Japan's Government Housing Loan Corporation is a veteran of Japan's RMBS market, since most of the original issuers disappeared during upheaval following the financial crisis of 1998. Its role is changing as mortgage origination slows and it becomes a secondary market institution. GHLC's issuance style remains the same, though.
A tidal wave of residential mortgage backed securities (RMBS) issuance has swept over the market in 2004. But the Government Housing Loan Corporation (GHLC) has since 2001 been the market's prime mover.
Many of the Japanese banks that pioneered the RMBS market in the early 1990s have since disappeared in the bout of mega-mergers that have reshaped Japan's financial landscape since the 1998 crisis.
While the banks became preoccupied with consolidation, the GHLC took up the baton in March 2001 when it launched its RMBS programme.
By the end of September this year, the corporation had sold 23 deals totalling ¥1.38tr, making it by far the most prolific RMBS issuer in Japan.
The GHLC has been the pre-eminent issuer and also as nurturer of arrangers, rating agencies and investors. For example, investors are now entirely comfortable with pass-through amortisation, whereas they used to demand a diet of only soft bullet structures.
With its enormous portfolio of mortgages, the GHLC has also played a vital role in disseminating precise data on the Japanese mortgage market.
In November 2003, GHLC started to provide pool data to investors as part of its efforts to enhance the availability of information on MBS transactions.
GHLC's issuance objective has evolved markedly from its inception in early 2001. Tomonori Sugiyama, director for the MBS market operations group at GHLC, explains: ?We set out with the objective to develop the Japanese securitisation market, setting standards for disclosure, ongoing reporting of pool performance and of course pricing benchmarks and liquidity.?
With most of that developmental work now completed, GHLC is gradually becoming less of a facilitator and more of an issuer of necessity. ?This is vital as we are gradually becoming less of a direct mortgage lender and more of a financing vehicle, akin to a Fannie Mae for Japan,? says Sugiyama.
The GHLC will officially cease to exist in its current form by the end of March 2007 and will be restructured as an independent administrative agency, although its precise shape and form has yet to be determined.
Winding down the GHLC is certainly practicable. GHLC's role has been as underwriter and funds provider, but the private sector banks have long been servicing all the mortgages.
With GHLC lending less, it has, since October 2003, been acquiring housing loans originated by private sector financial institutions. Its first RMBS to include these purchase-type of housing loans came in GHLC's issue number 14, a deal of ¥30bn, which was launched in November 2003.
The mortgage acquisition programme was slow to gain momentum but revisions to its scope in February this year mean the GHLC now has about 160 counterparties from which it can purchase mortgages.
GHLC was established in 1950 and is the largest residential mortgage lender in Japan. Supported by the government, it has around a 30% share of the mortgage market for individuals and its primary role historically has been to promote housing ownership in the country, especially to the middle to low income bracket.
The slowing of the corporation's mortgage origination is partly in anticipation of GHLC's metamorphosis, but also because the GHLC's traditional 35 year fixed rate product is sought after less and the private sector is highly competitive.
Sugiyama explains: ?Banks have become active lenders of housing loans and the long term period of low and stable interest rates has caused demand for super-long term fixed rate loans to decline.?
Because many Japanese people have for the past few years not believed that interest rates will rise sharply, they have been happy to take out shorter dated mortgages instead, for example of five or 10 year maturities.
The corporation's share of the total market has dropped by 8% from 38% 10 years ago. GHLC now holds the equivalent of about ¥55tr of the total ¥180tr residential mortgage assets in Japan.
The large volume of prepayments of existing mortgages has also enriched GHLC's balance sheet with an embarrassment of cash.
GHLC is not permitted to prepay the super-long term loans it received in the past from the government, which was for decades its dominant source of funds. The net result has been a decline in GHLC's RMBS issuance, precisely at the time when private sector issuers are pouring into the market, albeit mostly with privately placed deals.
While the asset mix in GHLC's deals might now be changing, the structure of its transactions will not. GHLC does not issue through a special purpose vehicle, but directly from the corporation as bonds collateralised by loan obligations, which are entrusted to trust banks.
But if certain triggers were ever breached, including privatisation of the corporation, the transfer of entrusted assets would be legally perfected in a true sale.
For the foreseeable future, GHLC has no plans to change that structure. ?GHLC was founded as an institution for Japanese individuals as customers, so we want to ensure that linkage is maintained,? says Sugiyama.
GHLC's deals currently comprise a single tranche of triple-A paper, though Sugiyama notes that ?there is a possibility we might later structure in some lower rated paper?.
GHLC has so far only issued in Japan. ?The priority has been the domestic market and there is more work to be done to help refine the market here,? says Sugiyama. ?However, there is a likelihood that we will go offshore later.?