Mortgage Guarantee (MG), a relatively new product in India, is actively used by lenders in developed markets as a tool to manage credit risks on home loan contracts. A lender can take MG protection on a home loan or a pool of home loans from a Mortgage Guarantee Company (MGC) to protect itself against credit losses in the event of a default by the homebuyer. The lender has the ability to invoke the MG as soon as the contract becomes a Non Performing Asset (NPA) as per the RBI norms.
As India’s mortgage finance market expands, presence of Mortgage Guarantee will certainly be a boon for lenders.
Mortgage Guarantee allows lenders to mitigate credit risks, which could arise over the long cycle of a mortgage due to economic cycles or a decline in housing prices. Further, credit protection that is available to mortgage lenders through MG can also help lenders to enhance their product offering, and better tap into the opportunities present in new and emerging customer segments.
Mortgage Guarantee is recognized as a valid Credit Risk Mitigant for capital adequacy computation purposes. This means that from a lender and regulatory perspective, there is an element of risk transfer from the lenders ecosystem to the balance sheet of the MGC, which allows the lender to release capital. Better capital efficiency offered by Mortgage Guarantee can help lenders leverage the potential of India’s mortgage finance market. Based on ICRAs estimate, HFCs would need to mobilize external equity in the tune of Rs.180-280 billion (30-50% of their present Net worth) over the next five years to grow while maintaining the capitalization levels at current levels. Part of this capital could be tapped into in the form of Mortgage Guarantee.