Development of a Secondary Mortgage Market

A well-developed secondary mortgage market plays a useful role in channelling long-term funds, such as insurance and pension funds, to meet the rising demand for long-term home financing. The Hong Kong Mortgage Corporation Limited (HKMC), wholly owned by the Government through the Exchange Fund, was incorporated in March 1997 with the mission to develop this market.

The HKMC's business is being developed in two phases. The initial phase involves the purchase of mortgage loans for its own portfolio and the funding of the purchases largely through the issuance of unsecured debt securities. In the second phase, the HKMC securitises the mortgages into Mortgage Backed Securities (MBS) and offers them for sale to investors.

Since its commencement of business in October 1997, the HKMC has proceeded smoothly with its Mortgage Purchase Programme. Through effective marketing and the introduction of innovative products, the outstanding principal balance of the HKMC's mortgage portfolio reached $19.8 billion as at the end of 2001.

The HKMC introduced the Mortgage Insurance Programme (MIP) in March 1999 to promote home-ownership in Hong Kong. It enables the banks to lend home mortgage loans above the 70 per cent loan-to-value ceiling set by the HKMA without incurring additional risk. In 2000, the MIP was expanded to cover mortgage loans with a loan-to-value ratio from 85 per cent to 90 per cent.

The HKMC launched a back-to-back MBS Programme in October 1999. The back-to-back structure allows banks to effectively 'repackage' their mortgage portfolios into more liquid portfolios and to maintain the majority of the cash flow if they hold the MBS in their own investment portfolio. The HKMC's guarantee on the timely payment of principal and interest serves to make the MBS a safe and attractive investment for investors. The HKMC has securitised $2.26 billion of MBS with two of its key business partners. The corporation also launched a multi-currency conventional bond-style MBS Programme in 2001 and planned to launch the debut issue in early 2002.

Debt issuance is the mainstay of the HKMC's funding sources. Through debt issuing activities, the HKMC is able to achieve the objective of promoting the development of the Hong Kong dollar debt capital market. In 2001, the HKMC successfully issued 26 debt issues for a total amount of $15.6 billion under its $20 billion Note Issuance Programme (NIP), $20 billion Debt Issuance Programme (DIP) and through the retail bond issuance scheme, making it the most active corporate issuer of fixed rate debt securities in Hong Kong. At the end of 2001, the outstanding balance of HKMC's debt securities stood at $20.1 billion. The HKMC debt securities were well received by financial institutions, as well as institutional and retail investors. The over-subscription rate of the notes issued in 2001 averaged 6.8 times. To help develop the retail debt market, the HKMC listed the NIP on the Stock Exchange of Hong Kong in October 1999 and launched its debut retail tranche notes under the NIP at the same time. The HKMC introduced a new arrangement of issuing retail bonds through banks as placing agents in October. The debut issue was met with strong demand by retail investors with a total subscription amount of $651 million, setting a record in the local retail bond market.