First Mortgage-Backed Securitization in Thailand

On 30 August 2002 the National Housing Authority of Thailand (the "NHA") agreed to sell assets worth 700 million Baht (US$ 17 million) to the Secondary Mortgage Corporation ("SMC") in order to securitize those assets.

The SMC was established in 1997 by the Ministry of Finance to develop securitzation in the housing industry. The SMC is similar to Fannie Mae in the United States whereby it purchases assets for cash from primary mortgage providers including the National Housing Authority of Thailand, the Government Housing Bank, commercial banks, finance companies, credit foncier companies and saving cooperatives. The SMC can package the loans purchased from different primary originators and then issue notes in different tranches in the form of collateralized mortgage obligations ("CMOs").

According to several public sources, the SMC is expecting to issue Notes in the amount of 1.2 billion for a term of 10 to 15 years. The SMC will earn approximately one-half percentage point spread between the returns generated by the assets (i.e. payments made on the home mortgages) which are passed on to the owners of the CMOs and its funding costs. The SMC is now awaiting approval from the Securities and Exchange Commission in order to implement a trustee arrangement to control and manage the securitized assets.

From the perspective of NHA, it will be able to raise funds at an average cost of 5.3% from the sale of its assets to settle its existing debt, which is far below the 9% paid by the NHA on its existing debt financing. As further security to the SMC in connection with the proposed securitization, NHA will guarantee payment on the assets transferred in the event of default, and has the option to transfer other assets in substitution for those which are in default. Because of this recourse to SMC, it is anticipated that the actual securitization may not include any credit wrap or liquidity. Thus any credit risk will also take into account the credit standing of NHA.

Generally CMOs are attractive to investors because they offer high yields and yet are high quality from a credit point of view. In many instances, a securitization financial structure can obtain a "triple-A rating" from the rating agencies. However, investors must also note that CMOs have an intrinsic downside risk - the obligation can be repaid in full prior to maturity if the underlying mortgage loans are prepaid in advance. The mortgagors always have the right to repay their loans at any time.

In issuing securities, the SMC must comply with the Decree on the Secondary Mortgage Corporation of 1997, the Securities and Exchange Act of 1992, and the Decree on the Special Purpose Vehicle for Securitization of 1997.

Paniti Junhasavasdikul and Edward K Strauss, FIRST BANGKOK LAW & PRACTICE LTD.