In order to obtain and maintain Investment Grade Rating indicating highest safety (AAA(So)) and to improve the performance of the pool as also to ensure uninterrupted cashflow for yielding the indicated coupon interest to the purchaser or subsequent investors in the RMBS paper, the Rating Agency may require additional credit support (called credit enhancement) under the transaction. Credit Enhancement in generic forms may include Guarantees, Subordinate Tranches/cash collaterals, etc. Such credit enhancements serve as a cushion to absorb the credit risk to the investors, to the extent of the size of the credit enhancements. This would therefore enhance the confidence level of the investors in the RMBS papers.
In typical securitization structures in India, presently such credit enhancements are provided/subscribed to by the originators themselves in India. The proportions of such credit enhancements are largely dependent on the quality of the pool of home loans, Pool Selection Criteria, RMBS structure, Valuation and Pricing Strategy, Credentials of SPV, Credentials of Originator/Servicing and Paying Agent, the loan origination policies of the originator, collection efficiency of the Servicing Agency, loan recovery monitoring and administration system and other factors relevant to the Rating Agencies. For an average pool which is sound in the above factors, the average proportion of credit enhancements in India works out to about 18%-20% of the total pool size whereas the same is as low as 3-5% in countries like USA and Europe.Under the arrangement NHB shall offer to provide/furnish an irrevocable Guarantee in its corporate capacity, to the RMBS issues of eligible Primary Lending Institutions (PLIs) with the main intent to obtain Rating of investment grade indicating highest safety AAA(So) from an approved Rating Agency. A major objective of NHB’s Guarantee to the RMBS issue would be to reduce the credit enhancement cost to the originating institutions. At the same time, in order to ensure that the cashflows to the investors are sufficiently protected, it shall be NHB’s endeavour to stipulate adequate subordination and collateral levels to the Guaranteed Class of RMBS which are commensurate with high levels of safety grade of Rating (AA(So)) for the RMBS by an approved credit rating agency. This is in line with NHB’s objectives of promoting the secondary residential mortgage market, as the originators would be in a position to have lower credit enhancements at AA(So) terms while the RMBS issue would command a AAA(So) Rating based on NHB’s Guarantee. As such the advantages of AAA(So) pricing would also accrue to the originator(s).
In a typical RMBS transaction, the size of credit enhancements would considerably be less (almost insignificant) if NHB assumes the role of Guarantor to the RMBS issue. In such a case, the originator(s) would be benefited with higher levels of upfront liquidity at lower costs which would augur well with the overall intent of the securitization process. In a typical RMBS transaction considering that redeployment would be done at around 7.50% to 8.00% p.a., this may result in a saving of 0.30% to 0.40% p.a. of the issue size (Senior RMBS that is Guaranteed).
While the major objective of NHB’s Guarantee would be to enable originator(s) to derive the pricing and other benefits of a AAA(So) RMBS at AA(So) terms, it would be quite in order to ensure that NHB’s Guarantee is invoked in a transaction only in the event of non-availability of cashflows from the securitized pool to service the senior class of RMBS guaranteed by NHB. For the purpose, the following hierarchy of payments (payment water-fall) shall be built-in to the RMBS Structure
- Payments to Service Providers
- Payment of Interest to Senior Classes RMBS holders (Guaranteed by NHB)
- Payment of Principal to Senior Class RMBS holders (Guaranteed by NHB)
- Replenishment of Guarantee (to NHB) / Interest, if invoked in the earlier payout(s)
- Payment of Residual Income to Subordinate RMBS holders
- Payment of Principal to Subordinate RMBS holders
In the event of any default on the part of the Borrower(s) of the securitized pool of home loans in payment/ repayment of any of the monies due on senior Class RMBS holders, NHB’s Guarantee shall be invokable only after the residual income / principal of subordinate RMBS and all other forms of collaterals stipulated for the AA(So) rating have been exhausted/completed in a payout. With the credit risk component of home loan market being very low as also due to the cherry-picking exercise adopted for selection of the best quality home loans with excellent repayment track record for securitization, this would ensure sufficient safeguard to the transaction.
Further, the cashflows to the senior class of RMBS is credit enhanced with the subordinate class of RMBS and cash collaterals. In view of the foregoing, the credit risk in respect of RMBS issues are likely to be low and therefore it is proposed to stipulate that the originators should hold atleast 5% of the total pool size in the form of subordinated RMBS before NHB agrees to extend its Guarantee to the senior RMBS.
In the extreme situation of the collection inflows being insufficient to pay the holders of the senior classes of RMBS (Guaranteed by NHB) even after full utilization of the subordinate RMBS cashflows and other forms of collaterals stipulated under the transaction in a particular pay-out, NHB in its capacity as Guarantor shall, upon demand forthwith, pay to the Trustee or the Servicing and Paying Agent, or to any other nominated person of the Trustee, the value of such short-fall, subject to the broad terms specified below. The amount paid by NHB towards meeting the short-fall in payments to senior class of RMBS (Guaranteed by NHB), shall be entitled to be replenished from the subsequent pool cashflows in accordance with the hierarchy of payments indicated above, in the forthcoming payout(s) along with interest.
Investment in RMBS or the PTCs which are Trust certificates of undivided proportionate beneficial interest in the pool of mortgages with underlying securities held in the Trust, are direct exposure on the loans included in the mortgage pool, for which the direct recourse is to the aggregated pool of loans including the underlying security and the credit enhancement. The amount paid by NHB towards meeting the short-fall in payments to senior class of RMBS (Guaranteed by NHB) shall be sans recourse to the originator(s).
