Mortgage-backed security (MBS)
Banks, as the most important fund flow brokers, collect the surplus funds of natural and legal entities and provide the same to economic activists. This in turn results in financing the economic projects followed by economic growth and development. Sometimes, even the banks face financial problems. As one of the modern financing procedures, “Conversion of bank assets to securities” helps them in this regard.
Mortgage-backed securities [MBS] is a means of debt indicating the rights of the holder of securities over the receivable funds of the publisher
1- Depositing, 2- Identifying the client and granting the loan, 3- Payment of installments, 4- Deposit interest, 5- Publication of mortgage securities, 6- Collection of funds of investors, 7- Purchase of debt, 8- Payment of loan installments, 9- Payment of loan installments
According to the aforesaid diagram, when a large and appropriate collection of assets is made, it is analyzed by the bank or other finance institutions as a general basket. Aiming at financing the assets, the said collection is sold or transferred to a third person that is usually an agent company (Special-purpose entity - SPV). When an agent organization takes possession of the assets, it will release/publish securities for financing the cost of purchase of loans of banks. The said securities are organized in such a manner that the principal amount and interest thereof are financed through cash flows arising from the main collection of loans.
Conversion of mortgage loans to securities create a new investment market and results in creation of assets of high liquidity and effective and appropriate pricing for mortgages and this leads to operation of agents in mortgage market in a completely specialized way. All of these progresses will decrease rate of mortgage for those who borrow and increase number of individuals who will own housing and will omit conflicts among reasoning for development of investment in the houses for which bank loan is granted. Moreover, the advantage of conversion to mortgage securities for banks and finance institutes are detailed hereunder:
- Decrease of financing cost for banks and credit and finance institutions;
- Risk management arising from inconformity of assets and debts (especially for the banks and credit and finance institutions);
- Improvement of ratio of capital adequacy adequacy of banks and credit and finance institutions;
- Removing the assets from balance sheet and improvement of combination of assets;
- Conversion of assets (loan facilities) to securities results in maturity of the future incomes and liquidity will be increased.
In Iran, the only source of financing for housing has been financing through banks depositing systems to this date. Although upon ratification of Law on Securities Market in 2005, suitable grounds were established for establishment of new finance markets, means and organizations, manifestation of this ground for realization of goal of housing sector has been prolonged to this date. On the other hand, wondering liquidity of the public and no variety in financial means raises the governing economic problems. National economic growth in general and capital market development in particular require receiving these wondering funds in the nation. This will be realized through variety of financial means. For this purpose, Bank Maskan is willing to release securities as support of mortgage loan facilities of Bank Maskan at capital market launches this path in the nation which is full of ups and downs.
Model of Bank Maskan Mortgage Securities:
For modeling the cash flows of Bank Maskan for release of mortgage securities, those loan facilities of Bank Maskan that can be separated according to “Instruction for Release of Mortgage Securities”, enacted in Dec. 2015 by Securities and Exchange Organization as base for release of securities supporting mortgage loan installments in such a manner that from among 750,000 files of loan facilities of customers who enjoy sufficient fund to meet their financial obligations, 49485 files have been chosen. Sale loan facilities by installments on monthly basis is given as 13-15% (rate) of which maturity date is of publication date of securities within 105 to 119 months. Total principal amount and peripheral amounts of loan facilities is the base for release of securities for 3600 Billion Rials. Supporting the said mortgage loan facilities, mortgage securities amounting to 3000 Billion Rials are released with a nominal value of 18.5% of which duration is given as 2 years.
Cash inflows and outflows of the agent organization account within two years of duration of securities have been put into a model as detailed hereunder according to descriptions stipulated as follows. These cash flows are invested in a bank account held by an SPV and management of these cash flows is made through payment to investment.
Purchase of mortgage securities
Special-purpose Entity (SPV)
Money for purchase of loan facilities
Refunding the securities
- At time of release of securities, purchasers of securities pay a sum of 3000 Billion Rials to the agent organization and purchase all securities and the agent organization purchases the future loan installments amounting to 3000 Billion Rials from the initiating party.
- The initiating party transfers the mortgage loan facilities to the agent’s account on daily basis and the agent organization before the owner of securities undertake to transfer part of account balance to investors every three months as interest of securities and pay the principal securities to them on maturity date.
- During the two-year validity period of securities, cash funds available in the account of agent, are deposited with the deposit bank account and added to the agent’s account accordingly.
During the entire calculations made, the entire funds arising from receipt of installments (principal amount and peripheral amounts of loan facilities), interest earned through bank depositing of funds and the entire interests arising from loan facilities purchased shall go to the owners of securities and on expiration date of the securities, balance of agent’s account will become zero for transfer of funds to owners of securities.
Characteristics of Mortgage Securities of Bank Maskan
- Amount of securities: 3000 Billion Rials;
- Validity period of securities: Two years;
- Nominal value of securities: 18.5%;
- Terms of the corresponding payments to mortgage securities: Every three months as of date of release of securities;
- Secondary transactions of mortgage securities: Farabourse Iran;
- Date of release of securities: July 3, 2016;
- Duration for offer: Three days;
- Body of securities;
Published by Aban Dovom Financial Agent;
Initiating party: Bank Maskan;
Obligor: Bank Maskan;
Collection Agent: Bank Maskan;
Subscription obligor: Maskan Investment Bank
Market maker: Maskan Investment Bank
Trustee: Auditing Organization;
Sales Agent: Brokerage of Bank Maskan;
Payment Agent: Central Securities Depository of Iran (CSDI)
Advisor for design of the procedure for financing and supply of securities: Maskan Investment Bank