Secondary mortgage market development

By Sasmaya Tuhueleley

For long time, mortgage lenders (banks) in Indonesia do not have access to raise long-terms funds from capital market due to the lack of secondary mortgage market infrastructures. Banks can only issue corporate bonds and other medium-terms loan instruments or source short-terms funds like savings and time deposits for mortgages. Without long-terms funds from capital market, banks will be exposed to maturity mismatch risk. Because of this constraint, banks choose to limit their mortgage portfolio that deminish affordability of housing.

Some developed countries have been very successful in increasing affordability of housing by creating secondary mortgage market through the establishment of secondary mortgage facilities (SMFs) like Freddie Mac, Fannie Mae, and Ginnie Mae in the United State of America (USA). In Asia, there are also Cagamas Berhard (Malaysia), Korea Mortgage Corporation (South Korea), and Hong Kong Mortgage Corporation (Hong Kong) that have been proven successfully in contributing to increase affordability of housing.

Learning from the success of those countries, several years ago the Government of Indonesia began to think of creating secondary mortgage market. After many studies, seminars and meetings among experts and officials, the momentum to create secondary mortgage market then showed its face, when Susilo Bambang Yodhoyono was elected as a new President in 2004.

One of Yudhoyono’s 100-day programs at the time was to develop secondary mortgage market in order to meet Indonesia’s housing deficit. To start this valuable program, on February 7, 2005 the new President signed Presidential Decree No. 19/2005 on Secondary Mortgage Facility (SMF). The Decree calls for alternative long-terms financing for mortgages through securitization. Pursuant to this Decree, PT. Sarana Multigriya Finansial (PT. SMF) was established and scheduled to begin operating in the first semester 2006.

Unfortunately, after almost 3 years in operation, PT. SMF can not be functioned as people’s expected. Although, the company has announced to public about its plan to close IDR 500 billion mortgage securitization transaction involving Bank BTN as an originator last year, but the transaction has not been done yet. The IDR 1 trillion paid-in capital is still in the company’s pocket waiting for purchasing mortgages to be securitized.

Initiatives

Before secondary market-based housing finance system was introduced, the world only knows depository bank-based housing finance system. Depository bank-based housing finance system is a system where banks originate loans (mortgages) portfolio and take deposits or borrow money from money market. The depository bank-based housing finance system is no longer exist in many countries.

Secondary market-based housing finance system is a system developed to connect housing financing with capital market. With this system, banks or other mortgage lenders originate mortgages and sell pool of mortgages to SMF as a conduit. SMF then issues collateralized mortgage obligation (CMO) or participation letter to investors like pension funds and insurance companies in the capital market. Secondary market-based housing finance system now has replaced depository bank-based housing finance system in many countries because as explained before, this system can increase affordability of housing.

Indonesia is in the process of moving from the “old-style” depository bank-based housing finance system into a “world-trend” secondary market-based housing finance system. With this new system, the country can increase affordability of housing significantly. The system will also help the development of capital market in Indonesia. The objective to create secondary mortgage market and migrate to the new system will be difficult to be achieved if PT. SMF still can not function well. The longer PT. SMF start operating the system, the longer the development of secondary mortgage market and the longer the country move to this new system.

Initiatives to speed up secondary mortgage market development should be taken by PT. SMF, Government and also Parliament. The following are some of those incentives:
Firstly, PT. SMF should be more proactive in approaching banks, investors and other related parties through persuasive communication. Stakeholders need transparent and clear information about PT. SMF’s roles and activities. Lack of information will lead into mis-interpretation, so it will be more important for PT. SMF in their early stage to speak with stakeholders.

Secondly, PT. SMF as a conduit and be assigned to create and develop secondary mortgage market should change its business model on securitization from just acts as coordinator or arranger to directly involve in the business transaction by purchasing mortgages and then issue collateralized mortgage obligation (CMO) or participation letter to investors.

Thirdly, in the early stage it should be more clear also about PT. SMF’s roles to make houses more affordable and creating secondary mortgage market in Indonesia. These two roles could not be bounded into one package. It will be better for PT. SMF to focus on achieving its main goal which is to create secondary mortgage market.

Fourthly, to support PT. SMF in developing secondary mortgage market in Indonesia the Government needs to relax taxation rules or regulation on mortgage securitization. Taxes charged to the mortgage securitization business should encourage investors, originators and other related parties to engage in the transaction.

Finally, the rules for transfer of land title in the second lien and Bapepam regulation should in accordance with the PT. SMF’s rules on securitization. These two rules will not be hurdles if Indonesian has Securitization Law. Therefore Government and Parliament should start working in issuing Securitization Law.

Secondary mortgage market in Indonesia will be in place if all parties could play their role accordingly. So we hope so much that all parties have the same idea and think in the same length of curve. We will taste the benefit of secondary mortgage market if all parties play all instruments in the same harmony. So it is necessary for us to use this momentum, otherwise people will loose their faith and it could jeopardize the Government housing programs.

Catatan: Coloumn ini pernah dimuat di majalah Asian Property Investment