Lehman Brothers is believed to be working with Hong Kong's Pan Asian Mortgage Company (Pamco) on a securitization of negative equity mortgages. Although it is bank policy to not comment on market speculation or deals it is working on, FinanceAsia has heard from a number of Asian securitization bankers that it is an open secret that Lehman has had the mandate for some time.
A source at Pamco declined to substantiate the story but admitted the company will continue to look at securitization opportunities. "I cannot really comment other than to say that we are looking at the possibility of doing a deal backed by negative equity mortgages," the official says.
"It's a question of trying to feel the pulse of the market, particularly given the heightened awareness of negative equity mortgages at the moment. We're considering doing something but it is premature to say anything else at this stage. The timing needs to be right and we would need to put together something that investors could get their teeth into."
If the Lehman rumour is true, where that leaves HypoVereinsbank (HVB) is anyone's guess. HVB was chosen late last year to work on a $200 million deal, with Centre Solutions providing third party credit enhancement. However, the likelihood of that deal going ahead looked slim - at least in the short term - when Centre Solutions closed its Asian office in early December.
When questioned about the speculation linking Lehman with Pamco, a source at HVB replied that, as far as he was aware, HVB still had a mandate but said it was possible that Pamco was speaking to other investment banks about unrelated transactions. However, the HVB deal is supposed to be for around $200 million and Pamco's negative equity mortgage programme is currently valued at around HK$2.5 billion ($320 million). Unless Lehman is working on a relatively small local currency issue for Pamco, it is a reasonable question to ask whether Pamco has enough assets to do two sizeable deals.
Even if has, some ABS bankers feel that a deal backed by negative equity mortgages is some way off. "This would definitely not be the easiest deal to do given current market conditions and limited historical experience of the originator," comments one banker. "I don't know what local investor response would be like for a deal of this type and the swaps would make it expensive to do an international deal at the moment."
Any potential deal might also be difficult given that there is still so much uncertainty over Hong Kong's economic prospects and whether the property market could deteriorate further. Nevertheless, potential investors might consider taking on the risk involved due to the loans being insured by HKMC and Pamco's impressive track record to date. The delinquency rate on mortgage loans in Pamco's portfolio is 1.18% - below the industry average of 1.6% - and since it was established in May 2000, only one out of its 1,200 loans has defaulted.
Pamco is headed by Leland Sun, a former banker with Bear Sterns and Goldman Sachs who also briefly held the top post at HKMC. Its current partners are Asia Commercial Bank, Citic Ka Wah Bank and Wing Hang Bank.
In May 2002, the company established the snappily titled SuperFirst Negativity Equity Mortgage Refinancing Programme, which allows homeowners whose properties have depreciated in value to borrow up to 140% of the underlying value at low interest rates. Under the scheme, the partner banks lend 100% with Pamco funding the balance through its mortgage conduit.
The company recently widened the scope of its business by accepting loans of up to HK$12 million from individual borrowers and owner occupied properties registered to shell companies. Previously the loan limit was set at HK$8 million with only individual borrowers able to apply.
According to a Hong Kong Monetary Authority Survey released last September, 70,112 mortgage borrowers - 16% of the market - hold negative equity on their homes.