                                            SECURITIZATION
US                              70% of origination fixed rate       •     No payment shock – less
                                mortgages:                                credit risk
                                • Fully amortizing                  •     Prepayments unpredictable –
                                • Level payment                           full option to the borrower
                                • Fixed tenor                       •     Easy to put in pass-through
                                • No prepayment penalty                   security – cash flow very
                                                                          predictable (making
                                                                          assumptions for prepayment
                                                                          and delinquency)
                                                                    •     Generally not assumable by
                                                                          new borrower
                                30% of origination in Adjustable    •     Bonds are adjustable, in
                                Rate Mortgages (ARM’s):                   synch with underlying
                                • All tied to specific index (i.e         mortgages and use the same
                                    1-Year Treasury, 3-year               index (no basis risk)
                                    Treasury, ,LIBOR, FHLB          •     Bonds are pass-through
                                    Index)                          •     Investors know dates of
                                • Set payment/rate change                 possible interest/payment
                                    dates (6-month, annually,             changes for modeling
                                    every 3, 5 or 10 years)               purposes
                                • May be per adjustment caps        •     Long history of various


                                               15
    on interest and/or payment         indices – can model the
    increase and/or decrease           expected changes over life of
•   May be caps/floors on new I        bond with some certainty
    interest rate and/or payment   General Characteristics of US
    change over life of mortgage   mortgages that may effect
•   Specified lookback date –      securitization:
    what index is in effect to     • Almost all payments are due
    calculate rate/payment             on the first of the month
    change                         • Generally 30 year team but
•   Generally assumable by             other terms available
    qualified borrower             • Private mortgage insurance
•   Specified period before rate       on all loans over 80% LTV
    and/or payment change will     • All interest paid in arrears
    take effect                    • Full months interest
•   Borrower disclosure ahead of       collected, no simple interest
    change                         • No capitalization
•   Convertibility option from     • Standard legal documents
    ARM to fixed rate loan             and underwriting criteria
                                   • Still small percentage of
                                       mortgage payments are made
Large array of fixed and               by direct debit from the
adjustable mortgage products           borrower’s bank account
such as bi-weekly, GPM, reverse    • Lower volume of MBS
mortgage, HEL and tied to many         issued with ARM’s - less
different indices                      liquid




              16
HONG KONG   98% floating rate mortgages:           •   Payments can be on any day
            • Fully amortizing                         of month
            • Index is Prime Rate                  •   Several ways to calculate
            • Administered rate - Prime                interest
                rate is set by each bank           •   Several ways to apply
                (usually the same for all              payment (principal and
                banks)                                 interest and fees)
            • Each bank sets their spread          •   No standard legal
                to prime (+ or -) based on             documentation
                competitive issues and some        •   No predictability on when
                borrower profile                       banks will change rates
            • Borrower chooses fixed tenor         •   Basis risk – mortgages tied
                (payment may change with               to Prime and bonds generally
                interest rate)- this is the most       tied to HIBOR
                common mortgage type or            •   Standard underwriting
                fixed installment (tenor may           guidelines for LTV and debt-
                change with rate change)               to-income
            • Maximum tenor generally 25           •   All HKMC MBS have been
                years but borrower may                 pass-through of this product
                select                             •   HKMC pass-through coupon
            • Rate/payment can change at               rate was floating as a fixed
                any time at bank’s                     spread to Prime (guaranty
                discretion-no warning to               fee and servicing fee)
                borrower                           •   Private sector has created
            • Higher payment shock                     Mortgage-backed Bonds
            • Generally assumable by                   with this product
                qualified borrower
            • Usually step down
                prepayment penalty for up to
                3 years
            • Mortgage insurance for
                loans over 80% LTV
            • 90% of payments are direct
                debited from borrower’s
                bank account
            • Rate and/or payment change
                can be champed almost              •    Not popular product with
                immediately                             consumers due to declining
            2% of mortgages originated                  interest rate market
            under HKMC’s fixed rate                •    Not sufficient volume to
            scheme:                                     securitize – illiquid product
            • Rate fixed for 1-2, or 3 years       •    Difficult to price as to
            • Fully amortizing payment                  uncertainty of what will
            • Prepayment penalty                        happen at end of fixed
            • At specified change date                  period
                borrower can choose to             •   High refinance in declining
                convert to Adjustable rate or          interest rate – reinvestment
                lock in another fixed rate for         risk
                the same specified period
            • Mortgage insurance for
                loans over 80% LTV
            • No borrower notification of
                rate/payment change
            • Rate/payment change can be
                effected immediately
                            17
KOREA                          Almost 100% of residential
                               mortgage loans are adjustable
                               rate (does not include Chonsei or
                               General Loans):
                               • Fully amortizing                  •   Little standardization in
                               • Interest rate determined by           legal documentation or
                                    Prime Rate of bank                 underwriting criteria
                               • Interest rate/payment are         •   Flexible programs –
                                    administered and can be            borrowers can change loan
                                    changed at any time by the         terms with bank approval,
                                    bank                               difficult to put into
                               • Generally very low LTV                securitization
                                    (below 50% for private         •   Payments can be on any day
                                    sector loans)                      of month
                               • Banks have several different      •   Simple interest calculation
                                    products to meet needs of      •   Unusual late payment fee
                                    consumers                          calculation
                               • Virtually 100% of payments        •   No strict guidelines on debt-
                                    are direct debited from            to-income ratio
                                    borrower’s account             •   Interest rates have been
                                                                       stable, little volatility
                                                                   •   Basis risk as mortgages tied
                                                                       to bank Prime Rate and
                                                                       bonds tied to 3-Year
                                                                       Government Bond




Regulatory Treatment - Another pre-condition for active securitization markets is a
regulatory framework that clearly sets out the impact to both the issuer and the potential
investors. Generally, the regulatory framework creates the proper incentives to make
securitization feasible from everyone’s perspective but in no way jeopardizes the integrity
or strength of the financial sector. It is a difficult balancing act that the respective
regulators need to perform. In most cases (except for the US) there is little experience or
inherent knowledge in evaluating the various risks to the financial sectors (including any
secondary market corporations) and the country as a whole. The following chart highlights
the current regulatory treatment for the most important areas:




