Hong Kong 2003
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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 (HKMC), wholly owned by the Government through the Exchange Fund, was incorporated in March 1997 with a 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 retained mortgage portfolio reached $34.6 billion as at year-end.

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. In 2001, the MIP was expanded to cover equitable mortgage loans on residential properties under construction with loan-to-value ratio of up to 90 per cent. The loan size ceiling for mortgage loans on residential properties under construction with loan-to-value ratio of up to 85 per cent was increased from $8 million to $12 million in December 2003. The streamlined pricing arrangement (commonly known as 'one-stop' 90 per cent mortgage service) for mortgages covered by the MIP was well received since its introduction in late 2002. Since its inception in 1999, the MIP has steadily been gaining acceptance by home buyers and increasing market penetration through product diversification and effective promotion. The total number of applications received since launch amounted to 31 000 and the penetration ratio of the programme had reached a level of 13.6 per cent for the first 10 months of 2003.

One of the missions of the HKMC is to promote the development of the MBS and debt markets in Hong Kong. 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 $2.84 billion of MBS with three of its key business partners. The corporation also launched a multi-currency conventional bond-style MBS Programme in December 2001. Under the programme, two issues of $2 billion and $3 billion were launched in March 2002 and November 2003, respectively.

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 2003, the HKMC successfully launched 54 debt issues for a total amount of $10.9 billion under an enlarged Debt Issuance Programme (programme size increased from $20 billion to $40 billion) and through the retail bond issuance scheme, making it the most active corporate issuer of fixed rate debt securities in Hong Kong. At year-end, the HKMC had 112 issues of debt securities with a total amount of over $33.1 billion outstanding. The HKMC debt securities were well received by financial institutions, as well as institutional and retail investors. To help develop the retail debt market, the HKMC pioneered the issue of retail bonds through banks as placing agents in October 2001. Since then the HKMC has issued 16 retail bonds for a total amount of over $7.5 billion. Banks and other corporations adopted the same mechanism to issue retail debt securities with an aggregate issued amount of over $38.6 billion in the same period.

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