INTERVIEW:KHFC Aims To Issue Up To KRW1T MBS Overseas In 2H

SEOUL (Dow Jones)--SouthKorea's state-run Korea Housing Finance Corp. is looking to raise up to KRW1 trillion ($758 million) in foreign-currency denominated real-estate mortgage-backed securities overseas in the second half of the year, Chief Executive Lim Joo-jae said.

"There are some indications that the financial market is set to improve in the second half. (At the moment) we are comparing the costs of issuing securities overseas and domestically so that when global market conditions turn favorable,we will be ready to issue," Lim told Dow Jones Newswires in a recent interview.

Because the plan is in its early stages, KHFC has yet to decide on the tenure of the securities, what currency they will be denominated in, and where it plans to issue them.

"We are getting various ideas from global investment banks (on tenure and currency)," Lim said.

In March, KHFC selected Standard Chartered PLC (STAN.LN) and BNP Paribas SA (4507.FR) to advise them on how to issue these securities, Lim said.

Launched in March 2004, KHFC is a government body that promotes long-term house mortgage financing through long-term fixed-rate loans, and has also issued won-denominted mortage-backed securities over the years.

Lim said the KRW1 trillion in securities to be issued - its first outside South Korea - will be backed by real-estate assets on KHFC's books. Recent government bonds already show some receptiveness to Korean paper. Earlier this week, the South Korean government priced a $1.5 billion 2014 bond at 99.512 to pay a yield of 5.864%, equivalent to 400 basis points over the five-year U.S. Treasury yield. It also priced a $1.5 billion 2019 bond at 99.052 to pay a yield of 7.260%, equivalent.

Despite the ongoing credit crunch turmoil that has soured the reputation of mortgage-backed securities, Lim said that he was confident KHFC's debt issuance overseas will be well received.

Any losses will also be backed by the government which is ultimately responsible for KHFC, he added.

"Delinquency ratios in Korea are very low and house prices aren't likely to fall below our collateral set price due to strict risk controls and requirements we implement from the start," said Lim.

An individual that borrows from KHFC is limited to payments of, at most, 33% of their household income on annual basis.

Still, KHFC's delinquency rates are rising, though not as much as that of the commercial banks, which are more focused on small-to-medium sized companies as customers.

As of the end of January, the ratio of delinquent loans to total loans was 0.82%, higher than the 0.66% average at South Korean banks. At the end of 2008, KHFC's mortgage-loan delinquency ratio was 0.72% and Korean banks' was 0.47%. The average loan-to-house value ratio of KHFC's outstanding loans is 47%, which means KHFC only loses money during a foreclosure in the unlikely event that house prices fall below this amount.

KHFC To Securitize KRW6T Of Banks' House-Backed Loans In 2009

Since it was launched five years ago, KHFC has issued a total of KRW14 trillion of MBS in the domestic market.

"And in about three years, the MBS market will grow to about KRW40 trillion to KRW50 trillion in Korea," said Lim.

KHFC is securitizing residential mortgageloans extended by domestic banks as part of its efforts to grow the MBS market. It plans to securitize KRW6 trillion of home mortgage loans by domestic banks this year, providing the banks with the funds to increase their residential loans.

"We have so far securitized Woori Bank's loans and will securitize up to KRW2 trillion for Standard Chartered First Bank this month. We are also in detailed talks with Shinhan Bank," said Lim.

KHFC securitized KRW367 billion of Woori Bank'shousing mortgage-backed loans last month.

"By securitizing their loans through KHFC, banks will be able to extend loans to their clients without worrying about having to set aside more loan-loss provisions," said Lim.

Because Korea has virtually no market for trading won-denominated MBS issues, banks can hold the loans they securitize with KHFC as safe assets.

"There will also be growing demand for MBS going forward because the Bank of Korea changed the rules in December to allow KHFC-issued MBS to be used as collateral for Repo deals," said Lim. Of the KRW239.6 trillion in residential mortgage loans at the end of 2008 in South Korea, KRW10.7 trillion, or 4.45%, was from the KHFC.

"We hope to raise our market share to at least 20% to promote long-term fixed-rate house mortgage loan, which will help bring stability to housing prices," said Lim.

KHFC also provides so-called reverse mortgages to senior citizens of 65 years and older who put up their homes as collateral and receive monthly pensions from the institution in exchange.

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