Mortgage refinance: Company to be established in 2014-15, says Dar

[Edevelop]

KARACHI: The long-promised Mortgage Refinance Company (MRC) will be established in 2014-15 in order to develop a vibrant secondary mortgage market, which is currently non-existent in the country, according to Finance Minister Ishaq Dar.

During the budget session, Dar said the company will be set up with a broad shareholding of the government, commercial banks, development finance institutions, multilaterals and others to generate long-term liquidity for housing finance.

In a fully developed secondary mortgage market, mortgage loans are traded among investors, mortgage aggregators and mortgage originators, which happen to be commercial banks and House Building Finance Company (HBFC) in Pakistan’s case.

According to Dar, total paid-up capital of the company will be Rs6 billion. It will provide refinance facilities through purchases of loans from the financial institutions engaged in loan origination and packaging them for sale to long-term investors. The government will invest Rs1.2 billion in the equity of the company, he added.

Speaking to The Express Tribune earlier this year, a senior official of the State Bank of Pakistan had said the proposed MRC would initially be taking on the assets – ie mortgage loans – of commercial banks and HBFC temporarily on its balance sheet. The reason for this ‘temporary arrangement’ is the tiny size of Pakistan’s mortgage market, he said.

In return, MRC will provide mortgage originators with liquidity to further expand their portfolio.

For example, a commercial bank will have the option to shift its 15-year mortgage loan onto the books of the proposed MRC for, say, the first seven years. This will enable the mortgage originator – which is the commercial bank in this example – to generate sufficient liquidity in the short run and use the same for expanding its housing finance operations.

As a result, customers will have an easy access to housing finance while mortgage originators will be able to maintain liquidity despite increasing their housing finance portfolio in a short period of time.

MRC is likely to have at least three sources of funds. One, its board of directors may choose to increase the company’s capital, thus providing it with funds to acquire the assets of mortgage originators.

Two, it may seek loans from an international lender, like the World Bank. And three, the proposed MRC may decide to issue bonds and raise money through the debt market.

Speaking to The Express Tribune, Association of Builders and Developers of Pakistan (ABAD) Senior Vice Chairman Saleem Kassim Patel welcomed the establishment of MRC by calling it a step in the right direction. However, terming the allocation of Rs6 billion a ‘small amount’, he said it should be increased to create a liquid mortgage refinancing market.

Mortgage refinance: Company to be established in 2014-15, says Dar – The Express Tribune