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The Guaranteed Mortgage-Backed Pass-Through Programme ("Pass-Through Programme") targets at banks interested in balance-sheet management with a view to converting illiquid residential mortgage loans into liquid Mortgage-backed securities (MBS).
Under this programme, the HKMC purchases mortgages from the originating bank and sells them to a bankruptcy-remote special purpose entity (SPE), HKMC Funding Corporation, Limited. The SPE will then issue MBS to a noteholder, who may either be the originating bank or another investor. The HKMC provides a guarantee (the 'HKMC Guarantee') on the timely payment of principal and interest of the MBS issued under the programme, thereby substantially reducing the credit risk of the mortgage loans and reduce the need for the originating bank to make loan provisions.
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The Pass-Through Securitisation Programme is an efficient, flexible, and cost-effective way for originating banks to offload mortgage loans. The use of standardised documentation for each issue reduces the time required for document preparation and negotiation, and improves issuance efficiency as a whole. Since the HKMC is wholly-owned by the Hong Kong SAR Government through the Exchange Fund, the HKMC Guarantee serves to enhance investors' confidence in the MBS issued.
The issuing structure allows the originating bank to hold the MBS and retain the income stream from the pool of mortgages. Since the MBS is guaranteed by the HKMC which is a public sector entity, it carries a lower risk weighting of 20% for the purpose of determining the capital adequacy ratio, compared with 50% for mortgages. This will result in savings in capital cost for the originating bank.
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