Mortgage-backed products set to debut this year

Residential mortgage backed security products are set to debut on Chinese markets this year, but some commercial reasons may hinder the explosive growth of the product, industry experts said on Tuesday.

China Merchants Bank has already wrapped 8,920 of its mortgages amounting to 3.15 billion yuan ($500 million) into a security, and the same would be offered for sale in China's interbank markets on Friday.

It is the first RMBS product introduced in China after the regulator adopted a new registration system for credit asset securitization, meaning qualified issuers will only be required to register transactions before issuance, as opposed to the previous system where regulators approved transactions on a deal-by-deal basis.

Asset-backed securities were banned in 2009 after they helped spark the global financial crisis, before they were allowed again in 2012. Despite an explosive growth of credit asset-backed securities in 2014, there was only one RMBS product issued in that year: a 6.81 billion yuan security issued by the Postal Savings Bank of China.

The latest RMBS offered by China Merchants Bank has an average weighted duration of 6.6 years. Previous RMBS products have a much longer average duration. Such products issued by Postal Savings Bank of China have a duration of 15 years.

A product with a shorter duration was more popular among institutional investors as most of them would not hold those assets long.

However, Ma Li, managing director at Moody's Investors Service, told China Daily that some banks' commercial concerns might discourage the issuance of RMBS this year.

One reason is the underlying assets, mostly mortgages issued in the past few years, have a relatively low yield, because they are issued to homebuyers with a rate near to the benchmark lending rate, whereas mortgages issued in previous years usually were offered at a 20 to 30 percent premium (over the benchmark rate).

New loans as underlying assets also have two other shortcomings, according to Ma. They have a longer remaining duration, and too high loan-to-value ratios, which undermined their appeal to investors.

Although previous mortgages own more characteristics for underlying assets, banks would be reluctant to package them as securities for sale as they are quality assets for lenders, Ma said.

The recent cut in interest rate and reserve requirement ratio boosted banks' liquidity, which may also undermine banks' incentive to sell RMBS as a way to liquidize their remaining assets, Ma said.

"RMBS is in line with the government's intention to liquidize credit assets and expand home ownership. But the problem is how to make it more commercially attractive," he said.

China's asset securitization offerings jumped to 280 billion yuan in 2014 from 16 billion yuan in 2013, a 17.5-fold increase, and with a commensurate spike in sponsors, according to China Chengxin International Credit Rating Co Ltd, a subsidiary of Moody's.