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ADB recommends mortgage insurance for Thailand
Publication Date : 21-05-2012
A recent Asia Development Bank (ADB) report said that Mortgage Insurance will be a useful, but not an essential, feature of the Thai mortgage market.
Alan Taylor, the ADB consultant who prepared the report as part of this country's Capital Market Development Phase III, said that mortgage insurance will improve standards of mortgage origination and arrears management and provide banks with an additional tool for managing their home loan exposures.
"Both these points will help reduce the systemic risk from home loans," he said.
Moreover as the Thai mortgage expands (at the end of 2011 loans outstanding were more than 2 trillion baht or US$63 billion), he said mortgage insurance will become even more important.
"It will introduce a greater element of risk-based pricing to the Thai market and will encourage the standardisation of home-loan origination and documentation processes, which will reduce risk."
The introduction of mortgage insurance into Thailand, Taylor said would also benefit Thailand as its current capital markets develop.
"It will support mortgage securitisation and sales as and when these markets develop in Thailand."
Taylor said that he did not believe that the main justification for introducing mortgage insurance into Thailand should be to help home-owners.
"The main reason for mortgage insurance should be risk reduction and capital market development."
Mortgage insurance, he said is an insurance policy that protects the lender, in part or in whole, against borrower non-payment or default on a residential property loan."
An Englishman based in Hong Kong, Taylor said mortgage insurance is also known as "mortgage default insurance" in the US and "mortgage indemnity guarantee" in the UK.
Mortgage insurance, he added should not be viewed as a magic solution for the housing market. "Like mortgage securitisation, it is a useful tool, but should not be over-relied on."
The best risk mitigation tool for any financial institution, he said is always good mortgage-lender loan-origination and loan management processes, backed by efficient and effective regulation and supervision.
"With this in mind, we suggest an initial target of insuring perhaps 20 per cent of total mortgage loans over the first five to ten years of operations."
He feared creating systemic issues through single-entity concentration risks even though the new mortgage insurance entity may be well-capitalised and managed.
"That level should not be exceeded unless the mortgage insurer is able to lay off excess risk thorough reinsurance or other arrangements."
The study suggests that an initial mortgage-insurance product for Thailand should be used to test the market.
"We suggest that the product should be voluntary, not mandatory and the premium should be paid by the lender, not the borrower."
In addition, the report said that the insurance may be agreed upon after the loan has been originated and that an existing state-owned entity could be the sole insurer.
The initial product, Taylor said should be available for home loans with loan-to-value ratios (LTVs) of between 70 and 75 per cent. "A maximum LTV [perhaps 90 or 95 per cent] should also be set."
To ensure that the lenders retain an incentive for risk control and arrears management, the mortgage insurance should only cover a portion of each loan's loss. "Cover should be on a first loss basis."
The mortgage insurance should also be offered on an "all loans or none" voluntary basis, where all participating financial institutions must insure all loans that meet certain agreed parameters.
"This will help avoid adverse selection risk."
Taylor's ADB study is not the only mortgage insurance study for Thailand undertaken by international consultants during the past decade.
In 2002, the World Bank undertook a feasibility study that concluded Thailand could benefit from mortgage insurance and suggested various options. The study highlighted the importance of foreclosure process reform to reduce the time and cost of collateral recovery in the event of default.
In 2005, the International Finance Corporation and Canada Mortgage Housing Corporation study recommended that mortgage insurance should be introduced and specific proposals were made for the institutional arrangements.
The study recommended that the Thai Mortgage Insurance Company ensure loans with loan-to-value ratios of between 70 and 90 per cent. The company was to be regulated by the Office of Insurance Commissioner and the Bank of Thailand.