Japan Housing Finance Agency (JHF), a government entity set up to help fund mortgage sales, now issues around 90% of all RMBS in Japan. It raised around $34.6bn last year after appealing to investors wanting a pick-up albeit only a slight one from wafer-thin Japanese government bond returns.
JHF does not control a similar majority of Japans overall mortgage market, but when it comes to fixed rate loans, it is by far the most important institution. Japanese homebuyers have two options: turn to banks for floating-rate mortgages, or turn to private institutions for long-term, fixed-rate mortgages that, in many cases, are then sold on to the JHF.
This makes private lenders little more than middlemen between borrowers and the JHF when it comes to fixed-rate mortgages. That may make a lot of sense for homebuyers, but it cuts Japanese banks off from the fixed-rate mortgage market and, perhaps just as painfully for them, from the RMBS market.
Japanese banks have been increasingly forced over the last few years to define their long-term plans. That is not always easy. The three megabanks Mitsubishi UFJ Group, Sumitomo Mitsui and Mizuho still rely on the domestic market for the bulk of their revenues, and their sheer size means that even when they do attempt to find new sources of revenues, they need to win a lot of business to tip the scales.
The standard request from analysts barking at Japanese bankers on conference calls is to concentrate on overseas markets: they should expand in Asia; they should move into emerging markets; they should try to compete with the big boys.
These requests all make a lot of sense, but there are still some markets closer to home that could prove very profitable for Japans banks.
The RMBS market is one such area, and the government could give its banks a big boost by opening the market up. These banks would first become issuers and, later, they could use their now-rusty skills to originate and distribute deals from the smaller lenders.
It is not hard to see why Japanese banks have stepped away from RMBS issuance. They cannot compete with the razor-thin margins that JHF is willing to bear. The agency paid an all-in cost of around 1.90% on one recent deal, once its behind-the-scenes costs are added to the 1.23% coupon, said a senior JHF official this week. But its mortgage portfolio has returned 2%-2.5% for the last five years.
Japanese banks will need to earn bigger returns than this if they are going to head into the market with greater size, but a few key chances could help. The finance ministry should, for a start, cut withholding tax on bank RMBS, aligning these deals more closely with the zero-tax regime JHF benefits from.
But most crucially, the government should cut JHFs issuance, giving banks room to step into the breach and forcing more borrowers to pay market rates for fixed-rate loans if they want to buy houses.
There is clearly a demand for RMBS in Japan, and while a big chunk of that will fall off when a government agency is no longer the issuer, there will still be several billion dollars left for Japanese banks to originate. That will be a big bump to their fees and will show their critics that turning away from home is not their only option.