All that talk came to nothing, but new President Gloria Arroyo put ABS straight back on the agenda in her State of the Nation address on July 23, as her government sought to give fresh impetus to the country's economy.
Senen Matoto, vice president and liaison director for the securitization and capital markets committee with the Financial Executives Institute of the Philippines (Finex) - in addition to his role as executive director and vice-chairman of BPI Capital - is one of three people working on a draft securitization bill. Finex is a non-profit organization that has been actively promoting securitization development since 1999, holding roundtable discussions on issues such as housing finance, legal, tax and regulatory issues.
Those discussions have resulted in a draft bill being sent to members of Congress, the Department of Finance and other government agencies. Matoto talks to FinanceAsia about the market's potential.
FA: Finex has been working on this issue since 1999 and during that time various government officials have been vocal on how they would like to develop securitization in the Philippines but, so far, nothing has happened. Do you have confidence in the new government's commitment to securitization and that the bill will be passed by the end of the year?
SM: Securitization was included in President Macapagal Arroyo's State of the Nation address as a priority legislation, which her administration is proposing to push through as part of the plan to stimulate the economy, particularly as it relates to housing finance.
At least two Lower House (Congress) securitization bills have already been filed. We have also initiated contact with a Senator to file a parallel bill in the Senate and are closely coordinating with the Legislative Liaison Office of President Arroyo.
With all this in mind, we are hopeful that the bill will be passed into law within this twelfth Congress.
Why in your opinion is securitization necessary in the Philippines and what advantages does it have over other means of raising finance?
SM: If you take the housing market as an example, the primary housing finance market is fairly well developed, but there is no secondary market to speak of. In my view, securitization is a key step to catalyze, promote and develop a secondary market for housing finance.
As a secondary market develops, its advantages will become obvious. I am referring to longer maturities for mortgage loans and lower interest rates as intermediation costs/ lending spreads drop. This will happen because of the turnover in loans that will ensue, instead of the conventional lend and balance sheet carry, currently the primary mode of operation for most lending institutions.
Additionally, advantages will come from having fixed rates for longer tenors, because this allows you to trade the loans; the unbundling and the specialization and development of the loan process from mortgage underwriting and origination; credit ratings; standardization of loan documentation; loan servicing; trustee and custodianship plus a better clearing and settlement system.
What work needs to be done to promote and educate potential issuers and investors about the benefits of securitization?
SM: A securitization bill that eliminates or minimizes the legal and regulatory obstacles as well as providing tax incentives needs to be passed by the twelfth Congress which commenced this month.
Once this bill is passed into law, an important step will be to encourage several key institutions, both private and public, both foreign and local, to establish a specialized secondary mortgage institution (SMI). The bill itself defines the functions and the role of the SMI, which is essentially expected to play the role of a Fannie Mae [The SMI in the United States] in our market.
What are the potential constraints to the development of an asset backed securities market in the Philippines?
SM: The pressing constraints are legal, regulatory and tax related. They are all addressed in the proposed bill. There are, however, other structural hurdles that will have to be dealt with over time. Examples of this would be lack of title insurance and the need to upgrade technical skills.
Are you confident these can be overcome?
Yes, over time as the demand for securitization develops. Currently, the loan market is soft and primary lenders are keener to retain the loans on their balance sheets.
What major asset classes will be securitized in the Philippines?
It is in the interest of the government to push for the immediate securitization of the housing loan portfolios of various government institutions. These include the National Home Mortgage Finance Corporation, Pag-Ibig Provident Fund, Housing Guaranty Corporation, Social Security System and the GSIS.
The private sector is likely to seek to securitize portfolios of non-performing assets.
