The Hong Kong Mortgage Corporation

The HKMC plays an important role in maintaining banking stability.

My Viewpoint article on 11 September drew attention to the distinction between the Hong Kong Mortgage Corporation (HKMC) and the likes of Fannie Mae and Freddie Mac in the United States. The clear objective of the HKMC is to promote banking stability by taking mortgage assets off the books of banks in need of liquidity. There are stringent purchasing criteria against which the mortgage loans are assessed to uphold prudent credit standards. So the distortion to incentives that prevailed in the United States, leading to the origination and distribution through securitisation of sub-standard (or so-called sub-prime) mortgage loans – the origin of the current global financial crisis – has not been a factor in Hong Kong.

With the sharp worsening of the global financial crisis since the middle of September, some banks in Hong Kong have been considering the adoption of a more conservative business strategy, involving the raising and retention of more liquid funds. The HKMC can obviously help those banks wishing to turn part of their illiquid mortgage portfolios into liquid assets. Indeed, the HKMC has been holding discussions with individual banks on purchasing conforming mortgages from them, and we hope that by the end of the year the HKMC will be able to manage a total of $25 to 30 billion of purchases. It should not be difficult for the HKMC to raise the necessary funds in the market to meet this increase in its mortgage purchases, although we stand ready to give funding assistance from the Exchange Fund if needed. The size of the Revolving Credit Facility extended by the Exchange Fund to the HKMC has been increased from $10 billion to $30 billion.

Apart from providing liquidity to banks by purchasing mortgages, the HKMC has also explored the possibility of extending its mortgage insurance programme to keep credit flowing to the mortgage market. Any significant disruption in mortgage funding as a result of liquidity conservation by the banks could lead to unwelcome stress in the property market that could have wider implications for the economy and banking stability. A sudden contraction of mortgage finance could exacerbate any adjustment of property prices.

Currently there are banks that are contemplating the reduction of the loan-to-valuation (LTV) ratio of mortgages from the norm of 70% to, say, 60%. It is, of course, understandable that the banks may wish to be more conservative in stressful times. However, this move may create, in a technical sense, a financing gap that may have the unintended consequence of restricting more generally the availability of finance for mortgages with a relatively high LTV. The HKMC can fill this gap through modifying the mortgage insurance programme by lowering the threshold above which mortgage insurance will be made available under the programme from the current 70% LTV to the 60% being offered by banks. This will mean, however, a lowering of the total LTV ratio for such loans from the current maximum of 95% to 90% although the 95% maximum total LTV will continue to apply to loans where insurance is provided above 70%.

We referred to this possible modification in the mortgage insurance of the HKMC at the meeting of the Legislative Council Panel on Financial Affairs on 21 November. With the approval of the HKMC Board of Directors, the HKMC has promulgated the details today. The HKMC is playing the important role of helping to maintain banking stability at this difficult time, which is consistent with the principal objective of the HKMC when it was first established.

Joseph Yam
11 December 2008

Related Press Release:

• Enhancement of the Mortgage Insurance Programme and the Revolving Credit Facility

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