To revamp the financial sector Iran’s capital market regulator aims to develop a vibrant market for mortgage-backed securities (MBS) to stimulate the debt market and spur the sluggish construction industry. To this end it has published rules and regulations to underpin the MBS to widen the range of funding options for local firms who suffer from lack of capital.
According to sources in Bank Maskan (Iran’s main housing bank and mortgage provider), 100 trillion rials ($3.25 billion) worth of MBS will be issued by the end of this fiscal year that is in line with government plans to issue 400 trillion rials ($13 billion) worth of Islamic securities in the current fiscal that ends in March 2017.
The first tranche of Bank Maskan MBS worth 3 trillion rials ($97 million) was offered by its investment arm i.e. Maskan Investment Bank this month and was subscribed immediately.
Since the fallout of the global financial crisis in 2008 known as subprime mortgage crisis, there is usually some sort of association between the MBS and “crisis” in minds to the extent that most look at these instruments with extra caution. Therefore Iranian capital market’s approach to MBS varies in some important ways compared to instruments issued elsewhere. Here are some of the unique features that distinguish the Iranian MBS from its peers:
No sub-prime debtors: According to the Securities & Exchange Organization of Iran (SEO) rules, originators must structure MBS using receivables from high-quality (no more sub-prime) debtors and use receivables that have an existing repayment history.
Low NPF: Bank Maskan, i.e. the mortgage supplier, has the lowest non-performing financing ratio which is about 2%. It is worth mentioning that the originator of these securities is among Iranian banks that have not been affected by international sanctions.
High yields: These instruments pay annual yield of 18.5% distributable on a quarterly basis. This is while the inflation rate hovers around 10%.
Fix-Rate: Maskan mortgage facilities are not variable-rate mortgage or Adjustable-Rate Mortgage (ARMs)*, instead they provide fix-rate profits that do not change throughout the tenure.
Short-Term: Unlike the global practice, these securities are short term MBS that mature within 2 years.
Low FTV Ratio*: Whereas default risk could positively be correlated with the financing-to-value (FTV) ratio, Maskan MBS basket enjoys low FTV ratio of about 10-15% which means safer and more prudential investment vehicles.
Rigid consumer protection schemes: In the absence of credit rating agencies to assess the creditworthiness of these new securities, the regulator, within rigid consumer protection schemes, obliges originators to obtain a guarantor firm that will guarantee payments for investors and provide continuous monitoring of the instruments.
Shariah Compliant and Tradability: Bank Maskan mortgages are structured based on Murabahah facilities. Regarding the tradability of these securities, The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Shariah Standards no. 17, Article 5/2/15 mentions that “It is not permissible to trade in Murabaha certificates [Sukuk] after delivery of the Murabaha commodity to the buyer. However, trading of Murabaha certificates is permissible after purchasing the Murabaha commodity and before selling it to the buyer.” On the other hand, Shariah Advisory Council of Securities Commission Malaysia deems trading of Sukuk Murabaha permissible without any condition. However, according to the Shariah Committee of SEO, the only condition for tradability of these instruments is that there must be a real transaction among parties.
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ARM: A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.(Wikipedia)
FTV Ratio: The financing (loan)-to-value (FTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. The term is commonly used by banks and building societies to represent the ratio of the first mortgage lien as a percentage of the total appraised value of real property.(Wikipedia)
