In a move that has caught almost everyone by surprise, the Singaporean government has announced that from September 1 private lenders will have first claim on mortgage properties that are partially financed using money borrowed from the Central Provident Fund (CPF), the country's public pension entity.
Additionally, as of Jan 1 next year they will also get first lien over mortgages used to buy Housing & Development Board properties.
The new ruling is a complete reversal of the government's previous policy in which the CPF always had first charge, meaning that whenever a property was sold û voluntarily or otherwise û proceeds would first be used to repay any funds a borrower had used from their CPF to finance the mortgage. Anything left over would then go to the mortgage lender.
That policy was always considered an impediment to the development of a mortgage-backed securitization (MBS) market in Singapore because investors are highly unlikely to buy a transaction when they would not have first rights to the underlying collateral in the event of a default.
"By granting private lenders first lien over collateral properties, it will now be possible to give credit to recoveries from defaulted loans in residential mortgage backed securitizations," says Diane Lam, director of structured finance at Standard & Poor's. "This in turn will lower the amount of required credit support, and markedly improve the affordability of structured finance as a funding tool for banks."
It is thought banks can now be more aggressive in their lending policies because they will take less of a haircut should a mortgage loan go wrong. A further boost should come from the government lowering the cash down payment requirement on new properties from 20% to 10%. That means that there is even less downside risk to buying property.
Securitization can be beneficial to lenders in a couple of key ways. Firstly, if they use a true sale or synthetic structure, taking the loans off balance sheet reduces the amount of capital they have to hold against those loans.
Secondly, issuing MBS deals will allow them to generate funds from which they can generate new mortgage loans. This will particularly benefit the smaller players in the market by giving them a new source of capital.
