HF and Standard Chartered Bank Korea Launch Securitization-Purpose Conforming Loan to Increase the Availability of Fixed-Rate Housing Loans

- The first Korean example of using securitization to promote long-term, fixed-rate loans

Banking customers will soon have access to a wider variety of long-term, fixed-rate loans originated by commercial banks.

□Korea Housing Finance Corporation, in partnership with Standard Chartered Bank Korea, launches the first Korean-type conforming loan

Korea Housing Finance Corporation (HF, CEO Seo Jong-dae) and Standard Chartered Bank Korea (SC, CEO Richard Hill) signed a Memorandum of Understanding (MOU) to launch a securitization-purpose mortgage loan, and announced on March 8 that they would hold a ceremony to celebrate the launching of the new Korean-type conforming loan fit for securitization on March 9 at Korea Federation of Banks in Myeongdong, Seoul.

□Paving the way for the growth of long-term, fixed-rate mortgage loans through the development of a Korean-type conforming loan

The newly-launched conforming loan is meant to improve the situation of the Korean mortgage market, which is currently dominated by short-term, adjustable-rate, interest-only mortgages that are sensitive to financial crises and other market fluctuations. The idea is for HF to help financial institutions originate more fixed-rate mortgage loans of their own.

※Conforming loans are mortgage loans that conform to a preset standard which makes them fit for securitization, hence allowing financial institutions to finance their loans more easily. Once financial institutions originate such mortgage loans under different product names and with varying interest rates, a securitization agency purchases their mortgages and turns them into tradable securities such as mortgage-backed securities (MBS).

"This MOU will serve as a springboard for more long-term, fixed-rate loans to come. Our plan is to make conforming loans available at any financial institution willing to provide them", remarked President Seo.

Conforming loans represent over 60% of all mortgage loans in countries such as the US and Japan, where long-term, fixed-rate loans are common. In Korea, by contrast, the new loan launched by SC in partnership with HF would be the first conforming loan to hit the market.

□Financial institutions to benefit from diverse financing sources including MBS

Securitization of conforming loans is supposed to work like this: once financial institutions make conforming loans to their customers, HF would purchase those mortgages (the loan originators' claims on the houses put up as collateral by their borrowers) and use them as underlying assets to issue mortgage-backed securities (MBS). In this way, banks can secure a reliable source of funding to finance other loans as well as a means to hedge their risks, which would allow them to provide long-term, fixed-rate loans in sizeable quantities.

Financial institutions would also benefit from improvements in their financial ratios, their ability to originate fixed-rate mortgages without exposure to credit risks or interest rate-fluctuation risks, and the availability of diverse financing sources including the issuance of MBS and cover bonds (CB).

HF plans to set up a pre-purchase screening system before the end of the year to determine whether individual mortgage loans originated by financial institutions fit the criteria for conforming loans. The system would make it easier for financial institutions to handle conforming loans.

□Facilitating the development of housing finance through conforming loans

"We hope the securitization scheme for conforming loans would increase the proportion of long-term, fixed-rate amortizing mortgages in a market dominated by short-term, adjustable-rate loans, and thereby contribute substantially to the development of the Korean housing finance market", said an HF official.