Iran’s capital market regulator wants to develop a market for mortgage-backed securities and has published rules covering them, the latest move by authorities to revamp the financial sector.
Last weekend’s lifting of sanctions on Iran promises to draw billions of dollars of fresh capital into the country. But the domestic debt market is underdeveloped and has struggled to offer a wide range of funding options for local firms, Reuters reported.
MBS, which are bonds backed by home loans packaged together and sold to investors, could help stimulate the debt market and spur housing construction in the country of about 80 million people.
Iran has seen some issues of MBS but on a small scale and active trade in them has not developed.
“The MBS concept is a newcomer to the market; this is designed to diversify lending sources and bring fresh money for banks,” said Majid Pireh, senior Islamic finance expert in the Research, Development and Islamic Studies Department of Iran’s Securities and Exchange Organization.
“We have to find alternatives due to limitations in the market,” he said.
The new MBS rules, released by the SEO last week, include strong consumer protection features-a reasonable precaution considering the role MBS played in 2007 when some turned sour in the United States and triggered a worldwide financial crash.
They also feature some particularly Iranian aspects that make them different from similar securities elsewhere.
In Iran’s entire financial system, interest payments are banned, but bank deposits and bonds carry “profit rates” that function much like interest rates.
The central bank uses tools such as reserve requirement ratios and open market operations to conduct monetary policy.
Consumer Protection
The SEO has introduced several debt products, including various types of Islamic bonds over the past six years. But these have had mixed success, so it has continued to explore other funding tools for companies to use.
“Local banks studying the new MBS rules include state-owned Bank Maskan, one of the main issuers of housing loans in Iran,” said Pireh, adding that a deep market for MBS would need time to develop because they had limited experience of securitization.
Foreign investors are expected to be able to enter the market when they eventually enter Iran.
Minister of Industries, Mining and Trade Mohammadreza Nematzadeh said last year that foreigners would be welcome to establish joint ventures in the banking sector after sanctions were removed.
Concerns about consumer protection, coupled with years of sanctions, mean that Iran’s approach to MBS differs in some important ways from the instruments issued elsewhere.
For example, Iran lacks credit rating agencies that can evaluate the creditworthiness of this new paper. In their absence, the SEO requires originators to obtain a guarantor firm that will guarantee payments for investors and provide continuous monitoring of the instruments.
“This is designed to provide protection for consumers, but could also increase costs for originating banks,” Pireh conceded.
Guarantors must meet requirements outlined in the rules to ensure they are financially sound, including capital requirements.
“The SEO has asked banks to structure MBS using receivables from high-quality debtors and to use receivables that have an existing repayment history,” Pireh added.
In addition to mortgages, the rules allow for the use of “other types of receivables”, he said, suggesting that non-bank companies might be able to raise funds in future by securitizing a range of instruments.
