The Hong Kong Mortgage Corporation Limited (HKMC) announced its results for 2012 yesterday. The Corporation posted an after-tax profit of over HK$1.1 billion, which is the third highest since its establishment in 1997.
The HKMC has been endeavouring to pursue the following three objectives:
(1) to promote financial stability by providing liquidity to banks through purchasing banks’ mortgage loan assets,
(2) to facilitate the development of the local debt market through securitisation and debt issuance, and
(3) to promote wider home ownership.
Generally speaking, banks should not have liquidity problems during normal times. However, the market will become extremely volatile during financial crises and banks may face liquidity strains because of various reasons. The HKMC can perform its roles during such times and purchase eligible assets from those banks that are in need of liquidity. For example, the HKMC purchased mortgages totalling HK$11.4 billion from banks during the Asian financial crisis in 1998. During the global financial tsunami triggered by the Lehman incident at the end of 2008, the Corporation also purchased mortgages totalling HK$11.5 billion from local financial institutions. In both cases, liquidity pressure in the banking system was greatly reduced as a result. No other commercial entities would be in a position to perform such roles when the market is under tremendous pressure.
Despite that references had been made to the business model of Fannie Mae and Freddie Mac in the US prior to the establishment of the HKMC, a more conservative and prudent risk management framework was put in place for the HKMC. The HKMC has always been operating on a commercial basis but profit-maximisation is not its main objective. On the contrary, Fannie Mae and Freddie Mac actively provided funds to support the growth of the mortgage market in the US so as to achieve their aim of profit growth. Both Fannie Mae and Freddie Mac had repeatedly lowered the criteria for purchasing mortgages in the past so as to expand their balance sheets. The leverage ratios of Fannie Mae and Freddie Mac at the end of 2007 (the US sub-prime mortgage crisis broke out in mid-2007) were 66 times and 76 times respectively. As a result, their delinquency ratios rose sharply from 0.98% and 0.65% at the end of 2007 to 5.38% and 3.98% at the end of 2009. As for the HKMC, it adheres to its stringent mortgage purchasing criteria. Its leverage ratio as at the end of 2007 stood at 7.3 times only and the delinquency ratio as at the end of 2009 was just 0.07% which was far lower than those of Fannie Mae and Freddie Mac.
The HKMC also helps promote home ownership through the Mortgage Insurance Programme (MIP). Under the MIP, the down payment burden of homebuyers can be reduced without additional credit risk to banks. Since its introduction in March 1999, the MIP has helped over 100,000 families to attain home ownership. The Financial Secretary published an article on the functions of the MIP on 7 April 2013 and therefore I would not repeat here. However, I would like to add that while assisting homebuyers through the MIP, the HKMC also observes prudent approval criteria. The delinquency ratio of the MIP has always stayed at a low level. At the end of February this year, no mortgages under the MIP were overdue for more than 90 days (while the delinquency ratio for the overall mortgage market was 0.01%). The highest delinquency ratio in respect of the MIP was 0.39% recorded in September 2009 (and the delinquency ratio for the residential mortgage market at that time was 1.05%) which was far lower than the mortgage delinquency ratio of the banking sector.
In addressing the risk of the overheated property market, the HKMA has continued to tighten its supervisory guidelines on banks’ mortgage business. I would like to take this opportunity to discuss the respective roles of the HKMA and the HKMC in this regard. The HKMA’s main consideration is the banking sector’s exposure to their mortgage portfolios. As for the HKMC, its main consideration is the financial risks to which it might be exposed as a result of an overheated property market. Despite the different considerations, both the HKMA and the HKMC have introduced countercyclical measures of similar nature in times of rising risks. During the past few years, the HKMC has repeatedly tightened the MIP criteria. In February this year, the HKMC lowered the cap on the value of properties eligible for the maximum MIP cover of 90% loan-to-value from HK$6 million to HK$4 million. This is in line with the approach taken by the HKMA.
On promoting the development of the local debt market, the HKMC has been the most active corporate issuer of Hong Kong dollar debt in Hong Kong. Over the past fifteen years, it issued a total of HK$177 billion in Hong Kong dollar debt instruments, which represented 9.4% of the total corporate debt issuance in Hong Kong (i.e. Exchange Fund Bills and Notes and Hong Kong Government papers excluded). Through its active participation, the HKMC has contributed significantly in meeting the growing demand for high-grade debt from insurance, investment and pension funds in Hong Kong. On the retail sector, the HKMC also spearheaded the development of the retail bond market in Hong Kong with the first issuance of such paper and the pioneering use of banks as placing agents and market makers in 2001. Under this mechanism, the HKMC has so far issued 37 series of retail bonds in 11 issuances, raising a total of HK$13.7 billion and involving over 30,000 retail investors. This helps facilitate the diverse growth of the local bond market.
In view of the changing environment in Hong Kong, the HKMC has launched new businesses in recent years to help fill market gaps in certain products or services. For example, the Reverse Mortgage Programme (RMP) was introduced by the HKMC as a brand new concept in Hong Kong. Local banks and insurance companies have been hesitant about offering reverse mortgage products due to the generally longer term of such lending. They are also concerned about the perceived risks arising from such volatile factors as local property prices, interest rate movements and life expectancies. In view of this, the HKMC launched the RMP in 2011. Through the provision of an insurance arrangement for banks, this new programme offers elderly people an additional financial planning option. Since its introduction, the programme has seen over 300 individuals make use of payouts from reverse mortgages to enhance their quality of life.
Under the SME Financing Guarantee Scheme, where the major risks are being borne by the Government, the HKMC manages an operating platform to help small and medium-sized enterprises secure sustainable bank financing. As at the end of March 2013, more than 4,800 enterprises with a total of about 130,000 employees have benefitted from the scheme. This helps promote the sustainable development of Hong Kong’s economy.
The HKMC has also launched the Microfinance Scheme, which assists those who wish to start their own businesses, enhance themselves through training or obtain professional certifications, but lack the necessary funds or have difficulties in obtaining them via established channels. The scheme provides an effective funding channel to assist business starters and enhance manpower quality. As at the end of March 2013, the HKMC has approved microfinance applications for over HK$17 million, benefitting a wide range of applicants. These include young aspiring talents in the IT field, middle-aged business starters, discharged bankrupts and even rehabilitated offenders. I wish them success in their respective new endeavours with the help from the scheme.
Since its inception, the HKMC has faced challenges from a difficult market environment, including the Asian financial crisis in 1998, the spread of SARS in 2003 and the global financial crisis in 2008. We have also survived the property price falls by almost 70% and the resulting large numbers of mortgage loans in negative equity. The HKMC has remained profitable over the years and launched new products that contribute to the general well-being of the community. It has successfully met the policy objectives underlying its inception through the prudent management of its business operation model. I look forward to the HKMC continuing to play an active role in contributing to the financial stability, market development and wider home ownership in Hong Kong.
Norman T.L. Chan
Deputy Chairman, Hong Kong Mortgage Corporation
Chief Executive, Hong Kong Monetary Authority
16 April 2013