KARACHI: As home finance gradually picks up steam amid government efforts to promote home ownership, the Pakistani Mortgage Refinancing Company (PMRC) plans to issue its first mortgage-backed bonds in the next couple of years.
“Ultimately, we want to buy back the banks’ housing portfolios, securitize them and pack them for sale on the bond market,” PMRC CEO Mudassir H. Khan said in a recent interview with Dawn.
PMRC is the only government-backed company of its kind that provides long-term liquidity to banks, which are the main mortgage lenders.
“We are waiting for banks to bring their mortgage portfolios to a level where they have to cross them off their balance sheets in order to limit the concentration of risk,” he said.
Banks do not like to part with their funds for 15-20 years, which is the typical length of a home loan. So they create these loans and subsequently sell them to companies like PMRC. In return, they get fresh liquidity to lend new mortgages.
Internationally, refinancing companies convert these loans into mortgage-backed securities (MBS) and place them on the bond market. The bondholders then receive their income as homeowners pay their mortgage payments on a regular basis.
“I don’t think that securitization (on a massive scale) will happen in the next three to five years. But we want to make a deal in the next couple of years with at least one bank, depending on the nature of its portfolio, ”he added.
MBS is blamed for the 2008 global financial crisis. Mortgage banks in the United States have lowered their standards and made home loans to subprime borrowers. These loans were then packaged in MBS and sold to investors around the world. Homeowners then defaulted on their payments, triggering the global financial crisis.
Mr Khan said the mortgage securitization will be accompanied by a strict legal framework with standardized loan application and approval processes. “We will not securitize home loans for the poor. We will securitize other loans, but use the proceeds to promote low income mortgage loans. We will make sure people trust the paper issued by the PMRC. We will not sell anything that is subject to default, ”he said.
For its first securitization deal, PMRC is looking for a “safe” portfolio of at least Rs 1 billion, which ideally includes housing loans from government employees. “The risk will be less. It will be easier for investors to assess and share risks. But if I take a low-income loan portfolio, people will not understand the risk and prices will go up. This will not serve our purpose. The money we collect will then be used again for housing finance, ”he said.
The bonds will be traded in the secondary market, as will the shares of mutual funds, he said, adding that the PMRC does not want to sell only to corporations.
In terms of its current operations, the PMRC CEO said it has pre-financing operations with both Islamic and traditional banks.
In simple terms, this means that the PMRC provides upfront discounted money to mortgage banks, provided they use it to provide home loans to low- and middle-income segments.
“We are also encouraging them to lend at a fixed rate, which makes the loan available to the end consumer,” he said.
According to Mr. Khan, “discount” means that commercial banks can access funds through the PMRC at a rate lower than the PKRV rate, which is the revaluation rate determined at the end of each day for government securities traded in the secondary market. PMRC provided banks with long-term loans at a rate that was three percentage points lower than the current PKRV rate.
PMRC advances rose 16.3% qoq to INR 17.4 billion at the end of March. The quarterly net income was Rs 291 million, down 28% from a year ago. The company recorded more than 100% growth in advances in 2020.
PMRC has 14-15 clients, including banks, non-banking institutions, modarabas, microfinance banks and a housing finance company, the only dedicated housing bank in the country.
Published in Dawn, June 30, 2021