FA: You recently launched a mortgage insurance programme with Standard Chartered for 90% financing of equitable mortgages. What was the thinking behind the deal?
Lam: There is clearly a demand for a product like this in the Hong Kong market. You have a situation where mortgage financing has been a very safe and attractive business for banks. Banks have been able to charge high spreads and offer low loan to value financing. But with the introduction of the HKMC, the mortgage business became a commodity business very quickly as banks no longer had to think about funding costs and risks as long as they are producing mortgages which conform with the HKMC's requirements. They just book the loan, sell it off and keep the spread – good business. In the past they were making 4%-6% spreads on this. It was a bit of controlled cartel where everyone was happy except for the consumer.
Now with the HKMC in place, the consumer is benefiting. Banks have to compete in a market where the business demand is low, the banks have a lot of liquidity and there are not that many attractive borrowers to lend to. So now there is a price war in the mortgage market. But banks need to think of new ways to compete, not just on price. As a result the more forward-looking banks have become more creative. Standard Chartered is at the forefront of this. We have spent a long time with them developing the concept of mortgage insurance for equitable mortgages. Banks are not supposed to finance more than 70% of a property's value. Yet we all know with an equitable mortgage, where you are dealing with a genuine homebuyer, the risk is no different from a legal mortgage. We have experience of doing this kind of mortgage insurance elsewhere so we are leveraging of our experience.
FA: Is this product only applicable in Hong Kong is does it have uses around the region?
Lam: We certainly hope that this would set the precedent for others to follow in other markets. Every market has its own unique situation. The opportunity here in Hong Kong is because of the HKMA's limit of 70% loan to value. Other markets have similar constraints and generally speaking mortgages made to the end user are the best risk. So we want to apply this elsewhere, but tailored to each market.
FA: The mortgage market in Hong Kong has been very slow of late, will it take innovative new solutions such as this to get the market going again? Or is the underlying demand for property in the SAR, just too weak?
Lam: I think it is just sluggish demand that is keeping the market down. Banks are willing to lend. Yes there is a limit to what banks can lend due to the HKMA guidelines, but it is not much of a constraint. It is more on the demand side.
FA: Moving on, it has been three years since Centre Solutions (Asia) opened here in Hong Kong. How is business?
Lam: We have been getting very busy lately. We have closed a number of deals, which allows us to keep expanding. We are up to a dozen professional staff now. The nature of our business is rather niche. We focus on highly value added transactions. So if we do two or three deals every year at the right size and profit margin, then we are fine. This year I think we will do better than that.
FA: Given that markets and economies everywhere are down are you finding that your clients are becoming more risk conscious? Are they more focused on protecting themselves from the downside and therefore on the look out for the kind of solutions you can provide?
Lam: Most of our enquiries come from the other side, from people who need to raise capital. The perception of these borrowers is that it is a difficult market and if they come from a difficult country, industry or even company, then banks and capital market solutions do not work without someone like us to provide a guarantee or insurance policy. In situations where capital needs to be raised there is a risk perception. And it is true that the perception of that risk is increasing. The sluggish economic situation everywhere makes it difficult. But that is where we can add most value. Its what we were set up for – helping people to find solutions to raise capital or reduce risk.
FA: Is your business counter cyclical?
Lam: That's a good way to describe it. We do better in more difficult times and in more difficult markets. In Taiwan for instance, before the recent debt crisis, because of its high rating and the liquidity it had in the banking sector, borrowers could raise money at any time and with good rates. So under that situation there was not much opportunity for us. Now perhaps there is a recession there and banks are less willing to lend but borrowers still need to borrow to expand or refinance their existing borrowings. So now they are talking to us and they do not mind paying up for the financing. The lower interest rate environment does help to offset the higher costs they pay for coming to us.
FA: There have been any law changes in recent years to encourage the domestic securitization markets. Is this an area where you are looking to add value?
Lam: Securitization is definitely a business that we are keen on. We think we can play a critical role. But if it is a plain vanilla commodity product, then we will not be able to play a meaningful role. But within the securitization area, there are many areas where for instance the monoline insurers wont play or the investors will not want to invest without someone like us providing a guarantee.
When you are dealing with a new market or asset type for example, then usually it takes someone like Centre to be the first one to do the first deal. When people see that these deals can be structured in a satisfactory manner, then others come in as well. That is how you develop a market. We can add value in markets where the investors are not sure of securitization, or not sure of the assets being securitized or even the industry in which the securitization is taking place.
There have been a number of new laws promulgated around the region. Some countries have done it better than others. For instance in Thailand, they have had a securitization law for over two years. They were one of the first in Asia to adopt it right after the regional debt crisis. It was the right thing to have done. But no deals have been done under the new law even though everyone had high hopes. The problem was that during the consultation period, they have not got the right input from the lawyers and other practitioners so that the securitization law that was drafted does not work. They had the right intention, but it was not implemented in such a way that allowed deals to get done.
The opposite has happened in Korea. They had the benefit of seeing what happened in Thailand. The Koreans have gone through a lot of consultation and got a lot of people's input. So they have developed a law that really works. A number of securitizations have now been done in Korea under the new law, and more will follow.
