Residential Mortgage-Backed Securitization in Asia: The Singapore Experience

Securitizing residential mortgages has been used effectively to manage mortgage related risks like interest rate risks, credit risks, funding risks and sector concentration risks by financial institutions in many Asian countries. However, in Singapore, development of the residential mortgage-backed securitization (RMBS) market has been slow, despite strong support from the government of Singapore via revising securitization guidelines and making changes to policies that are favorable for RMBS development. Currently, an excess supply of liquidity and a perceived loss in the long-term relationship with the existing mortgagors/clients are the two main barriers to banks in securitizing their residential mortgages. Introduction Real estate bubbles and excessive lending have been suggested as the contributing causes for the 1997 Asian Financial Crisis by both the International Monetary Fund (IMF) (Collyns and Senhadji, 2000) and academic authors (Quigley, 2001; and Krugman, 1988). The high exposure of commercial banks and finance companies to real estate related loans appears to be connected to the financial and currency market crises in these Asian countries in 1997. The rapid escalation of asset prices in the mid 1990s fuelled by a large influx of foreign capital was not sustainable. The price bubble burst in mid-1997. Non-performing loans of financial institutions reached a critical level following a sharp decline in asset prices. Financial institutions and banks started to call their loans following a rapid depreciation of the countries' currencies. The inability of the borrowing institutions to liquidate their long-term loan assets to meet bank calls of loan repayment seriously disrupted the financial stability of many East Asian countries in 1997. Thailand was the first country to crumble under the financial pressure and the attack on its weakening currency. The "financial contagion" spreads quickly to other countries including Korea, Indonesia and Malaysia. The IMF swiftly stepped in to rescue three of the most seriously affected economies in Asia, Thailand, Korea and Indonesia, via a slew of financial re-capitalization and institutional restructuring measures. The Malaysian government has, on the other hand, severed its link to free exchange rate markets by introducing selective exchange and capital controls on September 1, 1998, which pegged the currency at Ringgit $3.80 to $1.00 U.S. The overreliance of households and corporations on bank loans for real estate purchases was one of the key factors underpinning the real estate bubble in the Asian markets. Various measures have been advocated to strengthen bank lending and to restrict the banks' lending to the real estate markets. The creation of the Real Estate Investment Trust (REIT) vehicle, which is so prevalent in the United States and the Australian markets, has been one of the policy recommendations, which is intended to provide an alternative source of financing for the real estate sector (Collyns and Senhadji, 2000). Securitizing mortgage loans has also been identified as a possible way to improve bank liquidity, and more importantly, to enforce greater discipline on bank underwriting and lending evaluation standards (Quigley, 2001). The Mortgage-Backed Securities (MBS) market was established in the U.S. with the objective of increasing liquidity and lowering the financing cost in the housing markets. It also serves to reduce financing institutions' exposure to various risks related to residential lending such as interest rate risk, credit risk, funding risk, liquidity risk and sectoral concentration risk. The Residential MBS (RMBS) history in the U.S. can be traced as far back to 1930s with the establishment of the Federal National Mortgage Association (FNMA) (Fannie Mae). Following the privatization of the FNMA in 1968, the Government National Mortgage Association (GNMA) (Ginnie Mae) was then set up under the Housing and Urban Development Act to serve mainly low and moderate income homebuyers. …