- India Mortgage Guarantee Corporation (IMGC) closed its first mortgage guarantee contract under which Dewan Housing Finance Limited (DHFL) has securitised a pool of priority sector housing loans, provisionally rated as “AAA (SO)” by CARE Ltd., with a mortgage guarantee to a trust, the pass-through certificates issued by which have been subscribed to by ICICI Bank.
- 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 level of credit enhancement (cash collateral) that is otherwise required for this will be substantially reduced as a result of the cash flow and first loss support provided by IMGC. 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% equivalent of the credit enhancement to be reduced from capital funds).
- The existing structure of securitisation transaction requires the originator of the pool 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. The product can be altered for the type and level of cover to meet specific needs of a lender.
Exams Perspective:
- India Mortgage Guarantee Corporation (IMGC)
- Collateral
- Securitisation