June 28, 2011, Ulaanbaatar, Mongolia

(Former GHLC: the Government Housing Loan Corporation)

Workshop on Housing Finance, APUHF

Technical Session III: Experience with Secondary Mortgage Market Operators Session to deliberate on developments and experience of the secondary mortgage markets, linkages & issues and scaling up

Development of Secondary Mortgage Market in Japan

Masahiro Kobayashi,Chief Economist, Global Market

Incorporated Administrative Agency Japan Housing Finance Agency (JHF)

2

Reform of Japanese Mortgage Market

GHLC

Borrowers

Fixed Rate Mortgage

Treasury

Loan with Prepayment Penalty

GOJSubsidies

BanksARM

DepositorsDeposit

JHF

Borrowers

Investors

BanksARM

DepositorsDeposit

Banks and Mortgage Banks

MBS

F35

20thCentury

21stCentury Sell Loans to JHF35 year Fixed Rate Mortgage

Adjustable Rate Mortgage

Government of Japan

GHLC: Government Housing Loan CorporationJHF: Japan Housing Finance Agency

Mortgage Backed Security

3

　 Stakeholder Challenges Solutions

BorrowerUncertainty about the holder of note

•Clarified that loan will not be negotiated beyond JHF

OriginatorBanks were not willing to originate F35.　

•Encouraged the establishment of mortgage banks (New distribution channel)•Gave incentives for originators by liberalization of servicing fee•Standardization of documentation and data transmission system•Worked with legal firms and accounting firms regarding extinguishment of loan

InvestorInvestors were not familiarized with MBS.　

•Achieved investor confidence by enhancement of transparency through disclosure in a satisfactory manner•Credit enhancement via over-collateralization and achieved AAA rating•Conduct JHF RMBS non-deal road shows to both domestic and overseas investors

What were the challenges to develop secondary mortgage market?

4

3

7

15

21

2426 26

0

5

10

15

20

25

30

2004 2005 2006 2007 2008 2009 2010

Number of Accredited Mortgage Banks

(Source) JHF

These 26 mortgage banks accounts for 50-60 ％ of total F35 origination while remaining 40-50% are originated by 300+ depository institutions.

5

Number of loan applications for F35

(Source) JHF

805

17,173

59,573 59,40952,995

41,772

81,320

174,087

0

50,000

100,000

150,000

200,000

FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010

With the expansion of distribution channel (mortgage banks), mortgage origination for F35 increased gradually. But there was some policy support needed to go further.

6

(Source) JHF

Market Share of GHLC and JHF (Mortgage at Origination)

Mortgage origination for F35 has increased gradually, but its market share is still below the level of Direct Origination of GHLC in 1990’s.

0%

10%

20%

30%

40%

50%

1990 1995 2000 2005 2010(YTD)

F35

Direct OriginationAverage of 1990's: 36%

GHLC JHF

7

Reduction of CO2 emission through enhancement of energy efficiency of housing structure

Grade ４

Grade ３

Grade ２

Grade １

Corresponding energy efficiency grade under House Quality Disclosure System

（ 10 years interest discount）

Reduce emission of CO2 by 800kg（ around

23%）

※Criteria for insulator is based on the case around Sapporo

High-grade glass wool 230㎜

High-gradeGlass wool135㎜

Paired glass

High-grade glass wool 135㎜

High-grade glass wool 110㎜

High-gradeGlass wool85㎜

High-grade glass wool 85㎜

1980 standard　（Old

energy efficiency criteria）

1999 standard （ Next

generation energy efficiency criteria）

【 F35】 S

【 F35】

【 F35】 S - incentive mechanism to supply energy efficient houses -

Blinds etc

8

35 years

10 years

2.50%

1.50%

subsidies

Image of incentives for F35 S

F 35 Fixed Rate Mortgage funded by MBSF 35 S Fixed Rate Mortgage funded by MBS + Enhancement of Energy Efficiency via subsidy

Note) Figures listed above are indicative ones. Interest rate on F 35 varies depending on market conditions as well as the servicing fee which each lender charges individually.

Assumption:Original Loan Balance 30 million yenInterest Rate 2.50%1% discount for F 35 S Initial 10 yearsTerm 35 YearsPrepayment 0

Total amount of repayment over 35 yearsF 35 45,044,539F 35 S 41,933,480Difference 3,111,059

9

Consumer Protection:Fixed Rate Mortgage

Capital Markets Development:Standardized MBS

Reduction of CO2 Emission:Incentive to enhance house quality

F35 S funded by JHF MBS

Policy orientation and approach – rationale for scaling up

Challenge: Sustainability of Subsidy under Fiscal Constraints

10

Before an Beneficiary Certificate Trigger EventBefore an Beneficiary Certificate Trigger Event

Investors

Make timely payment of both principal and interest based on JHF’s responsibility

Trust banks

Trust asset

JHF MBS

JHF

Loans to be securitized Proceeds from

the trust loan pool are passed along as the repayment of the MBS principal.

JHF MBS – some similarity with Covered Bond

After an Beneficiary Certificate Trigger EventAfter an Beneficiary Certificate Trigger Event

Dividend based on beneficiary right

JHF

Occurrence of event causing a beneficiary interest

JHF MBS

Beneficiary(investors)

Beneficiary right

Trust bank

Trust asset

Note :Beneficiary certificate trigger events1. The obligor of the JHF MBS becomes a joint stock corporation or a legal entity to

which file for corporate reorganization or other similar bankruptcy proceedings can be applied

2. The failure by JHF to fulfill a payment obligation with respect to the MBS is not cured within 7 days

JHF MBS is an asset-backed Zaito bondBefore any beneficiary certificate trigger event , interest and principal are paid by JHF, as if MBS is a corporate bonds

The credit of JHF MBS is supported by both the credit of JHF and the credit of housing loan pool Due to Japanese government's policy to maintain flexibility against the borrowers, JHF will recognize the housing loans

on the balance sheet even after the MBS is issued After an beneficiary certificate trigger event , JHF MBS, a Zaito bond, will be replaced with the beneficiary right Risk weight of JHF MBS, as a Zaito bond is 10% under standardized approach By selecting a corporate bond format, JHF contributes to the development of secondary markets

These materials have been prepared for the sole purpose of providing information to our investors and not as an offer, sale or inducement to buy or sell bonds.

We urge investors when they are making investment decisions regarding bonds to carefully confirm details of the conditions, content, and structure of the final products in the latest product prospectus prepared for the issuance of the relevant bonds as well as any other most recent available information and accordingly assume personal responsibility for their decisions.

(Former the Government Housing Loan Corporation)