(i) Eligible Primary Lending Institutions: The following institutions are eligible to securitise their residential mortgage portfolio under NHB’s RMBS programme:
- Housing Finance Companies (HFCs) registered with National Housing Bank
- Scheduled Banks
- Eligibility Criteria for HFCs for being eligible for NHB’s Guarantee:
- The HFC should be registered with NHB to carry out housing finance activity in the country. The HFC should provide long-term finance for construction/purchase/repair/ upgradation of dwelling units by home-seekers.
- The HFC should have been in active business of providing long term finance continuously for the preceding 5 years.
- The Gross Non Performing Assets (GNPA) of the HFC should not be more than 5% of the Gross Advances.
- The Internal credit rating of HFC should be minimum BBB in scale of AAA to C (in descending order of credit worthiness).
- Eligibility Criteria for Scheduled Banks:
- The maximum Gross Non-Performing Assets of scheduled banks should not exceed 5%.
- The Internal credit rating of bank should be minimum BBB in scale of AAA to C (in descending order of credit worthiness).
- The Scheduled Commercial Bank should have been in active business of banking and finance in India, continuously for the preceding 5 years.
ii) Eligible Pool of Residential Mortgage Loans
The Pool of Residential Mortgage Loans underlying the RMBS should satisfy the Selection Criteria stipulated in the Residential Mortgage Securitization Policy of NHB. Due diligence Certificate should be obtained from Statutory Auditors of the Company or a firm of Chartered Accountants acceptable to NHB, duly indicating that every individual loan in the pool of home loans being securitized, satisfy the stipulated pool selection criteria.
(iii) Eligible Structure of RMBS
NHB’s Guarantee shall be provided only in respect of senior RMBS and not for subordinated RMBS. It shall be ensured that NHB’s Guarantee would be to enable originator(s) to derive the pricing and other benefits of a AAA(So) RMBS at AA(So) term. Further, NHB’s Guarantee shall be the last resort in the hierarchy of other structural credit enhancements (such as senior-subordinate structure, etc.) being provided in the structure of RMBS.
(iv) Limit of the Guarantee
The quantum of Guarantee is limited to 100% of the principal and interest payable to the Senior RMBS, based on the amortization schedule drawn at the time of issue, subject to a maximum of Rs.125 crore.
(v) Requirements of RMBS Structure
NHB’s Guarantee to the RMBS structure of different classes of originators would be subject to stipulating sufficient safeguards for the cashflows to investors in senior classes of RMBS. While the criteria, structure and other parameters of the RMBS policy are proposed to be followed in full, it is proposed to stipulate the following requirements in RMBS structure to qualify for NHB’s Guarantee. NHB’s Guarantee shall be the last resort in the hierarchy of the structural credit enhancements (such as senior-subordinate structure) and cash collaterals provided in the structure of RMBS.
|HFCs (ICRM – 6*, 5* & 4*) and
Scheduled Commercial Banks
As per AA(So) Rating Grade
As per AA(So) Rating Grade
(vi) Validity of the Guarantee
The Guarantee shall remain valid until full discharge of the RMBS and shall be made available where payments receivable on the housing loans are not sufficient to satisfy the amount payable to holders of the RMBS.
(vii) Replenishment of Guarantee Amount
In the event of invokement of Guarantee at any time during the currency of the RMBS thereby resulting in depletion of the level of Guarantee limit for the residual period of the RMBS, NHB (Guarantor) shall be entitled to be replenished and the Guarantee level restored to its original level to the extent of recoveries from the pool collections in subsequent months or from realization of the securities in respect of underlying housing loans by the Trustee or any monies relating thereto. It should be ensured that in any payout to the RMBS holders by NHB, replenishment of Guarantee from the pool cashflows to the extent of payments met by NHB together with interest thereon, shall figure in the hierarchy of payments to the RMBS holders and be immediately after the payment of dues of the senior RMBS holders (for whom the guarantee was provided) in the hierarchy of payments in the RMBS structure. On replenishment of such amount, the amount guaranteed by NHB shall stand reinstated subject however to the condition that the total liability of NHB under the guarantee at any given point of time shall not exceed the amount of senior Class RMBS outstanding.
In respect of the amount utilised for making the timely interest and / or principal payments to the RMBS holders in the event of invokement of Guarantee, NHB (Guarantor) shall be entitled to be replenished with interest equal to the Pass-through Rate applicable to the RMBS holders (for whom the Guarantee was provided).
The RMBS (or the PTCs) being issued to the investors are stand alone securities in the nature of Trust certificates of undivided proportionate beneficial interest in the pool of mortgages with underlying securities held in the trust. It does not represent an obligation of either the issuing institution or the originating institution. Exposure to PTCs therefore, shall be direct exposure on the loans included in the mortgage pool, for which the direct recourse is to the aggregated pool of loans including the underlying security and the credit enhancement.
(ix) Guarantee Fees to NHB
- NHB will charge an initial fee of upto 1% of the guarantee amount, taking into consideration the credit rating (internal as well as external) of the PLI. For purposes of calculating this fee, the amount would be the product of the percentage of the guarantee (i.e. 100) times the initial principal amount of the guaranteed loan.
- Annual guarantee fee: An annual guarantee fee of 0.25% p.a. points of the total cash flows, i.e. principal and interest, guaranteed based on the amortization schedule drawn subsequent to the March payout every year would be payable for the guarantee provided by NHB. The fee would be collected in the subsequent payout to be made on April every calendar year.
The Chairman and Managing Director may modify operational aspects of the scheme and /or stipulate additional condition(s) in respect of any specific RMBS based on the need for such condition(s) as relevant to that particular RMBS structure, and report the same to the Board subsequently.
Delegation of Authority for Sanction of Guarantee
Proposal relating to the issue of Guarantee shall be placed before the Internal Credit Committee (ICC) for approval.