JHFs securitisation programme dates back to March 2001, when the Government Housing Loan Corporation (GHLC) launched its inaugural ¥50bn RMBS transaction via Credit Suisse First Boston, Goldman Sachs and Sanwa Securities.
As a structured transaction issued without a special purpose vehicle (SPV) and not involving a true sale of assets, the 2001 deal established the template for future MBS issuance both by GHLC and, after April 2007, by JHF. This structure, described by bankers today as being similar to a European structured covered bond, was chosen because GHLC gained no capital advantage from taking the loans off its balance sheet.
Volumes in Japanese RMBS rose steeply between 2003-06, with a Bank of America Merrill Lynch report on the sector noting that 17% of newly originated mortgages were securitised in 2005, compared with 4% in 2003 and 10% in 2004.
Since then, however, JHF has effectively become the only game in town as far as the Japanese RMBS market is concerned, with little incentive for the banks to securitize their mortgage portfolios. "Today, the mortgage market in Japan can basically be divided into Flat 35 loans originated by financial institutions and sold to JHF on the one hand, and private sector floating rate lending on the other," says Kaoru Kondo, structured finance analyst at Bank of America Merrill Global Research in Tokyo. "But because the banks dont need to hedge the interest rate risk on their floating rate loans, it is very unusual for these to be securitised."
The figures tracking the growing dominance of JHF within the MBS market tell the story. According to data published by Credit Suisse, total issuance peaked at ¥5.66tr in 2006, of which ¥2.46tr or 43% was accounted for by JHF.
Although JHFs issuance declined in the next three years, it did so at a much slower pace than the overall market, meaning that its contribution of ¥1.96tr in 2007, ¥1.85tr in 2008 and ¥1.67tr in 2009 represented a rise in its market share to 54% in 2007, 73% in 2008 and 82% in 2009. Bankers report that in 2010 its share has risen again, to about 86%.
The reduced competition at the primary level of the Japanese securitisation market has not, however, led JHF to compromise the high standards that bankers say it has always observed in the primary market. "Because JHF was aware from the start of its programme about how much it would need to issue, it has always aimed to follow a very market-friendly approach to marketing and pricing," says Reiko Hayashi, head of corporate and public finance debt capital markets at BofA Merrill in Tokyo. "JHF is always careful to ensure that it prices its new issues in response to investor demand, although this does not always mean paying a high new issue premium."
It is not just the pricing of JHF MBS that has strengthened their appeal to investors. Bankers say the regularity and transparency of issuance has also reassured investors. "JHF has established itself as the anchor of the RMBS market," says Yoichiro Nakai, executive vice president at Shinsei Securities. "It remained committed to the market throughout the financial crisis. After the Lehman crisis, JHF continued to price deals every month except in December 2008. The relative stability of the market following the Lehman collapse can be attributed to JHFs continued issuance."
Today, JHF has a targeted annual issuance of around $30bn (equivalent) of monthly MBS, with $5.6bn of S Series MBS and about $8.3bn of straight bonds, according to Katsuhiko Maeda, director general of the market operations department at JHFs Tokyo headquarters. "The collateral of all three is different," Maeda says. "Monthly MBS are backed by new mortgages, while the S Series is collateralised against seasoned mortgages. Straight bonds are backed by a general lien, meaning they are well covered by all other JHF assets, including mortgages held on JHFs balance sheet but excluding the mortgages used as collateral for monthly MBS and/or S Series MBS."
Bankers certainly believe there is plenty of room for continued growth in the Japanese MBS market in general, and in JHFs issuance in particular. "Look at the US market, which is huge," says Tomomi Kikuchi, managing director and head of mortgage Japan institutional sales at BofA Merrill in Tokyo. "The US Treasury market is worth about $6tr and the agency market about $5tr, with liquidity in the agency sector sometimes better than it is in Treasuries."
He adds: "Id like to see the Japanese market develop in a similar way, and I think there is a good chance that it will. About half of the entire US home loan market is accounted for by securitised agency loans, whereas in Japan only about $100bn equivalent of the $2tr mortgage market is securitised, which is only 5%."Kikuchi concedes, however, that sustainable long term growth in the Japanese RMBS market will be hostage to macroeconomic developments in general and to Japan conquering its deflation demon in particular. As long as Japan remains trapped within its deflationary spiral, consumers preference will be for floating rate mortgages which originators have no incentive to securitise. "When inflation picks up again in Japan, demand for fixed rate mortgages will grow, underpinning an expansion in the market for Japanese RMBS," he says.