Economy, Business And Markets

Secondary Mortgage Market And the Housing Sector

Secondary Mortgage Market  And the Housing SectorSecondary Mortgage Market  And the Housing Sector

The Central Bank of Iran and Securities and Exchange Organization have tentatively agreed to launch a “secondary mortgage market” for the first time. The decision, which will be announced in the coming days by the SEO and Bank Maskan, will make it possible for former to issue mortgage backed securities, Donya-e-Eqtesad newspaper reported on Saturday.  

With a long history in countries like the US, secondary mortgage market was first considered by the administration of former President Mahmoud Ahmadinejad in 2008 but its coincidence with subprime mortgage crisis that was largely triggered by failed mortgage backed securities put the kybosh on the plan.

 The secondary mortgage market is the market for the sale of securities or bonds collateralized by the value of mortgage loans. A mortgage lender, commercial banks, or specialized firms group together many loans (from the “primary mortgage market”) and sell grouped loans known as collateralized mortgage obligations or mortgage-backed securities (MBS) to investors such as pension funds, insurance companies and hedge funds.

The secondary mortgage market is intended to provide a new source of capital for the market when traditional sources –such as home deposit accounts are unable. The current housing stimulus package requires mortgage applicants to make a one-year deposit before receiving the 12-year loans.

But in a secondary mortgage market, loans will be reimbursed more quickly, enabling lenders to offer more loans in a shorter span of time. The secondary mortgage market helps to make credit equally available to all borrowers across geographical locations.

The extended loan repayment period of most mortgages and the fact that most bank deposits are short-term has drained banks of lending power that was already under heavy strain thanks to piling up non-performing loans and open-ended government borrowing.

 CBI Terms

Negotiations between Bank Maskan, Ministry of Roads and Urban Development and CBI to launch the secondary mortgage market have been underway for almost a year. The CBI had indicated that its approval of the initiative is subject to an OK from the bourse. In addition to that, CBI set two conditions before giving its final blessing to the plan.

“Self-regulation” and “self-operation” were the two key demands of monetary officials. This would mean that Bank Maskan will be ultimately responsible for managing the risk involved in the venture. If for any reason, MBSs fail to meet market’s expectations, Bank Maskan should have enough reserve funds to reimburse the investors.

Bank Maskan will issue 1 trillion rials ($ 34 million at the official exchange rate) worth of MBSs in the first phase of the plan. The lender has announced plans to pump 100 trillion rials ($3.4 billion) annually into the secondary market from MBS revenues. That money would be twice the housing saving account – the 12-year mortgage plan --is capable of generating.

This could enable Maskan to raise the ceiling for its measly mortgages and cover more loan recipients. Its mortgage bonds are currently worth 450 million rials ($ 15,000).

Some analysts, however, argue that for the secondary mortgage market to succeed, inflation must first be tamed since the market normally looks to bank deposit rates and the “general inflation” rate to adjust its expectation of MBS yields.

But those who are impatient to see the housing market pull out of recession could not disagree more. They contend that the government should fill the inflationary chasm by subsidizing the market while inflation continues on its downward slope.