                                              18
                                Exhibit 11
                    Comparison of Regulatory Treatment



     COUNTRY        TREATMENT FOR            TREATMENT FOR           OBSTACLES
                         ISSUERS                INVESTORS           /CHALLENGES
US                 Capital Treatment:       Capital Treatment:
                      Risk weighting offVI.    Risk weighting of
                      balance sheet –          bonds – from 20%
                      from 50% whole           for agency and %
                      loan to 20% for          for government
                      Agency MBS or 0%         guaranteed
                      for government VII.
                      guaranteed MBS        Tax Treatment:
                      Well established VIII.   Investors pay
                      guidelines by            income tax on
                      Federal Reserve          investments
                                        IX.    Accounting opinion
                   Transferability:            provided on all
               IV.    Loans are freely         securitization
                      transferable without     products
                      any prior
                      notification to
                      borrower

                  Tax Treatment:
                        Grantor trust
                        alleviates the need
                        to pay taxes on the
                        pass-through funds
                        held in trust before
                        submitting to
                        investor – avoids
                        double taxation
                  Accounting opinion on
                  all types of
                  securitization to set out
                  the tax implications




                                               19
HONG KONG   Capital Treatment:           Capital Treatment:    Competitive Primary
            • Risk weighting off         • Risk weighting of   Market Pricing
                balance sheet –             HKMC bonds -–      • If the current
                from 50% whole              from 50% whole        “interest rate price
                loan to 20% for             loan to 20%           war” continues
                HKMC MBS                                          with banks the
            • HKMA sent out              Tax Treatment:           loans will be below
                revised guidelines       • No onerous stamp       market rate and not
                in 1997, includes           duty or capital       securitizable or
                clear definition of         gains tax             saleable to
                “clean sale”                                      secondary or other
                treatment and                                     entities
                recourse                 •   Investor pays
            Transferability:                 income tax on
            • Loans are freely               bonds
                transferable without
                any prior
                notification to
                borrower
            Tax Treatment:
            • No onerous stamp
                duty or capital
                gains tax
            • Tax neutral to
                issuer
            Liquidity Ratio:
            • HKMC regarded as
                liquifiable assets to
            •    improve liquidity
                ratio
            Provisioning:
            Due to HKMC guaranty
            banks do not need to
            hold any general
            provision for loans in
            HKMC MBS – zero
            credit risk to bank


KOREA       Capital Treatment:           Capital Treatment     Settlement/Clearing
            • Risk weighting off                               • Minimum
               balance sheet –                                     denomination for
               from 50% whole            [KMC SHOULD               clearing and
               loan to 20% for           COMPLETE THIS             settlement
               KoMoCo MBS                SECTION TO ENSURE
                                         IT IS ACCURATE]       [KMC CAN ADD
            [KMC SHOULD                                        MORE DETAILS]
            COMPLETE THIS
            SECTION TO ENSURE
            IT IS ACCURATE]




                                        20
Legal Framework – While their legal structures are different, the US, Hong Kong and
Korea are all in the enviable position of not having any legal impediments to securitization
as it is currently being done in their respective countries. In each case the legal framework
protects both the issuer and the ultimate investors in the important areas to include:


    1.   Trust /SPV – bankruptcy remote, true sale
    2.   Foreclosure/Repossession/Auction/Eviction
    3.   Clear Title/Ownership
    4.   Transferability/Assignability
    5.   Due Diligence
    6.   Privacy Issues
    7.   Legal documentation for securitization, securitization law

While the necessary legal frameworks are in place, there are amendments that could be
made in Hong Kong and Korea that would further enhance the development of
securitization as identified in Exhibit 12.


                                          Exhibit 12
                             Legal Enhancements for Consideration
                                    Hong Kong and Korea


                   HONG KONG                                                   KOREA
•   The Land Registry system is cumbersome and           •   Current law does not allow KoMoCo to
    needs to be automated. The documents                     purchase mortgages and retain them in their
    (memorials and exhibits) needed to transfer the          own portfolio for securitizing in the future
    mortgages are onerous to complete and require        •   Unlike all other beneficiary certificates in
    much detailed information on each mortgage.              Korea, the repurchase of MBS are not
    There are 7 registries and forms for all affected        permitted
    registries must be complete and accurate before      •   In order to fix the indebtedness under the Keun
    the entire transfer can be recorded. There are           mortgage the borrower must receive prior
    “stopped deed” fees for correcting any errors.           notice and give their consent to the transfer,
    The larger the transaction, the more difficult           thereby adding a significant amount of time
    the timely recording of the transfer becomes.            and cost to each transaction
                                                         •   Under current law KoMoCo must appoint a
                                                             third party to perform due diligence, this is
                                                             generally the role of the secondary market
                                                             entity and again saves time and cost for the
                                                             transaction




                                                        21
III.   COMPOSTION AND SIZE OF SECURITIZATION MARKETS

The following section will provide general information on the types and volumes of
mortgage securitization that have been done in the US, Hong Kong and Korea to date. In
addition, a list of impediments is provided that are currently hampering the growth of
securitization in Hong Kong and Korea.

First, it is important to clearly define the difference between the various types of MBS, for
the purposes of this paper we will be discussing Mortgage-backed Securities (primary
product in Korea) and Pass-through MBS (primary product in US and Hong Kong).

Mortgage securities are instruments backed by pools of mortgages. For Mortgage-backed
Securities the bonds are structured using eligible mortgages in which the cash flow from
the mortgages will be used to pay the tranches of the bonds as structured. The cash flow
model will take into consideration the issuer’s assumption in regards to delinquency and
prepayments to ensure there is adequate funds to pay interest due each payment period (i.e.
quarterly, semi-annual, annually) and the principal balance when it is due. There are
generally one or more types of credit enhancement for these types of structures to ensure
there is adequate cash such as: 1) senior/subordinated structure, 2) cash reserve fund, 3)
guaranty.

For the simple Pass-through MBS investors receive pro-rata shares of the cash flows
(scheduled and unscheduled principal) and scheduled interest from the mortgage pool. The
cash flow received on the underlying mortgages is passed-through to the investor whether
it is collected on the mortgages or not. More complex derivative securities are frequently
created from the pass-throughs. The cash flows of the loans and securities are thus
matched with the balance of the security equaling the outstanding loan balance.

