The Hong Kong Mortgage Corporation (HKMC) announced today (Friday) the introduction of the Home Owner Mortgage Enhancement (HOME) Programme: a new mortgage insurance programme that aims to reduce the financial burden of homeowners in negative equity and to provide an effective tool for banks to reduce the credit risk of mortgage loans with current LTV ratio above 100%.
The HOME Programme is intended to supplement private sector initiatives that aim to relieve the burden of homeowners in negative equity. According to a survey conducted by the Hong Kong Monetary Authority (HKMA), there were 67,500 residential mortgage loans in negative equity (not including loans with co-financing arrangement) and the mortgage rates of 25,395 (or 38%) of those loans were still maintained at or above the Prime rate as of 31 March 2002.
The HKMC will disperse the credit exposure of the HOME Programme through reinsurance arrangements and the issuance of credit-linked notes. In order to expedite the introduction of the Programme and to cater for possible adjustment of its features in the light of experience, the HKMC has decided to launch the HOME Programme on a pilot basis prior to the introduction of the full Programme. The Corporation will review the demand for the product under the Pilot Programme, the experience gained in the hedging arrangements and the feedback from banks and reinsurers before deciding on possible future expansion of the HOME Programme.
The HOME Programme provides insurance to cover a bank's credit exposure above 90% and up to 140% of the current value of the property at the time of refinancing. This will allow the bank to reduce the mortgage rate charged to the borrower. The Programme will be extended to all Approved Sellers of the HKMC. The key underwriting criteria of the Programme include:
- the property is owner-occupied;
- the LTV ratio of the loan at the time of refinancing is above 100% and up to 140%;
- a debt-to-income ratio upon refinancing of not more than 50%; and
- the outstanding mortgage loan amount at the time of refinancing is not more than HK$8 million.
A full set of the underwriting criteria is at Annex A. Other details of the HOME Programme are set out in the technical note at Annex B.
Eligible mortgage borrowers will be expected to pay an upfront premium ranging from 2% to 2.15% of the outstanding principal balance of the loan at the time of refinancing:
Additional on-going premium will be borne by the lending banks. This premium structure will allow the banks to offer mortgage rates ranging from Prime – 1.75% to Prime – 0.5% to match those of similar products being offered in the market.
In order to minimize the financing burden of homeowners, it is expected that the participating banks will offer the borrower the option to amortize the upfront premium into the refinanced mortgage loan for payment as part of the monthly instalment, and to extend the tenor of the refinanced loan up to 30 years.
The borrowers will derive the following benefits from the HOME Programme:
(a) savings in interest payment – assuming the upfront premium would be borne by the borrower and the participating banks would offer mortgage rates to match those of similar schemes in the market, the borrowers would derive total interest savings (net of insurance premium) of 6% to 18% of the outstanding principal balance in nominal terms and 5% to 14% in net present value terms, depending on the current LTV ratio of the mortgage loan (see Annex C);
(b) reduction in monthly repayment amount – for a loan originated in 1997 with an original maturity of 20 years, a remaining maturity of 15 years, and a current mortgage rate of Prime + 0.5%, an extension of the loan tenor to 25 years under the HOME Programme would substantially reduce the monthly repayment amount by 30% to 39%; and
(c) no pay-down requirement – one of the main obstacles for borrowers in negative equity to refinance at lower mortgage rate is their inability to pay down the loan to 100% LTV ratio. The arrangement that allows the upfront premium of the HOME Programme to be amortized as part of the refinanced mortgage loan will remove this obstacle.
The participating banks will also enjoy the following benefits:
(a) through insurance provided by the HOME Programme, a negative equity mortgage loan is effectively converted into a "positive equity" loan and hence the risk of default loss is removed unless property prices fall by more than 10% at the time of default; and
(b) as the arrangement would not require the borrower to pay down the mortgage or the bank to offload the portion of the loan above the 90% LTV ratio, it would not result in a depletion of the banks' mortgage portfolios. On the contrary, by allowing the borrowers to amortize the upfront premium and extend the tenor of the refinanced loans, the banks would benefit from a moderate increase in loan size and a longer cash flow from the loans.
To prepare for the launch of the HOME Programme, the HKMC will conduct a series of briefing and training sessions for the banks to help them familiarize with the eligibility criteria and the related application and claim settlement procedures. The legal documents are being finalized for signing with the banks and the reinsurers prior to the formal launch of the HOME Pilot Programme in July 2002.
"The HOME Programme provides a market-driven solution that will help mortgage borrowers in negative equity to refinance at a lower mortgage rate and the banks to manage the credit risk of their mortgage portfolios. I am very pleased that the HKMC is able to make effective use of its intermediary role to bring this solution to the market," said Mr. Antony Leung, Chairman of the HKMC.
Mr. Norman Chan, Acting Chief Executive of the HKMA, said, "the HKMA supports the HOME Programme as it is expected to contribute towards maintaining the stability of the banking system. The Programme is consistent with the HKMA guidelines under which banks are permitted to refinance mortgages in negative equity up to 100% of the current market value of properties."
The Hong Kong Mortgage Corporation Limited
14 June 2002
Annex A (MS Word, 28KB)
Annex B (MS Word, 28KB)
Annex C (MS Word, 28KB)
