Mortgage Guarantee is a credit default guarantee taken by mortgage lenders against borrower’s payment defaults. The mortgage guarantee becomes payable when a specified loan becomes non-performing. The intention of taking mortgage guarantee is to mitigate the risk taken by the lenders. This helps the lenders to explore alternate lending opportunities and loan products while transferring their home loan portfolio risk to Mortgage Guarantee Company (MGC).
Mortgage Guarantee is actively used by lenders in as a tool to help promote and advance home ownership. Considering the financial constraints of buying a house, MG product has been enabling lenders to provide higher loan amounts; thereby reducing the level of down payment required for purchasing a home.
Mortgage Guarantee is a credit guarantee for mortgage lenders and has provided a wide range of benefits to its acquirers like improved affordability for borrowers, risk sharing for lenders, improved standardization and overall improvement in hygiene. As India’s mortgage finance market expands, presence of mortgage guarantee will certainly be a boon for the industry.
Flow Product or ‘Loan by Loan’ guarantees are provided at the time of origination. These are useful when the lenders wish to expand their risk box for higher loan amount, geographical market expansion or segment extension. The MG fee is ordinarily borne by the home-buyer.
Bulk Product or ‘On-Book’ guarantee is the guarantee given to a group of loans that have already been originated. It is used when the lender wants to shield its existing book (full or part) against future credit losses. On-book guarantee transfers the credit risk from lender’s balance sheet to IMGC’s balance sheet along with benefits such as capital relief and cash flow support for non-performing loans. On-book guarantee on the existing book is also taken during securitization transactions wherein, a lender sells an existing portfolio. In the on-book guarantee, the MG fee is borne by the lender.