Mortgage pass-through securities represents a sale of the underlying assets. The issuer
may sell the mortgage assets to a special purpose vehicle or trust which then issues the
securities, or to a conduit institution which purchases mortgage loans from a number of
lenders, pools the loans and issuing the securities.

It is important to note that the mortgage securitization being discussed in this paper for
the US, Hong Kong and Korea all reflect using performing, high-quality assets to back the
securities.

There certainly has been a growth in the volume of receivable securitization in the
developing markets over the past 10 years, as demonstrated in Exhibit 13.




                                             22
                         Exhibit 13 Growth in Volume of Recievables

                6000
                5000
                4000
                3000
                2000
                1000
                   0
          Millions   1987 1988 1989 1990 1991 1992 1993 1994 1995 1996

      Source: Citibank
Securitization in the US -

Size of the Market –
The size of the US credit market is unparalleled as reflected in Exhibit 14.




                            Exhibit 14
               U.S. Credit Market Debt Outstanding
                                       (Through 1Q 1997)
           $4,500
                                   $3,967
           $4,000    $3,803
                                                  Securitised Unsecuritised




           $3,500                                                             $1,964                 $3,082
           $3,000
           $2,500
           $2,000
                                                                                  $1,106                          $1,202      $1,071
           $1,500
           $1,000
             $500             $2,003
               $0
                                                                                                                                Bank Loans
                                                                                   Commercial
                                       1-4 Family
                                       Mortgages
                       Treasury




                                                                                                                   Consumer
                                                                                                      Corporate
                                                                                   Mortgages




                                                                                                                    Credit
                                                                                                       Bonds
                         U.S.




             Source: Federal Reserve Bulletin (September 1997)




                                                                                                23
Secondary Market Institutions -


The largest issuers of Pass-through MBS in the US are the secondary market entities:
Fannie Mae, Freddie Mac and Ginnie Mae. The following Exhibit 15 shows the market
share of the respective institutions.




                                    Exhibit 15
                    Market Share of Secondary Institutions - US



                          Mortgage-Related Securities by Issuer
                                     $2,058 billion
                                          (1996)
                        Private
                         17%                                 GNMA
                                                              25%




                FNMA
                 31%


                                                            FHLMC
                                                             27%




                                           24
The following Exhibit 16 reflects the common structure for banks/thrifts and mortgage
bankers to securitize mortgages with the secondary market institutions in the US.

                                           Exhibit 16
                      Securitization Model with Secondary Institutions – US



                                      Households
                                      Households                 Savings


     Savings Loans
                                             Loans

     Banks &
     Banks &                          Mortgage
                                       Mortgage                            Institutional
                                                                            Institutional
     Savings
      Savings                         Companies
                                      Companies                              Investors
                                                                              Investors
   Institutions
    Institutions
                                           Loan Sales

                       Securities                                       Securities
                                      Secondary
                                       Secondary
                                        Market
                                        Market
               Loan Sales              Conduit
                                        Conduit

Source: Michael Lea



The following Exhibit 17 shows the total amount of Pass-through MBS issued by the
secondary market institutions as well as the outstanding balance.


                                     Exhibit 17
          Issued and Outstanding MBS for Secondary Market Institutions – US
                                 As of June 30, 2000


          FANNIE MAE                         FREDDIE MAC                                 GINNIE MAE
 Amount Issued         Outstanding’    Amount Issued        Outstanding’        Amount Issued   Outstanding’
     To Date                Balance       To Date             Balance                To Date      Balance
      (US $)                (US$)         (US $)               (US$)                 (US $)        (US$)




                                                       25
The following Exhibit 18 shows the basic process for securitizing loans with the secondary
market.


                                      Exhibit 18
                    Securitization Process – US Secondary Market



                          Securitization Process

          Borrowers       Lender & Servicer           Market Maker           Investors



                                            Sell to Dealer
                                             and Create                        Insurance
                                                a Pool                         Company
                          Mortgage Banker

                                                              Wall Street
                                                             Broker/Dealer

                                                                                 Bank




                                            Agency Issues
                                                                                 $
                                             a Guarantee                     Money Manager




Securitization In Hong Kong –

Private Sector Transactions

The first securitization using mortgages as collateral were done in Hong Kong in 1994.
These four deals are not perceived as successful for a variety of reasons. Most people feel
the market was not ready for these transactions, that they were not priced appropriately
and that potential investors had not been properly educated. The biggest advantage from
the standpoint of the issuers and the markets seems to have been the fact that the deals
were more a statement that “it could be done in Hong Kong” than commercial success.




                                              26
Table 19 shows the highlights of these four transactions done in 1994.


                                           Exhibit 19
                       Past Residential Securitization Deals Issued in 1994


  PRICING     ISSUE     SELLER         SIZE/PRICING          AVG.                 CREDIT
   DATE                                   (millions)         LIFE      FINAL     SUPPORT          COLLATERAL

   5/19/94    HKMC       Bank of    A-HK$325.0 1MH+138      yrs        18 yrs   7% of sub notes       N/A
              1 Ltd.     America    B-HK$24.5 1MH+350       3.6 yrs    18 yrs     (Class B)
                          Asia

   7/21/94   Home 1     Citibank    A1-HK$620.0 1MH+90      1.1 yrs    9 yrs      10% of sub      OLTV 68.7%,
              Ltd.                  A2-HK$280.0 1MH         4.1 yrs    15 yrs   notes (Class B)    CLTV 58.2%
                                    +175                    8.4 yrs    19 yrs                     Margin: Prime
                                    B-HK$100.0 1MH+500                                                +146
                                                                                                  Rem Term: 154
                                                                                                     months

   9/9/94     Mort.     Standard    A1-HK$500.0 1MH+75      1.2 yrs    18 yrs     10% of sub      OLTV:81.5%
              Asset     Chartered   A2 -HK$400.0             5.3 yrs   18 yrs   notes (Class B)   CLTV: 70.8%
              Rec.                  1MH+190                  7.4 yrs   18 yrs                      Margin:SCB
               Sec                  B-HK$100.0                                                     Prime+120
                                    1MH+500                                                       Rem Term:174
                                                                                                     months

