India Real Estate real picture
Real Estate loans in India : Is this real Bubble?
I’ve been waiting for some official confirmation of the bursting of the real estate bubble in India. Although bursting of the bubble (or even the existence of it) is still just hearsay, it is widely accepted that Indian real estate market is stuttering (to put it the best way I can). This article in the New York Times puts the depreciation in New Delhi and surrounding areas at 20%. I thought this is a good time to do a followup on my first post on Indian real estate.
In the midst of the bursting housing bubble in US, UK, Spain, Ireland ..etc., sub-prime has become a common word (it also was nominated as the word of the year). There are several articles, blog entries and web sites detailing the life cycle of a mortgage loan in these countries, especially in the US, talking about how these loans are converted to Mortgage Backed Securities (MBS) and packaged as Credit Default Obligations (CDO) and sold to hedge funds, central banks, private investors and investment banks. Although it is not exactly known who owns how much of the toxic mortgage loans, at least we know what happens to these loans in a general sense. This is very important in the current scenario for any kind of safe investment in the stock market or even to have a decent understanding of the current complex derivative based economic environment.
I’ve been trying to find out what happens to a mortgage loan made in India. Does the bank own it? Or do they sell it as MBS? If they sell it as MBS who buys it? What are the risks for ICICI, HSBC and the other large mortgage lenders in India, if there is a 20% to 50% crash in real estate prices in India? Does India also have a fractional reserve banking system? With the foreclosure process in India not that well defined who will end up holding the bag?
All these questions arise if we assume a deflating housing bubble. I know many readers still feel that there is no housing bubble in India. Let us keep that aside for the time being and let us assume hypothetically that there is a bubble in India and it will deflate 20-50% and and try to answer the following
What does ICICI/HSBC do with a mortgage loan they issued?
Are there any organizations equivalent to Countrywide/ New Century whose main role is issuing mortgage loans?
Are mortgage loans in India securitized and sold?
If yes, to the above question, who are the buyers of these securities?
What is the foreclosure process in India? How simple and efficient is it?
What happens when someone defaults on a home loan in India?
Open for Comments >>
Discussion Forum response :
Background:
first of all, indian mortgage market is a tiny fraction of US-counter part. Our total loan-advances (all loans..not just mortgage) is around <$0.5 triilion is 2.3% of US Advances. That kind of massive asset-requirements drove the US banking system to securitization in mid 90’s where these recievables were being bundled up and offered as bonds to investors, with initial sole purpose of freeing up capital to do more business .
The problem lies with investors who seem to have miscalculated the risk being taken for these returns. Good amount of CMBS (commercial mortgage) is still being floated into market in this quarter also, with relatively no issues as it’s usvally taken by hedge-funds with good risk-modeling in terms of pre-payment namely extraction and contraction risks. When overseas investors and banks got into this market as buyers , ignorant of underlying risks and attracted by higher yields..things got over-heated. Let’s take ICICI (10% share in total loan advances in india) as our candidate for analysis. (Sources: 178 page Annual report of ICICI for yr2007 is the sole source that’s been analyzed to provide any summary info below for that bank) How do we issue/support loans: Unlike western counterparts, our banks mostly fund thier lending with thier deposits and little bit of borrowing.
ICICI’s $50 billion loan advances (real estate loans constitute $20 billion) and $20 billion is mostly funded by a) $56 billion deposits and b) $12 billion borrowing. CDO market is relatively new even in US (last 2-3 yrs). But, MBS is being used for a long time to securitize mortgage receivables. Securitization is a sophisticated model driven process of building multi-tranche bonds upon the underlying passthrough securities with built-in derivatives to account for any internal credit enhancements of these offerings to get good rating from SP and moodys and these tranches offer different risk-return profiles that suit investors with different floating-rate obligations across various time-horizons.
In india, It was being slowly mainstreamed by these private banks (ICICI, HDFC) trying to grow faster by originating these loans and trying to offload them to release the capital for further lending. Securitization: Again, ICICI securitized around 1.5 mil loans worth $2.8 billion.
It had an obligation in terms of guarantees for around $400 million of that, which explains the relative low-offtake of these with the buyers and lack of depth in our financial mkts to support this ecosystem. But, again it’s a good start. Offloading NPA/ foreclosures: Over the last 3-4 yrs, a new recovery/liquidation process with in indian system is to sell these distressed loans to a third party aggregator. One of them named ARIC, bought around $300 million distressed receivables from banks.
