ENG-2000 — Page 127

FINANCIAL AND MONETARY AFFAIRS

Since its commencement of business in October 1997, the HKMC has proceeded smoothly with the first phase of its business plan. On the mortgage purchase side, the outstanding principal balance of the HKMC's mortgage portfolio totalled $11.1 billion as of end-2000, 94.7 per cent of which consisted of floating rate mortgages and 5.3 per cent of fixed rate mortgages. The HKMC has established a set of prudent purchasing criteria, with the aim of ensuring that its portfolio remains of good asset quality. At December 31, there were 29 loans with delinquency over 90 days, or just 0.42 per cent of the Outstanding Principal balance. This compares favourably to local and international industry averages. The weighted average current loan-to-value ratio was 84.4 per cent and the weighted average debt-to-income ratio was only 37.6 per cent, well below the 50 per cent limit set by the HKMA.

Debt issuance is the mainstay of the HKMC's funding sources. Through active debt issuing activities, the HKMC is able to achieve the objective of promoting the development of the Hong Kong dollar debt capital market. In 2000, the HKMC successfully issued 11 debt issues for a total amount of $6.6 billion through its $20 billion Note Issuance Programme (NIP) and $20 billion Debt Issuance Programme (DIP), making it one of the most active debt issuers in Hong Kong. At the end of 2000, the outstanding balance of HKMC debts stood at $11.6 billion with remaining maturities ranging from one month to nine years. The HKMC debt securities were well received by financial institutions, institutional and retail investors. The oversubscription rate of the debt securities issued under the NIP, in which the HKMA acts as the arranger, custodian, agent and operator, averaged 8.2 times. To help develop the retail debt market, the HKMC listed the NIP on the Stock Exchange of Hong Kong in October 1999 and launched its debut retail tranche notes under the NIP at the same time. Following the successful issuance of the inaugural NIP retail tranche notes, the HKMC continued to issue NIP notes to retail investors in 2000 to meet the increasing demand.

On December 3, 1998, the Board of Directors of the HKMC gave its approval in principle for the HKMC to partner with mortgage insurers to launch a mortgage insurance programme that will allow home buyers secure mortgage loans up to 85 per cent loan-to-value ratio. Under the programme, the HKMC provides an insurance cover at an insurance premium to the lending bank for an amount up to 15 per cent of the value of the property. The HKMC hedges the exposure of such cover by taking out insurance with mortgage reinsurers. The Mortgage Insurance Programme (MIP) has been well received by the market since its launch on March 31, 1999. On August 18, 2000, the Board of the HKMC approved an expansion of the MIP to cover mortgage loans with a loan-to-value ratio up to 90 per cent. This has further enhanced the attraction of the MIP to home-buyers. By the end of 2000, 7367 applications with an aggregate loan value of $14.8 billion had been received from 37 banks. Secondary market transactions accounted for over 87 per cent of the applications received. This indicated that the programme had served to improve the liquidity of the secondary property market.

With the launch of $1.6 billion MBS in the fourth quarter of 1999, the HKMC entered the second phase of its business plan. This back-to-back structure allows banks to effectively 're-package' their mortgage assets into a more liquid asset and maintain the majority of the cash flow if they hold the MBS in their own investment portfolio. This win-win structure is appealing to banks and investors. The high quality of Hong Kong residential mortgages, coupled with the HKMC guarantee for

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