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Speech
by Mr Peter Pang Launch of the Kuala Lumpur, 4 July 2008
Dato Ooi, Mr Choy, Ladies and Gentlemen, Good evening, It is my great pleasure to be here today to join Dato Ooi in welcoming senior members of Malaysia’s banking community to the launch of the Mortgage Guarantee Programme by Cagamas HKMC Berhad, the new joint venture company formed by Cagamas and the Hong Kong Mortgage Corporation. Last August, I came to Kuala Lumpur to witness the signing of the Memorandum of Understanding between Cagamas and the HKMC for exploring the potential in developing a mortgage guarantee business in Malaysia. Today, with the passage of only ten months, I am delighted to join you to celebrate the incorporation of the joint venture company and the launch of its ground-breaking Mortgage Guarantee Programme. The speed of turning the concept into a major business initiative testifies to the dedication and cooperative spirit of the joint venture partners. The Programme will provide guarantee on a portfolio basis for both conventional and shariah-compliant mortgage loans originated by financial institutions in Malaysia. The guarantee will cover the portion of the mortgage loan from 80% and up to 95% of the value of the property. The Mortgage Guarantee Programme aims to offer an effective tool for financial institutions in Malaysia to better manage the credit risk of their mortgage lending business. The US sub-prime experience has clearly demonstrated that without a proper structure and framework for managing the additional risks, a rapid expansion of mortgage financing could be detrimental to the health of banks and financial stability in general. Based on the Hong Kong experience, a successful mortgage guarantee programme needs to be firmly anchored on three pre-conditions. First, the guarantee product should bring real benefits to participating banks and potential homeowners without compromising the incentive for banks to maintain prudent underwriting standards. Secondly, there should be a conducive regulatory framework that provides incentive for banks to make good use of the guarantee for risk management and mitigation purposes. Thirdly, the provider of the guarantee should be of undoubted credit strength and possesses in-depth local market knowledge. The programme that Cagamas HKMC Berhad introduces today encompasses all three elements. From the perspective of the banks, the benefits of the Programme are three-fold. First, it provides the opportunity for banks to increase mortgage lending by raising the loan-to-value ratio, but without incurring additional credit risk. Secondly, unlike alternatives that involve securitisation, the mortgage loans can be retained on the banks’ books whilst transferring the more risky credit of the top portion of the mortgage to the guarantor. Thirdly, utilisation of the guarantee arrangement will lead to a more efficient use of capital permissible under the Basle framework. From the perspective of potential homebuyers, they can realise their dream of home ownership earlier as the significant uplift of the loan-to-value (LTV) ratio of mortgages, made possible by the guarantee, may lower the down payment to as low as 5% of the value of the property. For the regulatory authorities, the Programme helps to contain banks' credit exposure to mortgage lending by transferring the risks associated with the high LTV portion outside the banking sector. The regulatory regime in fact plays a crucial role in encouraging usage of the guarantee by banks through reduction in capital charge in recognition of the reduced risk. The treatment determined by the Bank Negara Malaysia will significantly reduce the risk weighting of mortgage pools guaranteed under the Programme. The success of this business model has been borne out by Hong Kong's experience. Since the introduction of the Mortgage Insurance Programme (MIP) by the HKMC in 1999, banks have originated HK$ 95 billion or around MYR 40 billion of insured mortgage loans due to the lifting of the maximum LTV ratio from 70% to 95%. The portion above 70% LTV ratio amounted to HK$21 billion, or close to MYR 9 billion. This has enabled some 50,000 households to advance their goal of attaining homeownership. The careful design of the Programme has also helped to maintain the excellent credit quality of the insured mortgage pool. The delinquency rate is currently below 0.05%. This is made possible by a host of factors - proper credit risk assessment, prudent underwriting practices, a well-tested pricing model, sound reinsurance arrangement and careful monitoring of loan performance. On the credit strength and local knowledge of the guarantor, one cannot find a better service provider other than our joint venture company - Cagamas HKMC Berhad. Cagamas has the strong backing of Bank Negara Malaysia and is one of the longest established national mortgage corporations in the region. Its in-depth understanding of the Malaysian housing and mortgage markets provides a solid basis to build the Mortgage Guarantee Programme launched today. On the other hand, the HKMC possesses solid experience in running one of the most successful mortgage insurance arrangements in the region and is one of the very few Asian financial institutions with a triple-A rating. The combined strength of Cagamas and the HKMC will enable the joint venture company to open up a new frontier in mortgage financing for the Malaysian banking community. I would like to offer my warmest appreciation to all those who have contributed to the establishment of the joint venture, and I look forward to the success of the Mortgage Guarantee Programme for many years to come. Thank you.
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