I’ve been waiting for some official confirmation of the bursting of the real estate bubble in India. Although bursting of the bubble (or even the existence of it) is still just hearsay, it is widely accepted that Indian real estate market is stuttering (to put it the best way I can). This article in the New York Times puts the depreciation in New Delhi and surrounding areas at 20%. I thought this is a good time to do a followup on my first post on Indian real estate.
In the midst of the bursting housing bubble in US, UK, Spain, Ireland ..etc., sub-prime has become a common word (it also was nominated as the word of the year). There are several articles, blog entries and web sites detailing the life cycle of a mortgage loan in these countries, especially in the US, talking about how these loans are converted to Mortgage Backed Securities (MBS) and packaged as Credit Default Obligations (CDO) and sold to hedge funds, central banks, private investors and investment banks. Although it is not exactly known who owns how much of the toxic mortgage loans, at least we know what happens to these loans in a general sense. This is very important in the current scenario for any kind of safe investment in the stock market or even to have a decent understanding of the current complex derivative based economic environment.
I’ve been trying to find out what happens to a mortgage loan made in India. Does the bank own it? Or do they sell it as MBS? If they sell it as MBS who buys it? What are the risks for ICICI, HSBC and the other large mortgage lenders in India, if there is a 20% to 50% crash in real estate prices in India? Does India also have a fractional reserve banking system? With the foreclosure process in India not that well defined who will end up holding the bag?
All these questions arise if we assume a deflating housing bubble. I know many readers still feel that there is no housing bubble in India. Let us keep that aside for the time being and let us assume hypothetically that there is a bubble in India and it will deflate 20-50% and and try to answer the following
What does ICICI/HSBC do with a mortgage loan they issued?
Are there any organizations equivalent to Countrywide/ New Century whose main role is issuing mortgage loans?
Are mortgage loans in India securitized and sold?
If yes, to the above question, who are the buyers of these securities?
What is the foreclosure process in India? How simple and efficient is it?
What happens when someone defaults on a home loan in India?
Open for Comments >>
Discussion Forum response :
Background:
first of all, indian mortgage market is a tiny fraction of US-counter part. Our total loan-advances (all loans..not just mortgage) is around <$0.5 triilion is 2.3% of US Advances. That kind of massive asset-requirements drove the US banking system to securitization in mid 90’s where these recievables were being bundled up and offered as bonds to investors, with initial sole purpose of freeing up capital to do more business .
The problem lies with investors who seem to have miscalculated the risk being taken for these returns. Good amount of CMBS (commercial mortgage) is still being floated into market in this quarter also, with relatively no issues as it’s usvally taken by hedge-funds with good risk-modeling in terms of pre-payment namely extraction and contraction risks. When overseas investors and banks got into this market as buyers , ignorant of underlying risks and attracted by higher yields..things got over-heated. Let’s take ICICI (10% share in total loan advances in india) as our candidate for analysis. (Sources: 178 page Annual report of ICICI for yr2007 is the sole source that’s been analyzed to provide any summary info below for that bank) How do we issue/support loans: Unlike western counterparts, our banks mostly fund thier lending with thier deposits and little bit of borrowing.
ICICI’s $50 billion loan advances (real estate loans constitute $20 billion) and $20 billion is mostly funded by a) $56 billion deposits and b) $12 billion borrowing. CDO market is relatively new even in US (last 2-3 yrs). But, MBS is being used for a long time to securitize mortgage receivables. Securitization is a sophisticated model driven process of building multi-tranche bonds upon the underlying passthrough securities with built-in derivatives to account for any internal credit enhancements of these offerings to get good rating from SP and moodys and these tranches offer different risk-return profiles that suit investors with different floating-rate obligations across various time-horizons.
In india, It was being slowly mainstreamed by these private banks (ICICI, HDFC) trying to grow faster by originating these loans and trying to offload them to release the capital for further lending. Securitization: Again, ICICI securitized around 1.5 mil loans worth $2.8 billion.
It had an obligation in terms of guarantees for around $400 million of that, which explains the relative low-offtake of these with the buyers and lack of depth in our financial mkts to support this ecosystem. But, again it’s a good start. Offloading NPA/ foreclosures: Over the last 3-4 yrs, a new recovery/liquidation process with in indian system is to sell these distressed loans to a third party aggregator. One of them named ARIC, bought around $300 million distressed receivables from banks.
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