SGV continues FERM series with securitization talk

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MG 5 and FSO Advisory organized a talk on Securitization in Housing Finance and an Introduction to Concentration Risk held at WSDC last July 4, as part of SGV’s effort to promote a more resilient financial sector through the Financial Engineering and Risk Management (FERM) series.

The second workshop focused on securitization – a process of taking a group of illiquid assets, packaging them into a pool, and channeling cash flows by issuing another security. The workshop concentrated on securitization of residential mortgage-backed securities (RMBS), specifically structuring and risk transfer mechanisms, legal, accounting and taxation factors, and pricing and valuation implications.

From a “macro” perspective, RMBS securitization augments the linkage between the financial system and the real economy, especially via the housing finance sector. Securitization can free up the assets of financial institutions so that they can increase business and lend more money to the general public, which can aid in the expansion of the housing sector and ease the current backlog. At the other end of the spectrum, securitization can address banking liquidity constraints and could potentially relieve the current concentration stress of banks’ real estate exposure.

Imperative in the implementation of a sound secondary mortgage market in the Philippines are checks and balances throughout the securitization process. There should be robust internal credit risk models in place and stringent collateral requirements for the underlying mortgages, a well-established regulatory framework to mitigate risks and resolve potential conflicts of interest, and explicit support of the government through provision of adequate capitalization and tax exemptions.

Around 80 participants composed of executives, senior officers, directors and department heads from various private institutions in the retail banking, investment banking and real estate sector, as well as representatives from policy-makers and government agencies such as the Department of Finance, Bureau of Treasury, Bangko Sentral ng Pilipinas, Home Development Mutual Fund and National Home Mortgage Finance Corporation attended the workshop.

FSO Advisory Partners Ian Lauron (CGL) and Francis Lumbres welcomed the participants to the event. CGL opened the talk with a primer on the state of the Philippine housing industry and a discussion on housing and house finance operating models, while associate director DJ del Mundo discussed structuring techniques and accounting implications of the securitization process. CGL then ran the participants through a transaction pricing example and various risk and regulatory guidelines, while associate director Geran Piquero closed with some salient points on the need for a sound internal credit risk system, concentration risk treatment, and macroeconomic stress testing. CGL closed the workshop by drawing the link between housing finance and securitization to financial market and economic development.

The FERM team also includes Associate Director Rodel Larga, Senior Associates Jason Naniong and Danica Sarmiento, and Associates Kim Cortez, Ed Boyose, Del Miram, Tin Eroles, Alec Machacon and Kleiser Padilla. Advisory FMA Carol Aquino and EA Yvette Batalon helped in organizing the event.

SGV is the first to conduct an integrated session about securitization in the Philippines in recent years. The most recent local RMBS-backed issuance was the Bahay Bonds 2 issuance last 2012, sold and originated by the National Home Mortgage Finance Corporation (NHMFC).