   9/12/94    Dragon     Cheung     A1-US$32.0 LIB+90       1.3 yrs    13 yrs    25% of sub        OLTV:83%
               MBS        Kong      A2-US$17.6 LIB+135      3.9 yrs    16 yrs   notes (Class B     CLTV:63%
               Ltd.                 A3-HK$131.7 HSBC+50     6.5 yrs    19 yrs       & C)          Rem Term: 215
                                    B- HK$68.7              9.3 yrs    20 yrs                        months
                                    HSBC+124                13.9 yrs   20 yrs
                                    C-HK$103.0
                                    HKBC+300
                                    *HSBC= hHong Kong
                                    Shanghai Bank best
                                    lending rate



Source: Morgan Stanley Asia Limited


In early 1997 the prospect of an active asset securitization market in Asia generally, and
specifically for Hong Kong seemed a foregone conclusion. However, the currency crisis
and economic turmoil put many of the bank’s plans on hold. Understandably, Hong Kong
was expected to be one of the most active participants in Asia because the pre-conditions
were in place to support securitization, as demonstrated by the deals done in 1994.

There were four more MBS deals done in 1997 that were generally perceived to be
successful. They were thought to be fully subscribed from both domestic and international
investors. The transactions for Dah Sing and Sanwa, which were done earlier in the year,
had more favourable pricing and used monoline insurance to enhance the deal.

Three of the deals done in 1997 used monoline (CapMAC and MBIA) insurance as credit
enhancement. Monolines underwrite deals to apply their own credit rating (“AAA”) to
the transaction, charging a premium to do so. This allows the issue a higher rating than its


                                                       27
country’s sovereign rating (“A” in Hong Kong). This should reduce the cost of funds for
the issuer. In addition, monolines have the advantage of attracting longer-term investors to
consider these types of collateral.

The securitization deals done in 1994-1997 were Mortgage-backed transactions, in many cases
using the senior subordinated structure. The development of the senior-subordination
structure has been a key factor in the growth of the private MBS market. In this structure,
the senior security has priority claim on the pool cash flows. All defaults and cash flow
shortfalls will be borne by the subordinate tranches until (in a worst case scenario) they are
gone. The rating agencies have developed models that predict the default rates on pools
of mortgages based on loan characteristics (underwriting ratios, loan type), servicer
performance, geographic location etc. Based on their estimate of lifetime default rates
they determine the size of the subordinate tranch (es) necessary to get the desired rating
(e.g., AAA).

The following Table 20 shows the highlights of these four transactions.


                                            Table 20
                         Residential Securitization Deals Issued in 1997

PRICING      ISSUE      SELLER          SIZE/PRICING             AVG.      FINAL       CREDIT           COLLATERAL
 DATE                                      (millions)            LIFE                 SUPPORT

 5/229/97    HKMF         HK        A-HK$778.0 1MH+60            3.5-4     20 yrs   6.0% sub notes         LTV:65%
              Ltd.      Telecom     (MBIA insured)               year               HK Telecom top      Margin: H on old
                                                                                    us for basis risk     scheme and
                                                                                                         H+!% on new
                                                                                                         scheme, 100%
                                                                                                        employee loans

 6/12/97      HK        Sanwa       A-US$144.0 3MLIB+20,         3.7 yrs   20 yrs     6.18% cash          CLTV: 59%
             Homes      Finance     coupon step-up in year 10-                       reserve (4.4%        OLTV:63%
             Fund.      HK Ltd      45 (MBIA insured)                                for credit and         Margin:
              Corp                                                                  1.78% for basis        Prime+73
                                                                                          risk)         Rem Term: 191
                                                                                                             moths
                                                                                                        100% owner/occ

 6/23/97    HK SAR      Dah Sing    A-US$300.0 1MLIB+20          2.7 yrs   25 yrs     5.5% of sub        CLTV: 59%
              Res.      Bank Ltd.   (CapMAC) and Asia                                    notes           OLTV: 64%
            Mtg. Ltd.               Limited insured)                                                       Margin”
                                                                                                          Prime+107
                                                                                                        Rem Term: 189
                                                                                                            months

 12/8/97     HKMF       Bank of     A-US$234 1MLIB+35            2.9 yrs   27 yrs       Class A –             N/A
                        East Asia   step-up to 1MLIB+75                              “AAA” reserve
                                    after initial 5 years                                  fund
                                    B-US$17 1MLIB+90             5.15      27 yrs    Class B – “A2”
                                    (no monoline insurer)        yrs                    trigger to
                                                                                    increase reserve
                                                                                    fund and switch
                                                                                    from pro-rata to
                                                                                    sequential pay if
                                                                                         quality
                                                                                      deteriorates –
                                                                                     currency swap



                                                           28
                                                                by UBS to
                                                                guarantee
                                                               payments to
                                                               noteholders




Hong Kong Mortgage Corporation

The most innovative and exciting development in the securitization of residential
mortgages in Hong Kong was the creation of the Pass-through MBS Program of the Hong
Kong Mortgage Corporation in 1999. The current structure is called a “Back-to-’Back”
Structure.

After acquiring mortgages from an Approved Seller, the HKMC will sell the mortgage
pool to the Special Purpose Corporation (SPC). The SPC, which is a “bankruptcy”
remote” special purpose vehicle, will issue MBS back to the original originator (Seller)
with additional credit enhancement (guarantee). HKMC and Approved Sellers agree upon
the structure and tranching of the mortgage pool. The proposed structure is shown in the
following diagram, Exhibit 21.


                                  Exhibit 21
                            Back to Back Structure




                                                                   Hold
       BANK A            HKMC            SPC         BANK A
                                                                   Sell

       Sells loans   Transfers loans    Issues         Bank can hold
       to HKMC       to SPC             MBS with       MBS or sell
                                        HKMC           to other investors
                                        guarantee
                                        to Bank A




The Banks could then hold on to the MBS until maturity or sell the bonds to other
investors whenever they choose. For the Sellers involved, the back-to-back structure
allows them to keep a substantial portion of the cash flow from mortgages while reducing
the credit risk and capital cost and substantially improving the quality of the mortgage
assets.


