National Housing Bank (NHB) has launched a new phase of securitization programme with the three issues of Residential Mortgage Backed Securities (MBS) involving housing loans originated by BHW Birla Home Finance Ltd. (BBHFL). The apex housing finance institution today executed a Memorandum of Agreement (MoA) with M/s BHW Birla Home Finance Ltd. (BBHFL), a subsidiary of BHW Holdings AG, Germany, to securitize 2892 housing loans originated by BBHFL amounting Rs.99.34 crores. The Chairman and Managing Director of NHB Mr. P.K.Gupta and the Managing Director of BBHFL Mr. Ralph Haerke were the signatories to the MoA. The securitization transactions would comprise three separate RMBS issues. NHB shall extend its Guarantee in respect of the principal and corresponding interest in respect of the Senior Class of RMBS in the transactions. These are the first RMBS issues in the Indian Capital market with Guarantee of NHB. It may be recalled that NHB had launched the country’s first mortgage backed securitisation deal during August 2000.

NHB’s endeavours have been directed towards developing a secondary mortgage market in India and extending Guarantee for Senior Classes of RMBS has been the latest initiative of the apex housing finance institution to promote specialized forms of credit enhancements for RMBS. In developed countries such as the USA, the secondary market
institutions like Fannie Mae, Freddie Mac and Ginnie Mae offer Guaranteed RMBS which have significantly contributed to the pricing efficiencies in RMBS. This has also been largely responsible for lower interest rates in respect of housing loans resulting in better affordability for the home loan borrowers.

The present transaction involves the assignment of pool of retail housing loans from the BBHFL to NHB. The loans, repayable in equated monthly installments (EMIs), are packaged and offered by NHB as two forms of Pass Through Certificates (PTCs) – the Senior Class A PTCs and the Subordinate Class B PTCs. The Class A PTCs shall be issued to the various institutional investors and Class B PTCs will be subscribed entirely by the originator (BBHFL). The aggregate value of the Class A PTCs of the three issues is Rs.94.28 crores and the Subordinate Class B PTCs is Rs.5.06 crores, thereby totaling tot Rs.99.34 crores. The three issues have been rated AAA(So) by CRISIL. The pool of housing loans which constitute the receivables to be securitised, will be held by a Special Purpose Vehicle (SPV) in the nature of a trust, declared by NHB

The structure envisages credit enhancement, inter alia, in the form of Guarantee from the National Housing Bank in respect of payment of principal and corresponding interest to the senior class of RMBS ( PTC ‘A’ Series). In this regard, it may be mentioned that credit enhancements in the form of cashflows of Subordinated Class RMBS and Cash Collateral/reserve as prescribed by the CRISIL for a AA(So) rating grade shall act as the initial layers of credit supports for the Senior Classes of RMBS (Class A PTCs). NHB’s Guarantee provides the final layer of credit support to the investors, after the initial credit enhancement layers of the subordinated cash-flows and the principal portion of the Class B PTCs and the Cash Collateral are exhausted. The main objective of NHB’s Guarantee has been to facilitate the housing finance institutions and banks to obtain AAA(So) benefits at AA(So) terms.

Today, securitization is seen as a potentially viable market oriented alternative for the housing finance institutions and banks in India to further their home loan portfolio. The announcement in the Union Budget of 2005-06 that RMBS would be included under the eligible securities as defined under the Securities Contract (Regulation) Act, 1956 is expected to pave the way for listing of RMBS in stock exchanges thereby facilitating its trading, and will lead to further development and strengthening of the secondary mortgage market in the country.