ENG-2004 — Page 134

104 | Financial and Monetary Affairs

the place of listing for the PAIF in view of the liquidity of financial markets and robust market infrastructure framework.

The long-term development of the bond market is promising. There is abundant liquidity to fuel the growth of Hong Kong's bond market. Hong Kong's free and open financial markets, with free flow of capital, help create a large international investor base. Other positive factors contributing to higher demand for bond investments include the vast amount of Hong Kong dollar time deposits, the growing retirement funds in Hong Kong for the aging population, and capital from the Mainland as a result of gradual liberalisation of the capital account.

Development of a Secondary Mortgage Market

A well-developed secondary mortgage market plays a useful role in channelling long-term funds, such as insurance and pension funds, to meet the rising demand for long-term home financing. The Hong Kong Mortgage Corporation (HKMC), wholly owned by the Government through the Exchange Fund, was incorporated in March. 1997 with a mission to develop this market.

The HKMC commenced business in October 1997 with its Mortgage Purchase Programme, which has developed in two phases. The first phase involves the purchase of mortgage loans for its own portfolio and the funding of the purchases largely through the issuance of unsecured debt securities. Under the second phase, the HKMC securitises the mortgages into Mortgage Backed Securities (MBS) and offers them for sale to investors. Through effective marketing and the introduction of innovative products, the outstanding principal balance of the HKMC's retained mortgage portfolio reached $35 billion as at end-2004.

In March 1999, the HKMC introduced the Mortgage Insurance Programme (MIP), enabling banks to lend home mortgage loans above the 70 per cent loan-to-value ceiling set by the HKMA up to an 85 per cent loan-to-value on completed properties without incurring additional risk. In August 2000, the MIP was expanded to cover mortgage loans with a loan-to-value ratio from 85 per cent to 90 per cent. In July 2001, the MIP was further expanded to cover equitable mortgage loans on residential properties under construction with loan-to-value ratio of up to 90 per cent. The product range of the MIP was made even more comprehensive with the introduction in July 2004 of the 95 per cent loan-to-value ratio product for both completed residential properties and properties under construction. To supplement the efforts of the Urban Renewal Authority in the rehabilitation of old properties and to assist homebuyers interested in purchasing such properties, the HKMC increased the limit on the combined age of property and loan tenor under the MIP to 60 years (with the market norm being 50 years).

Since its inception, the MIP has steadily gained acceptance by homebuyers and increased market penetration through product diversification and improving servicing standards. The total number of applications received since launch has exceeded 49 000, with a total value of $91 billion. The penetration ratio of the programme reached 16 per cent for 2004. About 81 per cent of MIP loans are in respect of