Government housing deal could be the spur for JapanÆs MBS market

Japan''s GLHC will launch its debut RMBS deal in March with a Ñ50 billion issue.
Outside the US and arguably the UK, the Japanese securitization market is one of the most developed in the world, but its growth, unlike the US and the UK, has not been built from a platform of deals backed by residential mortgages. That sector, however, could receive a welcome boost in March when the state-owned Government Housing Loan Corp (GHLC) will make its debut in the market with a Ñ50 billion ($430 million) issue.

GHLC, the dominant player in the residential mortgage sector with a market share of just over 40% and five million loans originated, has already mandated Credit Suisse First Boston to structure the deal, but will select a lead manager to underwrite the deal on March 7. The banks bidding for the mandate include CSFB, Goldman Sachs, Daiwa Securities, Tokyo Mitsubishi, Salomon Smith Barney, Nomura, Mizuho Securities, Merrill Lynch, Morgan Stanley Dean Witter and Lehman Brothers.

An official at GHLC was hopeful that the deal would act as a benchmark for the market, encouraging other prospective issuers to come forward. “The market is pretty underdeveloped but we expect that it will expand a lot in the future,” he says. “As a public corporation we hope that we can we can lead the market, to help it expand and make it more efficient.”

The development of the Japanese RMBS market has been made problematic by a number of factors, one of which has been the dominance of GHLC. Also previously, transferring assets into Special Purpose Vehicles (SPVs), was subject to a 6% transfer tax. That has been removed, but another technical problem exists because most mortgages are guaranteed by a subsidiary of the lender, and they have the first lien on the loans included in the pool, not, as is usually the case, the senior note holders. This makes it difficult to perfect the asset transfer.

Nonetheless, while some banks including Bear Stearns and MSDW, have managed to get deals done, the slow development of the market has been disappointing. Kenji Kondo, head of Standard & Poor’s structured finance group in Tokyo, believes the market has potential for expansion, but believes that banks themselves have so far preferred keeping assets on balance sheet.

“One important issue is that some banks really don’t see much benefit in securitizing their mortgages,” he explains. “They see them as a pretty good asset and keep them on their books because they don’t want to sell them to the SPV.

“However, although issuance has not been that quick in coming, we have rated some deals and I hope the market sees significant expansion,” he continues. “There is definitely potential for issuance from insurance companies, city banks, and some non-bank lenders.”

A head of securitization at a local bank concus with Kondo’s view on banks' reluctance to use this financing tool, but adds that technical difficulties in structuring transactions have not helped either.

“Banks are reluctant to sell off loans because they are very into building relationships with their clients,” he says. “There have also been issues with the transfer of assets in the last couple of years, in particular the tax situation and the triangular mechanism between the originators, the mortgage guarantors and the SPC. It has also been difficult to assemble mortgage portfolios with the same terms - in Japan there tend to be differences in prepayment criteria, termination events, that kind of thing. That makes it hard to package loans into a security with defined terms. Basically, it has been technically difficult and expensive to do, but after a few deals did get done, it’s surprising that more haven’t followed.”

The banker hopes, however, that GLHC’s deal could spark the whole sector back to life. “The GLHC transaction will be enormously important because if it goes well, it will send out the right signals to the market,” he concludes. “Because it is the biggest player, this deal will act as a benchmark. Once a precedent has been set, it becomes easier for the market to develop. Hopefully it will also make the regulators become, how can I put this, less opaque in their thinking.”