Securitization of Mortgage Loans by Banks

Mortgage loans owned by banks will soon be securitized via the Korea Housing Finance Corporation. 

In their negotiation, Woori Bank and KHFC decided to issue MBS (Mortgage Backed Securities) based on mortgage loans owned by Woori Bank as early as late February after undergoing the registration procedures for the securitization plan. When the MBS is issued as scheduled, it will be the first attempt by a bank in the Korean market to securitize the mortgage loan.

In this transaction, the bank sells the mortgage loans to KHFC, who will in turn issue MBS based on the mortgage to the bank.  

While the risk weight for mortgage loans is 21%, the risk weight of MBS, the principal of which is guaranteed by KHFC, is 0%; this allows the bank to switch mortgage loans to MBS, resulting in the reduction of potential risk and the increase of the BIS ratio.

In addition, the reserves for bad debts (1%) accumulated for “normal” loans in preparation for weakened mortgage loans will also be transferred, leading to improved income.

Gi-chun Jeong, the head of the Securitization Planning Department of KHFC, said, “Financial institutions receive MBS in return for the asset, but if necessary, they will be able to secure liquidity through BOK RP or MBS sales.” He added, “Since it is more effective in minimizing financial risks in many aspects, we will encourage active participation of banks (in the securitization of private assets).”