Finances for housing to get a sudden boost
A source told FE that the State-run National Housing Bank (NHB) plans to establish a mortgage securitization entity in a joint venture with one or more partners, which is an important step towards developing a structured market in this area.
This special purpose entity (SPE) is expected to be incorporated as a non-bank financial corporation (NBFC) and regulated by the Reserve Bank of India (RBI). This organization will help expand the securitization market, settle bad debts and expand the sources of finance for housing finance companies (HFCs). Initially, NHB can hold a majority stake (51%) in the SPE and the remaining capital can be raised from multilateral agencies. Its holding ratio will gradually be reduced as more and more investors join.
The decision is in line with the 2019 recommendations of the Harsh Vardhan committee established by the RBI, which has anticipated an anchor role for NHB in a securitization transaction. SPE will issue securities against the underlying risks of all mortgages – both commercial and residential. The Harsh Vardhan panel drew light upon the lack of standardisation in the housing finance securitisation space as an “important constraint” and proposed establishing a credible intermediary (under the NHB) “that can not only evolve these standards with industry inputs but also commit capital to securities that adhere to these standards”.
The RBI Panel recommended diversifying the company’s stock to include representatives of the founder community such as HFC, banks and insurance companies. Shares of originator investors should be limited to 5% to avoid conflicts of interest. The panel had recognized that 8-10 crore additional houses will be required to be built in order to meet the government’s “Housing for All” target by 2022. In this light, HFCs would continue to play a key role in extending credit.
The securitization market has always been dominated by direct assignment (DA) transactions, while PTC transactions accounted for only a quarter of the total transaction volume in 2019. This makes it difficult for large-scale participation by big investors, such as insurance funds, pension funds, and mutual funds. This is because securitization through DA channels generally involves tailored two-way transactions that restrict key details (including valuation, group performance, and advance payments) to the relevant parties.
However, if the securitization includes PTC, the pooled loans will be sold through an intermediary set up as a means of special purpose. This process is generally transparent and useful for standardization.