RBI constitutes committee to review mortgage securitisation

The Reserve Bank of India has constituted a six-member committee on Development of Housing Finance Securitisation Market to review the existing state of mortgage securitisation in India and various issues constraining market development, and to develop the market further.

The terms of reference of the committee, headed by Harsh Vardhan, Senior Advisor, Bain & Co, will review the regulations relating to mortgage-backed securitisation (MBS) currently in place, and make specific recommendations on suitably aligning the same with international norms.

It will analyse the prevalent structures for MBS transactions, including legal, tax, valuation and accounting-related issues, and suggest necessary modifications to address the requirements of both originators as well as investors.

The committee will identify the critical steps required for standardisation of MBS practices such as conforming mortgages, mortgage documentation standards, digital registry for ease of due diligence, and verification by investors.

It will assess the role of various counterparties, including the servicers, trustees, and rating agencies in the securitisation process, and suggest measures required, if any, to address the key risks such as structural, fiduciary and servicer risks.

The committee will recommend specific measures for facilitating secondary market trading in mortgage securitisation instruments, such as broadening the investor base, and strengthening the market infrastructure. It will analyse the inter-linkages between securitisation and other related financial market segments/instruments and recommend necessary policy interventions to leverage these inter-linkages.

The RBI said the mortgage securitisation market in India is primarily dominated by direct assignments among a limited set of market participants on account of various structural factors impacting both the demand and the supply sides, as well as certain prudential, legal, tax and accounting issues.

“For a vibrant securitisation market to develop, it is imperative that the market moves to a broader issuance model with suitable structuring of the instruments for diverse investor classes.

“At the same time, as the international experience shows, it is critical to address the issues of misaligned incentives and agency problems resulting from information asymmetry problems between the originators and investors in the market, which can exacerbate systemic risk. Thus, a careful design of a robust and transparent securitisation framework assumes paramount significance,” the RBI said.