NHB is considering an entity for securitization; housing finance to get a boost

As part of the government’s “Housing for All” goal by 2022, an additional 8-10 crore of houses will need to be built, which will cost around 100-115 lakh crore, the panel observed.

The state-run National Housing Bank (NHB) is considering setting up a mortgage-backed securitization entity in a joint venture with one or more partners, sources told FE, in an important step towards developing the ‘a structured market in this space.

This special purpose entity (SPE) is expected to be established as a non-bank financial corporation (NBFC) and regulated by the Reserve Bank of India (RBI). The entity will help deepen the securitization market, resolve bad debts and expand the financing possibilities of housing finance companies (HFCs).

The NHB can hold a majority stake (51%) in the SPE initially, and the remaining capital can be raised from multilateral agencies. Its stake would be gradually reduced once investors join again.

This decision is in line with the 2019 recommendations of the Harsh Vardhan committee established by RBI, which had considered an anchor role for NHB in a securitization transaction. The SPE will issue securities against underlying exposures which are all mortgages – both commercial and residential.

Highlighting the lack of standardization in the housing finance securitization space as an “important constraint”, Harsh Vardhan’s panel suggested that a credible intermediary (under the NHB) be put in place “who can not only change these standards with contributions from the industry, but also commit capital to titles that adhere to these standards ”.

Given NHB’s credibility and expertise in the housing finance segment, any such entity will have the greatest capacity (than any other company) to raise capital from investors. It will also allow the separation of the lending / refinancing activities of the NHB.

The RBI panel had recommended that the entity’s shareholding be diversified, in the future, to include representatives of the initiator community such as HFCs, banks and insurance companies, among others. The shareholdings of initiating investors should be capped at 5% to avoid conflicts of interest.

As part of the government’s “Housing for All” goal by 2022, an additional 8-10 crore of houses will need to be built, which will cost around 100-115 lakh crore, according to the panel. From this perspective, HFCs would continue to play a key role in granting credit. However, home loans generally suffer from a structural asset-liability management problem for lenders due to a mismatch between the long-term maturity period of the loans and the sources of short-term funding for HFCs. To remedy this, HFCs typically mop up resources by bundling mortgage loans to issue securities backing those loans through securitization.

The existing regulatory framework for securitization generally covers two types of transactions: direct transfers (DA) and pass-through certificates (PTC). Both involve pooling loans and selling to a third party to transfer credit risk.

The securitization market has been dominated by direct transfer (DA) transactions and PTC transactions only accounted for a quarter of overall transactions in 2019. This prevents large-scale participation of large investors, such as insurance companies, pension funds and mutual funds. Indeed, securitization via the DA channel typically involves personalized bilateral transactions that keep key details – including valuation, pool performance, and prepayment – confined to the parties involved.

However, when securitization involves the PTC, the pooled loans are sold through an intermediary, set up as a special purpose vehicle. This process is generally more transparent and contributes to standardization.

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About Kristina McManus

Kristina McManus

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