India Mortgage Guarantee Corporation (IMGC) has announced the closure of its first mortgage guarantee contract.
The transaction offers a first loss guarantee on a pool of priority sector housing loans of Dewan Housing Finance Limited (DHFL). Under this, DHFL has securitised this pool of priority sector housing loans with a mortgage guarantee to a trust, and the pass-through certificates issued by the trust have been subscribed to by ICICI Bank.
The pool has been provisionally rated 'AAA (SO)' by CARE Ltd.
(Mortgage guarantee is a financial product which compensates lending institutions or housing finance companies for losses that may arise when there is a default on mortgage loans.)
The cash flow and first loss support provided by IMGC to the pool of housing loans would enable DHFL to reduce the level of credit enhancement (cash collateral) that would have otherwise been required for the transaction.
This would result in release of capital (Tier I), which can be redeployed to earn higher returns (RBI regulation for banks under Basel III provide for 100 per cent equivalent of the credit enhancement to be reduced from capital funds).
As per existing structure of a securitisation transaction, the originator of the pool is required to provide credit enhancement and liquidity support in the form of cash collateral as a fixed deposit with banks or by over collateralisation (also called subordination).
IMGC provides mortgage guarantee cover on residential mortgage loans. On the occurrence of a trigger event (which is classification of the loan as NPA), IMGC pays the creditor institution all outstanding principal and interest on the loan to the extent of the guarantee provided. Within this basic offering, the product can be altered for the type and level of cover to meet specific needs of a lender.