RBI Panel Suggests Separate Regulations For Mortgage-Backed Securities

A committee set up by the Reserve Bank of India to look into ways to boost the market for securitisation of housing loans has suggested that a separate set of regulations be clearly outlined for mortgage-backed securities. These rules, which would differ from those applicable to other asset-backed securities, could offer more liberal requirements such as a reduced minimum holding period, the committee said.

The committee also recommends that home loans should be linked to an external benchmark, which is publicly disclosed by lenders.

With India's mortgage market is set to grow to Rs 35 lakh crore by FY22, an efficient mortgage securitisation market requires standardisation of practices by lenders and an intermediary to promote the segment, the committee headed by Harsh Vardhan, senior adviser to Bain & Co. said in its report released on Monday.

Separate Regulations For Mortgage Backed Securities

The committee suggested that the regulatory treatment should be distinct for mortgaged-backed securitisation and other asset-backed securitisation.

For mortgage-backed securities, the minimum retention requirement should be reduced to 5 percent or equity (non-investment grade) tranches whichever is higher, the committee said. “Any first loss credit enhancement provided by the originator will be included in the minimum retention requirement,” the committee said. The minimum retention requirement is the proportion that the originator of the loan must hold on to.

The committee also recommended that the minimum holding period for loan originators or mortgages should be reduced to 6 months. This is the amount of time for which a loan must be held before it is securitised.

The committee, however, suggests that the relaxed guidelines only apply to pass-through certificates and not direct assignment transactions. The latter is a direct sale, while the former includes pooling of securities with a rating assigned to the pool of assets.

A Separate Intermediary

The committee also recommends that a separate intermediary be created for the development of the mortgage market. The intermediary would not only help evolve industry standards but also commit capital to securities that adhere to these standards, the committee suggested.

This intermediary, the committee suggested, could be partly-owned (51 percent) by the government through the NHB with its stake gradually decreasing to 26 percent over a period of 5 years. The remaining capital can be raised from multilateral agencies initially and thereafter various HFCs, banks and members of the MBS investor community can also acquire a stake.

"The stakes of originator investors should be capped at 5 percent to avoid conflicts of interest," the committee said adding that the intermediary's board should include "a good mix of executive, non-executive and independent board positions"

Standardisation Of Documentation

In its report, the committee said that one of the main impediment to developing a robust market for mortgage backed securities is the lack of standardisation of loan contracts.

The resolve this, the committee recommends that the NHB issue instructions to standardise loan documentation, home-loan data and loan servicing processes. These instructions should apply to all lenders. Once loan contracts are standardised, minimum standards can be created by an established authority, so that only loans conforming to these standards would be eligible to be pooled for securitisation.

Expanding Investor Pool

The committee also recommended measures to widen the investor pool.

Banks should be allowed to classify investments in mortgage backed securities within their ‘held-to-maturity’ bucket, the committee recommended. This would encourage banks to invest as it reduces the mark-to-market volatility.

It added that rules for insurance companies, pension funds and provident funds should allow 5 percent investment limit for investing in mortgage backed securities.

The committee also suggested that any pool of mortgage backed securities above Rs 500 crore should be listed. It also recommended a central registry for such securities.

Tax Treatment

In order to reduce the tax burden, the committee recommended that the income received by the security trustee should continue to be exempt from income tax

Pass through certificates should be treated as debt instruments and tax on receipts from these certificates should be treated as the same, the committee said. Interest payments to resident investors in listed mortgage-backed securities should not be liable for withholding tax.

The committee also recommended that mortgage-backed securities transactions be exempt from stamp duty.