The government has identified mortgage-backed securities (MBS) as the next big-ticket reform item in the realty sector after the Real Estate Investment Trusts (REITs). MBS is a category of asset-backed securities secured by a single mortgage or pool of mortgages.
The finance ministry is readying a concept note for a new architecture to help MBS take-off in a big way, and will soon seek comments from interested stakeholders, official sources told FE.
The note aims to bring clarity on the role of regulatory agencies, including RBI (NBFCs and banks), Sebi (mutual funds, trading of securities) and National Housing Bank (residential MBS). It will also include tightening of safeguards to forestall situations such as the US sub-prime crisis, which was triggered by a fall in value of MBS after the housing bubble burst. Besides, the note will address issues like tax treatment and suggest incentives to develop the market.
According to Kalpesh Gada, head, structured finance, Icra, the estimated residential MBS issuance volume in FY14 was only R5,300 crore (excluding bilateral assignment of loan pools by one entity to another). Commercial MBS is at a nascent stage in India and the first transaction of R800 crore was in April 2014, Murali Balaraman, partner, financial services, EY, said. The big push to MBS is coming mainly from banks trying to meet their priority sector lending (PSL) requirements, he added. (Banks which find it difficult to meet PSL targets acquire priority sector loans ? via investments in securitised assets ? from banks/NBFCs which have crossed the specified target).
The note will also cover issues such as lack of quality valuation of residential/commercial properties, the need for greater digitisation to ensure clear titles (property is free of encumbrances) and changes needed in the level of credit enhancement (in the form of insurance, third-party guarantee or cash collateral to protect investors against losses incurred on the assets collateralising their investment) to MBS. In addition, it would also have pointers to the states on issues relating to the stamp duty structure.
Gada said obstacles to residential MBS transactions in India have been long tenure, lack of secondary market liquidity, interest rate variability, prepayment risk and high stamp duty on transfer of security (specially in some states).
Referring to the fall in issuance volume of rated transactions in the Indian securitisation market by 5% over the previous fiscal to R28,800 crore in FY14, Balaraman said this decline could be due to the tax on distribution of income by the trustee (where the issuer of the security is structured as a trust), introduced in Union Budget 2013-14, which adversely impacted the post-tax yield for banks, the key investor set for securitisation transactions. Gada said the key change required to help MBS take-off is the taxation regime, adding that replacement of distribution tax with a withholding tax should help.
Here is how MBS works. Bank or NBFC (originator) sells the loan portfolio (home or commercial property) to a firm which creates an SPV. Through the sale, the bank/NBFC raises resources to lend more and is also freed from prepayment and default risks. The SPV then creates a pool of such mortgages, bundles them and sells these MBS to investors (individuals and institutional). The SPV, through the sale of MBS to investors, then purchases more of it. When the initial home loan borrower repays the principal with interest through EMIs, the lender transfers it to the SPV after retaining a fee. The SPV then passes the repayment amount to the investors after deducting its fee. The investors also benefit as they get better yields on MBS than government bonds.
