Japan, being a developed country, has the second largest mortgage market among the
selected Asian countries. Japan has a very low mortgage rate of 2.375%.
The mortgage market as percentage of Gross domestic product in Japan has reached at 40.3 % .The following table represents the mortgage GDP ratio of some selected economies in Asia.
Country
% GDP
Japan
40.3%
Hong Kong
37.6%
Singapore
35.9%
Korea
12.6%
China
10.0%
Japan's decade-long banking crisis has created a substantial number of problems in the mortgage market, resulting in a considerable drop in land and home prices. Consequently, a great deal of money is tied up in problem loans, representing a severe misallocation of resources in the Japanese economy.
Housing Finance Arrangement In Japan
Designing mortgages depends on the nature of the housing system, the allocation of risk and the economic and institutional factors in a country. From the experience it is seen that Mortgage loan funding in Japan is characterized by heavy dependence on government treasury investment, which is based on subsidies.
The last decade virtually eroded the capital base of financial institutions due to non-performing loans and forced them to restructure their business models from lending to industrial enterprises to financing home purchases.
Coupled with the price crash in property markets, after the bubble era, debate on the current housing finance system has emerged. Currently Japan is restructuring its housing finance institutions by redefining the role for the public sector.
Commercial Mortgage-backed Securities in Japan
Commercial mortgage-backed securities (CMBS) rely upon converting a pool of loans secured by real estate collaterals into a security that can be traded in the secondary market. The securitisation workflow can be classified into the following stages:
Pool preparation: loans to be converted into securities are marked at the time of underwriting based on:
Collateral value;
Projected cash flows (and their stability); and
Loan tenor (which should be usually more than two years).
After loan origination, the securitisation team regularly monitors the earmarked loans for performance stability, and also looks at other loans that display high securitisation potential.
Off-balance-sheet (OBS) creation and maintenance
once the loan pool is substantial enough to begin securitisation, bids are invited from securities companies to provide an OBS facility for warehousing the loan pool until the bonds are issued.
Underwriting -
After the OBS process is complete, the originator works closely with the securities company to structure the security and present it for assessment to independent rating agencies. After suggested modifications are incorporated, the originator and/or other investors set up an SPC to which all loans are transferred. The SPC then issues bonds to external investors.