Introduction of Mortgage Backed Securities in Pakistan

Pakistan Mortgage Refinance Company (PMRC) expects to issue its first mortgage backed bond in the next couple of years as housing finance picks up amid the government’s push to promote homeownership. PMRC CEO Mudassir H. Khan stated, “Eventually, we intend to take out the banks’ housing assets, securitize them, and package them for onward sales on the bond market.” It is a one-of-a-kind government-backed enterprise that provides leading mortgage lenders with long-term liquidity. They’re waiting for banks to develop their mortgage portfolios to the point where they’ll have to separate them from their balance sheets to reduce risk concentration.

Banks are hesitant to part with funds for 15-20 years, which is the average home loan length. As a result, they originate loans and then sell them to companies like Pakistan Mortgage Refinance Company. They get more liquidity in exchange, allowing them to offer more mortgages. Refinance businesses worldwide convert these loans into mortgage-backed securities (MBS) and sell them on the bond market. As homeowners make monthly mortgage payments, bondholders earn their returns.

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“I don’t think (massive) securitization will happen in the next three to five years,” he explained. “But, depending on the nature of its portfolio, we hope to conduct a transaction with at least one bank in the next couple of years,” he added.

In the United States, mortgage-originating institutions reduced their standards and extended house loans to subprime customers. Following that, the loans were packaged as MBS and sold to investors all over the world. Homeowners subsequently stopped paying their mortgages, resulting in a global financial crisis. Mr. Khan stated that the securitization of mortgages would be accompanied by a strict legal framework with the regulated loan application and approval processes. They will not securitize low-income housing loans. They’ll securitize other loans and utilize the money to promote low-income mortgages, guaranteeing that PMRC’s paper is trusted. They will not sell anything that has a high risk of default.

PMRC is looking for a secure portfolio of at least PKR 1 billion, ideally with home loans granted to government employees, for its first securitization-related transaction. “Investors will be able to analyze and take risks more easily. People won’t comprehend the risk if I take a low-income loan portfolio. Therefore pricing will go up. That isn’t going to help us. We will subsequently use the money we raise for home financing,” he noted.

He emphasized that the bonds will be tradable in the secondary market, similar to mutual fund units. The Pakistan Mortgage Refinance Company does not want to sell just to corporations.

According to the CEO, Pakistan Mortgage Refinance Company’s present operations include pre-financing transactions with Islamic and mainstream banks.

In simple terms, they provide mortgage-originating banks with upfront funds at a reduced rate in exchange for their extending house loans to low- and middle-income borrowers.

At the end of March, the company’s advances had increased by 16.3% quarterly to PKR 17.4 billion. Its quarterly net profit was PKR 291 million, down 28 percent from the previous quarter. In 2020, the company saw a more than 100 percent boost in advances.