A Reserve Bank committee recently recommended standardization of loan documents and setting up of a government-sponsored intermediary under the National Housing Bank (NHB) for development of the home loan securitization market.
The committee also suggested developing standards for loan origination, loan servicing, loan documentation, as well as loans towards being eligible for securitization, which includes standardized formats for data collection and aggregation.
Amongst other things, the Committee on Development of Housing Finance Securitization Market also suggested that the central government must exempt mortgage-backed securitization from stamp duty which was done in the matter of asset reconstruction companies (ARCs).
Securitization contains pooling of loans and selling them towards a special purpose vehicle which then issues securities called pass-through certificates (PTCs) backed through the loan pool.
Well-developed securitization market could appear as a reliable complement towards other sources of backing for home loan lenders, as well as reducing volatility in funding for such loans.
The committee has likewise recommended separation of regulatory guidelines for direct assignment transactions as well as transactions concerning pass-through certificates and for mortgage-backed securities (MBS) and asset-backed securities (ABS). Relaxation of regulatory rules for minimum holding period (MHP) as well as minimum retention requirement (MRR) for MBS was also advised.
The report has furthermore suggested amendments and clarifications for registration as well as stamp duty necessities and tax guidelines to decrease transaction costs for securitization as also to boost investments in pass-through-securities.
The report also stated that treating the assets underlying a securitization transaction and any exposures in the form of credit enhancement as bankruptcy-remote under the insolvency laws for financial companies and alterations to regulations issued through financial sector regulators to incentivize participation of their particular regulated entities as investors,
The RBI, which has announced the report on its website, has asked for comments from the stakeholders by September 13.
The NHB, the report stated, it must undertake efforts to set up the loan origination standards (for the affordable housing loans) on an importance basis and establish the infrastructure for gaining and disseminating pool performance data for every securitization transactions.
An intermediary to endorse housing finance securitization with the main functions of standard-setting and market-making must be established by NHB.
The RBI report also stated the loan documentation should be standardized for housing loans.
It held that the documents for the three alternative forms of underlying mortgages [equitable mortgage which is registered, an equitable mortgage which is not registered, and registered (legal) mortgage] must be standardized and adopted by every lender,"
Also, the committee has also suggested that loan servicing procedure must be standardized and be adapted by every mortgage lenders. A master servicing agreement stating the standardized servicing procedure must be developed and adhered to by every lender.
Regarding stamp duty, the report recommended that the central government must exempt mortgage-backed securitization transaction in a similar manner that assignment stamp duty towards ARCs as well as stamp duty for factoring transactions (which also involve the assignment of receivables) has been exempted.
Besides, the government can also consider standardized stamp duty on an assignment of mortgage pools and control them at a reasonable level across every state.
Towards ensuring that public records are maintained for such exempted transactions, a necessity to register such transactions through a digital registry, for example, the Central Registry for Securitization Assets Reconstruction and Security Interest (CERSAI) with a nominal registration charge could be considered
The committee has also suggested that home loans pricing must be connected to an external, objectively observable benchmark (like the repo rate).
Lenders, it can be mentioned, have already started the exercise of linking interest rate on loans towards external benchmark.
The panel has also recommended that PTCs issued in mortgaged-backed securitization must be on par through corporate bonds and must not be subjected to withholding tax.
Furthermore, PTCs issued in mortgaged-backed securitization are required to be compulsorily listed in case the securitization pool is larger than Rs 500 crore.
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