                                          29
The key features of the HKMC Program are:

       •    Banks retain income stream of mortgages less guarantee fee with the option to
            offload MBS to investors in future
       •    Pass-through structure (all cash received on underlying loans will be passed
            through to the investor)
       •    HKMC to guarantee the timely payment of all scheduled principal and interest
           (monthly and in case of repossession)
       •    No additional credit enhancement needed (i.e. reserve fund, subordinated
            tranche)
       •    Issued in HK Dollars
       •    No need for credit rating

The HKMC made a revolutionary change in the legal documentation for MBS in Hong
Kong by standardising the MBS documentation in a previously fragmented market. The
creation of a base issuance prospectus for example means that all future MBS issues will
require only a supplement referring to the underlying assets of each new pool of securities.
This dramatically improves the efficiency and reduces the cost of securitization by
eliminating the need for legal and accounting opinions for each transaction. The master
SPV concept is shown in Exhibit 22.


                                     Exhibit 22
                            SPC Structure - Multiple Issues
                              Mortgage
                              Pool Sales
                   Bank A                             HKMC


                                                                Mortgage Portfolio Sales

                   Bank B                             MASTER            Note/Security
                                            Share                       TRUSTEE
                                            Trustee   SPC
                                                                        Security interests
                                                                        to support Note
                   Bank C                                               issues

                                       Issue 1        Issue 2        Issue 3




The HKMC has done the following MBS transactions to date:


                                           Exhibit 23


                                                30
                                HKMC MBS Transactions

       DATE                         SELLER                   SIZE OF TRANSACTION

       10/99                    Dao Heng Bank                      Hk$ 1 Billion
       12/99                  American Express Bank               HK$ 700 Million



Impediments for Development of Hong Kong Market

While the pre-conditions and framework is in place, there are several issues and obstacles
that hamper the development of the MBS market in Hong Kong. Some are related to the
economic environment, while others are more structural in nature, and will take longer to
address.

•   Banks are highly liquid and have no need or desire to remove high quality mortgage
    assets from their balance sheet
•   Current “price war” in Hong Kong is resulting in below market rate loans that are
    difficult to securitize or sell
•   As issuers are increasingly sensitive to the cost of funds, the recent volatility in
    HIBOR has made pricing unattractive. The underlying assets (mortgages) are tied to
    prime while the securitization uses HIBOR for its funding. On October 23,1997 the
    price of the basis swap increased from between 20-25 bp to around 75 bp over LIBOR.
    Prior to these levels, transaction costs stood at between 100 bp and 120 bp, the extra
    50 bp has had a marked effect on the bank’s willingness to securitize their assets.
•   As mentioned previously currently there is not much demand from investors for
    longer-term paper, educating investors in Asia will take some patience.
•   A standard and consistent benchmark pricing mechanism for MBS is just being
    developed


Securitization in Korea

Private Sector Transactions


Since the passage of the ABS Law in September 1998 the following ABS transactions
have been completed in Korea for Won 2.5 trillion or US $ 2.0 billion for the senior
portion and Won 580 billion or US$ 480 million. The following Exhibit 23 highlights these
transactions.
                                      Exhibit 24
                              ABS Transactions - Korea




                                             31
Korean ABS Issueance to 12/31/99 (Unit: Won Bil)


Date            Issuer                   Assets                       Amt       Yield     Rating    Maturity      Sub. Bonds
12/30/98    Orion Securitization       card loans, auto loans        160.0       N/a        NR         1       86.0
1/23/99     First Securitization       auto loans                     49.0     8.03%        A          3       13.5
2/27/99     LKSA Holdings              mortgages, real estate        115.2      equity      NR                  0.0
3/4/99      Hammi Bank Trust Acct.     loans                          70.0       N/a        AA         1       28.2
3/12/99     Hanaro Securitization      leases                         55.0     8.68%       A+,A        1        0.0
3/25/99                                                               25.0     8.84%       A+,A        2        0.0
4/12/99                                                               20.0     8.04%        A          3       23.1
5/15/99                                                               25.6       N/a                           60.4
5/21/99     Hyundai Cap. Auto Sec.     auto loans                     70.0     7.38%       AA-         1        0.0
                                                                      70.0     8.30%       AA-         2        0.0
                                                                      25.0     8.70%       AA-         3       34.6
6/11/99     Auto 1999-1 Securitizatn   auto loans                    120.0     7.20%       AA-         1        0.0
                                                                      90.0     8.00%       AA-         2        0.0
                                                                      19.0     8.30%       AA-         3       45.0
6/11/99     Hanaro 2 Securitization    land revenue                  200.0     7.76%      AA+, AA      3       10.0
6/15/99     KAMCO Mirae 1 Securit      non-performing loans           90.0     7.94%       AAA         2        0.0
                                                                      60.0     8.29%        AA         3        0.0
                                                                      90.0     Floating                4        0.0
                                                                      55.0     9.95%        AA         5       25.0
7/29/99     TCM Korea Investments      non-performing loans           33.9      equity                          0.0
8/16/99     Woopung 99-1 Sec.          loans                          25.0     9.51%       AAA         1        0.0
                                                                      15.0     12.81%      BB+         2       25.3
8/30/99     KAMCO Mirae 2 Sec.         non-performing loans          100.0     10.00%      AAA         2        0.0
                                                                      75.0     10.58%       AA         3        0.0
                                                                      60.0     11.23%       AA         5        0.0
                                                                      50.0     11.83%       AA         7        0.0
                                                                      40.0     11.41%       AA        10       35.0
9/20/99     Samsung Koram Sec.         auto loans, loans             200.0     10.52%      AA+         1        0.0
                                                                      50.0     11.22%       AA         2        0.0
                                                                      34.0     11.42%       AA         3       43.7
10/5/99     Landpia II 99-1 Sec.       corporate land                205.0     9.40%       AAA         3        0.0
                                                                     200.0     10.15%      AAA         5       150.0
Total                                                                2,496.7                                   579.8




                                                                32
Korea Mortgage Corporation (KoMoCo)


Since its inception in September 1999, KoMoCo has been very active in securitizing a
portion of National Housing Fund (NHF) loans. It is estimated there is an outstanding
balance of US $12 billion of easily securitizable mortgages (coupons over 9% and
maturities up to 20 years) in the NHF portfolio. Through December, KoMoCo has
securitized about US$ 1.3 billion of NHF mortgages, which have been fully subscribed.
Exhibit 25 reflects the details on the first two transactions done in April and September
2000. The MBS are not pass-through, but mortgage-backed bonds.


