FIIs may get to buy housing mortgage-backed securities

NEW DELHI:: The national housing and habitat policy, set to be taken up by the Cabinet shortly, has proposed to allow cross-border FII flows into residential mortgage-backed securities. The Cabinet note has been mooted by the ministry of urban housing and urban poverty allievation. The opening up of the housing sector to FIIs will attract international capital into the housing finance sector to keep up with demand in the sector while supplementing domestic funds.

In the past, RBI has expressed caution and reservation about foreign flows. It has said that 77% of the net annual foreign capital inflow in 2005-06 was volatile. According to the central bank, volatile foreign capital inflows comprise portfolio investment and short-term trade credit which, in effect, categorise the entire inflow of FII funds into the stock markets as volatile.

FIIs have shown interest in residential mortgaged-backed securities, Icra head (structured finance products) Kalpesh Gada said. Residential mortgage-backed securities are debt obligations that represent claims to the cash flows from pools of housing mortgage loans.

At present, FIIs cannot invest in rupee-denominated pass-through certificates (PTC) since these do not have the status of securities. Mortgage-backed certificates are the most common type of PTCs, where homeowners’ payments pass from the original bank through a government agency or investment bank to investors.

Once the amendments to the Securities Contract Regulation Act (SCRA) are approved, FIIs can invest in such PTCs. There is a limitation in the aggregate amount debt that FIIs can invest in, though the number of asset classes are more, to that extent MBS as a class may be crowded out, Mr Gada said. Domestically, there is limited demand for RMBS, considering they are long-tenor paper with a maturity of 15 years or more.

“FIIs will help in bringing down the cost of capital required for construction of housing projects, which have a bearing on the cost of the final product. The final product, i.e. house, will be cheaper than before. Moreover, FII investment will also align domestic capital market with international best practices,” Cushman & Wakefield joint managing director Sanjay Verma said.

“Mortgaged-backed transactions may also involve an element of interest rate risk if the PTCs are issued on fixed rate basis, since most of the underlying housing loans are on a floating rate basis,” Icra’s Gada added. Presence of interest rate risk in MBS transactions also results in requirement of higher credit enhancement.