The newly bailed out US housing firms, Fannie Mae and Freddie Mac, have a Philippine version: the National Home Mortgage Finance Corporation (NHMFC).

Since Fannie and Freddie hit rock bottom following the US subprime housing mess, inevitably, there are questions on whether NHMFC, one of the key housing agencies of the government, will follow their US counterpart’s sad course.

These questions will be more pronounced by November, when NHMFC will be issuing its first investment instrument backed by a pool of housing mortgages by borrowers who are considered poor.

NHMFC will be issuing about P2.5 billion worth of Residential Mortage-backed security, the first investment instrument to be offered by the government to banks that are based on housing mortgages. It is guaranteed by the Philippine government.

However, it seems that the fears are unfounded. NHMFC operates in a different housing and financial environment as Fannie and Freddie. Filipinos are generally not as financially adventurous as the Americans.

Besides, NHMFC has already went through a subprime-like experience in the 1990’s. It was bleeding to death after the government tinkered with its original mandate of staying only as financial arm for the entire housing system in the country.

Since P150,000 to P375,000-worth of housing loans are too focused on the medium to high end housing sector, NHMFC became the tool to meet the housing demands of those with lower income. But it proved to be overwhelming. NHMFC financed low-cost housing to thousands of poor borrowers, but it did not screen them well nor collected the loans properly.

When uncollected housing loans, or those considered highly delinquent, reached a massive P53 billion, this big burden brought it to its knees, prompting a major restructuring in 2002.

Fast forward to 2008. It has recovered lost ground and ready to be more or less like Fannie and Freddie. How? By being active in the secondary mortgage market.

Secondary mortgage market

The financial scheme called secondary mortgage market in the financial sector’s lingo is supposed to unlock opportunities in banks and among house builders so they could sell more residential properties at interest rates affordable especially to the low income masses.

It works this way: The banks and residential property developers lend to house buyers. Since the banks and developers cannot lend to more aspiring house buyers if they have to carry big chunks of these housing loans or mortgages in their financial books, NHMFC comes to the rescue by buying these mortgages from the banks.

NHMFC then turns these mortgages around, then securitize or document them as financial currencies that they could then sell as bonds to potential investors. They are like financial intermediaries between people who would like to park their money in bonds and housing loan borrowers who signed a mortgage document where they promise to pay in a future date.

NHMFC, however, started out in the eighties with a social function: to make housing affordable to the masses by tapping funds from the capital market to buy and sell mortgages.

However, since housing for the poor is a highly politicized activity, during the Aquino up to the Ramos administration, there were efforts to pump-prime the housing market.

Three government managed funds, the Government Service Insurance System (GSIS), Social Security System (SSS) and the Pag-Ibig Fund, were then instructed to set aside a portion of their members’ contributions and allotted them to NHMFC through a housing-for-the-poor program, called Unified Housing Loan Program (UHLP). The P43 billion from the three became NHMFC’s seed money to directly lend to the poor.

Between 1988 and 1996, NHMFC directly lent about 220,000 housing loans to poor borrowers.

It was doomed from the start. NHMFC, not immune to coaxing from politicians who peppered the housing agency with requests to accommodate their poor constituents, and from scheming housing developers, some of them fly-by-night ones, were  terrible at screen borrowers.

NHMFC also proved to be poor loan collectors. When it stopped entertaining new loan applications in 1996, collection levels dipped alarmingly below 65 percent. It was bleeding. About P30 billion worth of accounts were considered “highly delinquent.” It needed to be restructured.

Healthy asset pool

In other words, NHMFC was stuck with collecting, then eventually restructuring, the 220,000 mortgages it could not collect. It is only this November 2008 that it could truly become what it was meant to be.

NHMFC’s maiden bond issue, which will be rated by local firm, Philratings, will be underwritten by Standard Chartered Bank, with Ernst & Young and its local auditing partner, SGV, as the financial advisors.

The bond issue will be based on “highly seasoned” 15,000 housing mortgages, which the borrowers have been paying up-to-date. Since NHMFC’s housing loans usually last for 25 years, this means these mortgages backing the bonds have had 10 years of good payment record.

This makes the Filipino borrowers different from their American counterparts. The US subprime mess came about because the bonds were partly based even on mortgages that are beyond the value of the property that was bought through credit. The housing mess exposed the fact that these are dud loans when the credit risks became too apparent and each layer tumbled like house of cards.

“These mortgages are not the same as those that backed Fannie Mae and Freddie Mac,” said Daisy Dulay, the operations head for securitization for NHMFC.

“The borrowers have been at it for more than 10 years already. At the same time, the houses they got in 1996 at P150,000 to P375,000 are now worth P1 to P3 million. They would definitely want to keep that asset because it already appreciated tremendously,” Dulay added.

In other words, there is a real asset with real value behind NHMFC’s bond issue.

Setting standards

The maiden bond issue was postponed several times because part of NHMFC’s restructuring program was to sell the 220,000 highly delinquent mortgage accounts to a special purpose vehicle, namely the Deutsche Bank Real Estate Global Opportunities.

The bad loans sale to Deutsche was valued at a whopping P42 billion. It was the first bad loans sale in the Philippines.

The maiden bond issue, also set to be a pioneering one in the country’s financial market, is expected to create secondary mortgage experts within the NHMFC as an institution, since in the succeeding rounds, it will already start buying mortgages from commercial banks so they too could free up their books and expand their housing loan portfolio.

While this will initially be felt on the level of the financial institutions, the public, especially those who aspire to buy their own homes, will also soon feel the impact.

NHMFC’s maiden bond offer is expected to set the standards both for the underwriters of these instruments and in the documentary requirements to borrowers. Home buyers will eventually have to fill up just one set of forms and fulfill similar sets of requirements whether they are availing housing loans from a commercial bank, a financial institution, or on the in-house financing scheme of the property developer. (abs-cbnNEWS.com/Newsbreak)

---

INTERACT WITH THIS ARTICLE