                                     Exhibit 25
                             KoMoCo Mortgage Securitizations



             MBS 2000-1 - Issued
                   4/6/00
  TYPE    MATURITY   AMOUNT      COUPON   RATING   SPREAD      COUPON      PRIN
                     (Won Bln)                                PAYMENT     PAYMENT

 Senior    6 mths       22       8.15%     AAA     -84 bps
  MBS      9 mths       10       8.57%     AAA     -42 bps
             1 yr       12       8.81%     AAA     -18 bps
            1.5 yr      27       9.01%     AAA      +2 bps
             2 yr       33       9.16%     AAA     +17 bps
                                                              Quarterly     At
             3 yr       79       9.39%     AAA     +40 bps                Maturity

             4 yr       92       9.69%     AAA     +70 bps


             5 yr       75       9.94%     AAA     +95 bps
            * 6 yr      19       10.04%    AAA     +105 bps




            Total      369       9.66%
  Sub        6 yr      19.6      2.00%     N/A
  MBS        7 yr       9        2.00%     N/A
            Total      28.6




  Spread to 3 yr Government Bond Yield = 8.99% at 4/6/00



                                            33
               * Call Option for KMC on that tranche

 MBS 2000-2 - Issued 9/1/00
MATURITY     AMOUNT      COUPON     RATING   SPREAD      COUPON         PRIN
             (Won Bln)                                  PAYMENT      PAYMENT
  6 mths        25        7.38%      AAA      -41 bps


   1 yr         30        7.57%      AAA      -22 bps
  1.5 yr        30        7.87%      AAA      +8 bps
   2 yr         30        7.96%      AAA     +17 bps
  2.5 yr        35        8.11%      AAA     +32 bps    Quarterly      At
   * 3 yr       35        8.17%      AAA     +38 bps                 Maturity
  * 3.5 yr      34        8.29%      AAA     +50 bps
   * 4 yr       32        8.38%      AAA     +59 bps
  * 4.5 yr      35        8.48%      AAA     +69 bps
   * 5 yr       35        8.53%      AAA     + 74 bps


 ** 7.5 yr     158        9.00%      AAA                            Inst. Repay
                                                                    from 5.5 yr
                                                                    for 5 times
  Total        479        8.68%                                     at 31.6 bn




   8 yr         16          6.00%    N/A
   9 yr         5           7.00%    N/A
  Total         21

  Spread to 3 yr Government Bond Yield = 7.79% at 8/31/00
      * Call Option for KMC on that tranche
     ** Specific call option provision for this tranche



With the creation of these securities KoMoCo is providing the market with a good volume
of high quality bonds (KoMoCo guarantee, AAA) that will become even more liquid with
future issuance. KoMoCo is exploring the possibility of securitizing more NHF loans in
2001 as well as potential for securitizing private sector mortgages. In addition to this
mortgage-backed bond structure they will study the feasibility of creating a pass-through
structure depending on the needs of the investor base.

The following Exhibit 26 reflects the structure of the current NHF transactions.

[NOTE INSERT CHUNGS CHART WITH FLOW CHART OF PROCESS]

Other MBS Transaction – Korea



                                                34
In addition to KoMoCo, NewState Capital Company Ltd., an independent residential
mortgage lender in Korea has issued a mortgage-backed bond. On March 21, 2000 they
issued through a private special purpose company (SPC) in the amount of KW 58.9 billion
(US$ 53.6 million) with Daewoo Securities Co. Ltd. as the lead manager and Housing and
Commercial Bank as the trustee and back-up servicer. They issued 4 tranches of MBS and
one subordinated tranche, which was retained by the issuer. The senior tranches of the MB
S have a maturity of 1-10 years and an interest rate of 10.17-12.61 percent. It is said in
the market that New State Capital intends to issue its second MBS in December 2000.

Impediments to Growth in Securitization in Korea

While the transactions done by KoMoCo are very impressive there are obstacles that will
determine the speed of growth of mortgage securitization in Korea, as well as regulatory
issues that must be addressed, such as:

•     Banks are liquid and have no need or desire to remove high quality mortgage assets
      from their balance sheet at this time
•     Overall, banks have a low concentration of their total assets in mortgage loans
•     Current law does not allow for KoMoCo to buy and hold loans in its own portfolio for
      future securitization
•     MBS are beneficiary certificates not bonds
•     Minimum denomination for clearing and settlement amount
•     Onerous borrower notification process
•     Third-party due diligence required (could be done more efficiently and cheaper by
      secondary market)
•     Levels of credit enhancement needed
•     A standard and consistent benchmark pricing mechanism for MBS has not been
      developed
•     Limited disclosure documentation and on-going information on current issues (not to
      international standards at this time)


IV.      SECONDARY TRADING

The success of pass-through MBS in the US has been documented in previous sections of
this paper. However, mortgage pass-through securities are complex instruments,
particularly relative to government bonds. They pay principal and interest on a monthly
basis and can be subject to uncertain amounts of prepayment and default. A key question
in the development of an MBS market is the level of investor sophistication. The answer
to this question depends in part on the degree of bond market development. Are there
benchmark yields (particularly on long term government securities)? Are there market
makers to provide liquidity? Is there a regulatory body providing oversight of security
issues? Are there rating agencies that can help investors understand the characteristics of
the instruments and their relative creditworthiness? In countries where bond markets are
not well developed, particularly for long maturities, issuance of simple bonds by a


                                            35
centralized entity may be necessary to create the market. Issuance of more complex
mortgage pass-through securities could be at a later stage of the market development.

