Mortgage/Housing Loan in Japan

MBA

Executive Series

April 4, 2013

Norihiko Kato

1

Housing Loans in Japan

• Loan amount: up to 4-8 times of yearly income

• Relatively low interest rate

• Long term up to 35 years

relatively large amount of mortgage loans available

2 types

• Mortgage Loans provided by commercial banks, life insurance companies, and non-bank finance companies

• Government Agency Program:

– Loans by Government Housing Corporation (1950-2007)

– Funding /MBS by Japan Housing Finance Agency (2007- )

2

General Loan Conditions

• Borrower must have stable income

• Credit Guarantee by Guarantee Company

• Amount, Age, Income, Work duration, Credit history, Down payment, Life Insurance, Property insurance, Property quality

• Mortgage collateral registration by lender or guarantor

3

Loan Interest rates

3 types

– Variable rate: revised (mostly) semi-annually

– Fixed rate: 1% or more higher than variable rate

– Fixed for the first certain term and then borrower chooses fixed or variable for the remaining term

Monthly equal amount repayment (+ bonus repayment)

– partial prepayment reduces interest payment burden

4

Guarantee

• Credit Guarantee by a guarantee company designated by lender is generally required

• In case of default, lender can quickly recover the unpaid balance

• Borrower pays guarantee fee up-front or together with interest payment

• Guarantee fee may vary subject to borrower’s credibility

5

Amount Two considerations 1. Multiple of borrower’s annual income 2011 averages of FLAT35 program under JFH - New apartment: x 5.9 - New house: x 6 - New house with own design: x 5.2 2. Repayment ratio annual repayment of Principal & Interest/annual income < 25%～35%

6

In case of Non-performing

• Long time past due or personal bankruptcy

– Guarantee Company repays to Lender

– Guarantee Company forecloses the mortgage

– Life insurance pays insurance for repayment (death or health problem)

– Voluntary sale of the property

– Extension of term

7

Various types of mortgage loans

• Refinancing loan – Refinance by new loan with lower interest rate and/or

longer term based on updated collateral evaluation

• Relocation loan – Financing the difference of loan balance and sales value of

old house, plus value of new house

• Second house loan

• Reverse mortgage – Periodical loan disbursement to borrower (pensioners)

within the value of mortgage property which will be sold to repay the loan at maturity or borrower’s death.

8

by Government Agency 1950-2007

• Commercial banks’ mortgage loans were underdeveloped and not sufficient

• Government Housing Corporation (GHC) was established to promote housing in 1950

• GHC provided loans at low interest rate with term of 25 years or longer

• GHC made credit decisions and booking. Loan disbursement and repayment were made through commercial banks

• GHC captured 40% market share in 2000’s • GHC got criticized for competing with private banking

sector that increased its capability

9

by Government Agency 2007 - • Japan Housing Finance Agency (JHF) was established in

2007 to succeeded GHC • JHF buys and securitizes banks’ mortgage loan assets and

provides banks with long term funds • JHF directly provides handicapped/weak borrowers with

mortgage loans that commercial banks cannot provide • “FLAT 35”

– Fixed interest rate with term of 35 years – No guarantee needed – No fee for prepayment – Possible to apply for refinancing and purchase of second house – Life insurance is not mandatory – Applied only for technically qualified houses and apartments – Minimum term is 15 years. 10 years for aged 60 and above

10

Various types of JHF loans

• FLAT20: shorter term with lower interest rate

• FLAT35S: for better qualified houses (energy saving, barrier-free, etc.) with lower interest rate

• FLAT50: maximum term of 50 years, a child can succeed the loan from the parent

Combination of FLAT and commercial banks’ mortgage loans are possible

11

Sample interest rates quotation

As of April 2013

Variable 0.875% Variable 0.875% Variable 0.875%

5 yrs 1.000% 5 yrs 1.000%

10 yrs 1.350% 10 yrs 1.350%

15 yrs 2.600% 11-15 yrs 2.100%

20 yrs 3.150% 16-20 yrs 2.290%

21-25 yrs 2.320%

26-30 yrs 2.400%

31-35 yrs 2.440%

BTMU SMBC RESONA

21-35 yrs

5-20 yrs 1.810%

2.020%21-35 yrs 2.440%

12

GHC (1950-2007) & JHF (2007 -) structures

Borrower

Bank pass through

GHC loans

Government postal deposit

& gov. bond

Borrower Banks loans

JHF loan asset

securitization Investors

MBS

proof loan assets certificate trust

propery qualification

cheking institiution

custody

13

Mongolia/MIK structure?

14

proof loan assets

certificate trust

propery

qualification

cheking

institiution

custody

BorrowerBanks

loans

MIK

pass through

Government

gov. bond

BorrowerBanks

loans

MIK

loan asset

securitization

InvestorsMBS

Thank you

15

Disclaimer

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• This presentation has been prepared solely for informational purposes and its not to be construed as a solicitation or any offer to buy or sell securities, commodities, or related financial instruments.

• Norihiko Kato has prepared this presentation based on information available to it, including information derived from public sources that have not been independently verified. No investment, divestment or other financial decisions or actions should be based solely on the information in this presentation. Norihiko Kato accepts no responsibility in relation to this presentation, and shall not be liable for any loss or damage whatsoever suffered by any party arising from, relating to, resulting from or based upon the use of this presentation and any errors or omissions there from.