The importance of both domestic issuance and local investors is growing and is of
particular interest in Asia (particularly Japan, Hong Kong, Korea, Singapore).

Who are the Investors

The chart in Exhibit 27 below, which was prepared by Merrill Lynch, reflects the
investors for various countries.


                                                                                       Exhibit 27
                                                                                    Various Investors


                           Investor Distribution Profile - Example
                                             All Investors
                                             All Investors                                                                US Investors
                                                                                                                          US Investors
                                                                                                                                    In v e stm e n t
                            In v e stm e n t
                                                                                                                                      Ad visor         In su ra nc e
                                 Ad visor                  In su ra n ce                                                                5 . 4%            1 0.8 %
                                   1 9.6 %                     1 2.6 %      P e n sio n
                                                                              0 . 6%

           G o ve rn m e n-
                 ta l
               9 .6 %



                        Re ta il
                         8.3 %                                                                                          Ba n k
                                                                           Ba n k
                                                                           49 .3%                                       8 3.8 %


                                         Asian Investors
                                         Asian Investors                                                         European Investors
                                                                                                                 European Investors
                                                                                                                 In v e stm e n t
                                                  In su ra n ce          P e n sio n
                                                                                                                   A d visor
                                                     22 . 9%               1 . 4%
             In v e stm e n t                                                                                       3 7.7 %
               Ad visor
                1 8. 5 %




           G o v e rn m e n-                                                        Ba nk
                                                                                                                                                                       Ban k
                 ta l                                                               3 2 .2 %
                                                                                                                                                                       3 4.0 %
                4 . 3%
                                                                                                    G ov e rn m e n -
                                      Re ta il                                                            ta l
                                      2 0. 7 %                                                          28 .3%




Investor Base – Hong Kong

The unrestricted regulatory environment allows HK-based investors to invest in a broad
range of currencies and instruments. Hence, Hong Kong is the chosen location for a wide
number of regional investors. The following are the key local currency investors:

       •      Commercial Banks
       •      Exchange Fund
       •      Charity Funds


                                                                                               36
          •    SAR Government Land Fund
          •    Housing Authority
          •    Insurance Companies
          •    Fund Management
          •    Pension Funds
          •    Retail and Private Banking


Investor Base - Korea

With an improving and growing economy Korea is expanding its investor base. A positive
note in the Korean market is that there is more willingness on the part of certain investors
to invest in more long dated paper (i.e. 7.5-10 years). The following Exhibit 28 shows the
holdings of the primary investors in Korea at this time.


                                                   Exhibit 28
                                            Investor Holdings Korea

                 Commercial Banks                                     Specialized       Bank      Investment     Insurance   Securities
               Nationwide       Local        Foreign       Subtotal      Banks          Trust       Trust Co.    Companies   Companies
        1995     32,720         7,421         1,600        35,740         9,349       146,420           61,714    23,357      13,466
        1996     32,774         8,800         2,030        43,604        12,419       170,932           66,015    26,326      12,491
        1997     49,552        10,824         5,878        66,254        12,074       196,476           70,590    29,886      12,489
        1998     94,693        11,160         5,407        111,260       23,728       269,464       133,940       43,930      15,652
        1999    116,588        12,723        11,556        140,867       25,290       255,342       144,199       54,176      25,519
                 18.1%          2.0%          1.8%         21.8%          3.9%         39.6%            22.3%      8.4%        4.0%
Note: Securities include government bonds, stocks, corporate debentures, monetary stabilization bonds
and finance debentures




Trading Practices

Undeniably, the size and liquidity of secondary trading in the US could only be
accomplished through extremely efficient trading practices that are supported by:

          •    TBA (To Be Announced) Trading
          •    PSA Settlement which schedules the issuance of the most active types of
               securities giving certainty and liquidity to the markets
          •    Book-entry issuance of all securities (not physical delivery)
          •    Specialized back-office trading practices
          •    Sophisticated pricing models and standard pricing methodology
          •    Vast amounts of data on all securities




                                                            37
Hong Kong Settlement/Clearing

The Stock Exchange Hong Kong (SEHK) traded papers are cleared through the central
clearing and settlement system (“CCASS”), which was established in 1992. However, the
vast majority of trading of HK$ debt securities is over the counter.

To help develop the debt instrument market, the HKMA has instituted a clearing and
custodian service-the Central Moneymarkets Unit (“CMU”). After January 31, 1994 the
service was extended from Exchange Fund issues to cover HK$ debt papers issued by
private issuers. Since the clearing service is conducted in computer book entry form,
efficiency is enhanced and risks associated with settlement are minimised. The CMU has
also established correspondent links with Euroclear and Cedel.

Korea Settlement/Clearing

[KMC TO ADD INFORMATION]

Pricing

As mentioned previously the size and liquidity of the US markets as well as the
development of sophisticated pricing models and well-established and standardized pricing
methodology the market is very efficient. This is an area that both Hong Kong and Korea
will be developing in the future with the help of investment bankers and others. Hong
Kong and Korea will be developing and educating market makers who will be in the
market to quote 2-way prices at any time.

The following table shows the volumes of trading in the secondary market in Korea.

                                      Exhibit 29
                           Secondary Trading Volume - Korea

              Year            OTC Market        Exchange Trading       Total
                               Trading

                    1995    228,515    98.7%          3,053   1.3%      231,205
                    1996    228,979    98.8%          1,384   1.2%      230,363
                    1997    278,903    97.2%          8,088   2.8%      286,991
                    1998    828,082    96.2%         30,976   3.6%      856,991
                    1999   1,813,366   86.1%        293,606   13.9%   2,106,972



Hong Kong Pricing


In the primary market, Exchange Fund Bills and Notes are sold through auction and
traded via book entry. They are usually traded in the secondary with a bid/ask spread of 5


                                               38
basis points, whereas for CD’s and bonds a wider spread of 30 basis points is normally
quoted. A typical lot size for the trading of Exchange Fund Bills and Notes and other debt
securities is HK$ 10 million, although bonds and CD’s can be as little as HK$ 500,000.

Floating rate HKD issues are generally priced against 3-month HIBOR. Liquidity
Adjustment Facility eligibility is a key factor in determining the pricing of such securities.
Fixed rate issues have traditionally been priced in relation to US Treasury bonds, because
of the fixed exchange rate between the US $ and HK $. Currently they are most often
priced against the benchmark Exchange Fund issue or the interest rate swap curve, both of
which follow U.S. rates closely.



                                      Exhibit 30
                           Pricing Benchmarks – Hong Kong

                           12/31/93       12/31/94    12/31/95    12/31/96      01/04/97
 3-Mth HIBOR                 3.82           6.42        5.94        5.61          5.94
 3-Yr UST                    4.58           7.90        5.33        6.00          6.67
 3-Yr HK Govt Bond           4.25           8.03        5.73        6.05          6.60
 3-Yr Supranational          5.40           8.45        6.25        6.60          6.98
 3-Yr Fixed CD               5.55           8.65        6.60        7.00          7.25

Korea Pricing


[KMC TO ADD DETAILS]

                                        Exhibit 31
                               Pricing Benchmarks - Korea

Yield on Government Bonds - 3 Year
 Sep-00    Jun-00   Apr-00    Dec-99         Sep-99    Jun-99    Mar-99      Dec-98   Sep-98     Jun-98
 7.79%     9.16%    8.99%     9.03%          9.03%     7.20%     6.50%       6.80%    11.50%     14.00%



Yields on Corporate
Debentures
 Sep-00    Jun-00   Mar-00       Dec-99      Sep-99    Jun-99    Mar-99      Dec-98   Sep-98     Jun-98

   N/a       N/a       10.0%      9.9%       10.4%      8.1%     8.6%        8.3%     12.5%      16.6%

Credit Rating Agencies

The role of the credit rating agency in determining appropriate rating criteria and monitor
the performance of structured financings is well-defined and acknowledged. The research
and analysis they provide is invaluable to investors.


                                               39
Hong Kong

Hong Kong has no domestic rating agency but Moody’s, Standard & Poors, Thomson
Bank Watch and Fitch IBCA all have opened offices in Hong Kong.

While a top credit rating is not essential for issues in the domestic capital market
(particularly for companies and institutions regarded as likely to be influential in Hong
Kong’s future business community), the majority of investors are extremely credit
conscious and, for fixed rate issues, highly rated issuers are considered more seriously.
Over 75% of fixed rate issues have historically been for international and bank issuers with
a “AA” or “AAA” international credit rating. This is in marked contrast to the other
domestic capital markets in Asia, which generally attempt to develop their markets
through the promotion of lower rated corporate debt.

Korea

There are currently three domestic rating agencies which each have an US affiliate as
follows:

        Local Rating Agency                  Affiliate

Korea Investors Service (KIS)                        Moody’s Investors Service
Korea Management Consulting and
       Credit Rating Corp (KMCCRC)           Fitch IBCA
National Information and Credit
       Evaluation Inc. (NICE)                Duff & Phelps


The rating agencies are quickly becoming more familiar with MBS transactions with the
volume of KoMoCo and other transactions, the education process must continue. As more
data and information becomes available on current issues they will be able to refine their
criteria and provide better analysis to potential investors. Over time, investor confidence
will increase in the level of ratings.


V.      ROLE OF SECONDARY MORTGAGE MARKET

The role the Secondary Market Corporations (Fannie Mae, Freddie Mac and Ginnie Mae)
has played in the explosion of securitization in the US is indisputable. They’re long
histories and sound business models have also contributed in large part to the development
of these financial tools in other countries. It is no coincidence that Hong Kong and Korea
both have fledgling mortgage corporations (Hong Kong Mortgage Corporation and
KoMoCo) who promise to act as the catalyst for development of MBS in their respective
countries in a similar manner. While not every country has the pre-conditions necessary to


                                            40
adequately support these types of institutions, there are several important roles these two
institutions and others can play, such as:

J.         Standardization of origination and servicing guidelines for the mortgage lending
           community, whether they sell to the secondary market or not. Standardization of
           various legal and operational forms associated with mortgage lending (i.e.
           mortgage deed, valuation form, appraisal form, loan application form) making
           securitization easier and will help bring them to international standards
K.         Liquidity to market –1) provide source of liquidity and balance sheet management
           to primary mortgage market, 2) consistent issuers in the market, 3) new product
           innovations, 4) standardization all greatly enhance the liquidity of MBS
L.         Guaranty – can be lower cost than other credit enhancements
M.         Innovative products (i.e. fixed rate mortgages, mortgage insurance)
N.         Set benchmark price – make markets, standardize pricing methodology
O.         Investor education – very important in emerging markets
P.         Portfolio lending - having the ability to purchase and retain mortgages from
           various lenders and aggregate them to create larger and more liquid MBS
Q.         Broaden investor base – 1) develop products to meet specific needs of investors,
           2) various structures can be developed, 3)can develop new markets such as retail
           investors
R.         Efficiencies – 1) creates efficiencies for primary market in origination and servicing
           of mortgages, 2) development of technological capabilities in regards to mortgages
           and securitization, 3)master SPV(trust) to reduce cost and time


VI.        SUMMARY

In terms of residential mortgage securitization, clearly the US is a model for all others to
emulate. At least in the opinion of this author, the prognosis for both Hong Kong and
Korea in developing robust securitization markets is good. Undoubtedly, the continued
rebound in their economies and financial sectors after the Asian Crisis is paramount. While
there are uncertainties and issues and obstacles as highlighted throughout this paper, there
are several reasons for this optimism, which include:


      a)   Sound macroeconomic fundamentals
      f)   Well-capitalized and strong primary market players
      g)   Positive regulatory/legal environment
      h)   Fast pace of change in capital market development
      i)   Active and strong secondary market institutions




                                                41
VII. References

1. Lamoreaux., Country Study: Hong Kong, Presentation at IFC Conference Bali,
   Indonesia 5-6 February 1998
2. Lea, Michael J., Models of Secondary Mortgage Market Development, Presentation at
   IFC Conference Bali, Indonesia, 5-6 February 1998
3. Merrill Lynch, Presentation entitled Hong Kong Mortgage Market
4. Merrill Lynch Presentation entitled Overview of Mortgage and CMO Markets




                                        42

				
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