Introduction of Korea Housing Finance Corporation April 5

Introduction of Korea Housing Finance Corporation April 5, 2012 Korea Housing Finance Corporation

2 Contents Corporate Profile Korea Housing Finance Market 4 Line of Businesses Ø Ø Supply of Long-term FRMs (Bogeumjari Loan) Mortgage Securitization (MBS Issuance) Housing Finance Credit Guarantee Reverse Mortgage Guarantee (Joo. Taek. Yeon. Keum)

3 Corporate Profile Public Secondary Mortgage Market Enterprise Established on Mar. 1, 2004 Mission: To improve the welfare of the public and contribute to the development of the national economy by promoting the stable supply of long-term housing finance Capital Base & Government’s Credit Support Paid-in Capital: KRW 1, 077 billion (Dec. 31, 2011) Contributors of the Capital Ø Government(71%), BOK(29%) Government provides the strongest form of credit support Ø Losses, in excess of reserves, to be covered by government (HF Act)

4 Corporate Governance Housing Finance Steering Committee Ø Responsible for basic managerial and operational principles • HF President (Chairman of the Committee) • 2 Government officers • 3 Professionals Board of Directors Ø Responsible for decision-making on the execution of critical business Ø Specialized Sub-Committee: Strategy / Operation / Financial • President & 1 Vice President • 4 Executive Directors & 7 Outside Executive Directors Executive Administrative Council Ø Responsible for decision-making on general managing and operation • President • 1 Auditor • 1 Vice President & 4 Executive Directors

5 Characteristics of Korea Mortgage Loan Mortgage loans outstanding held by Financial Institutions & Government Agencies* Insurance Companies (4. 6%) KRW 409. 2 trillion (as of Sep. 2011) Mutual Finance Companies (12. 4%) * National Housing Fund(NHF) & Korea Housing Finance Corporation(HF) Community Credit Cooperatives (5. 0%) Savings Banks (0. 4%) Dominated by Banks covering 68% Banks (67. 6%) Mainly funded by Deposits and focusing on ARM origination Specialty Finance Companies (0. 3%) HF holds mortgage loans both in the trust as underlying assets for MBS and in its own book for mortgage portfolio. Providing funding source to financial institutions for FRM origination Korea Housing Finance Corp. (5. 0%) Source : FSS, HF National Housing Fund (4. 7%)

6 Characteristics of Korea Mortgage Loan (cont’d) Installment payment share has increased sharply. Bullet payment share still high. (40%, as of June. 2011) ARM share covering 79. 5%, susceptible to interest rate change Bank’s Mortgage Loans Outstanding ( Interest Rate type ) Bank’s Mortgage Loans Outstanding ( Payment type ) (June. 2011) (%) 100 14. 0 100% 23. 2 80 36. 3 52. 4 59. 2 60. 9 56. 7 58. 7 60. 0 60 40 1. 2 4. 0 2. 2 6. 1 1. 6 6. 4 1. 5 6. 0 6. 2 16. 8 4. 4 3. 8 80% 60% 86. 0 76. 8 40% 63. 7 47. 6 40. 8 39. 1 43. 3 41. 3 40. 0 20 0 '03. 12'04. 12'05. 12'06. 12'07. 12'08. 12'09. 12'10. 12 11. 6 94. 8 91. 7 92. 0 92. 5 89. 4 '06. 12 '07. 12 '08. 12 '09. 12 '10. 12 20% 0% Adjustable Rate Bullet Payment Source : FSS 79. 5 Installment Payment Source : FSS Hybrid Rate '11. 6 Fiaxed Rate

7 Banks, aggressive in Expanding Mortgage Business Banks’ mortgage business has shown steady increase reaching KRW 306 trillion(Dec. 2011). Started to expand mortgage business from 2001 Mortgages recognized as an asset class for increasing size without sacrificing credit quality during the period of persistent rise of house price Mortgages to household loans ratio reached 67. 2% (Dec. 2011) 6. 0 300 5. 0 275 250 4. 0 200 3. 0 175 2. 0 150 125 1. 0 100 0. 0 75 50 -1. 0 25 Monthly Net Increase(R) Source : BOK Outstanding Mortgage Balance(L) 10 4 7 7 10 11. 1 4 7 10 10. 1 4 7 10 09. 1 4 7 10 08. 1 4 7 10 07. 1 4 7 10 06. 1 4 7 10 05. 1 4 7 10 04. 1 4 7 10 03. 1 4 -2. 0 02 . 1 0 (KRW in trillions) 225

8 Major Regulatory Tools LTV Firstly Introduced in Sep. 2002 Now applicable to all mortgage origination Max. LTV ratio differently set by considering Ø Loan Maturity, House Price, House Type Ø Location (Speculation Zone) Ø Lender (Bank vs. Non-banking) DTI Introduced in 2004 as a requirement for allowing Max. 70% of LTV ratio to FRMs Ø Expanded its application to mortgages originated in Speculation Zone in 2006 Application of DTI, decided by Location & House Type Max. DTI ratio differently set by considering Ø House Price, Loan Amount, Property Size Ø Lender (Bank vs. Non-banking)

9 Major Line of Business Supply of Long-term Fixed-rate Mortgages Housing Finance Credit Guarantee Mortgage Securitization (MBS Issuance) Reverse Mortgage Guarantee

10 Supply of Long-term FRMs (Bogeumjari Loan) HF, Funding Source for Fixed-rate Mortgages Currently 20 lenders originate FRMs under HF Securitization Commitment Program 421, 709 low and moderate income families used Long-term FRMs. KRW 38 trillion (Mar. 2004 ~ Dec. 2011) Monthly FRM Origination by Participating Lenders (KRW in billions) 1, 400 2. 0%p 1, 200 1. 5%p 1, 000 1. 0%p 800 0. 5%p 600 0. 0%p 400 -0. 5%p - -1. 0%p '08. 1 2 3 4 5 6 7 8 9 10 11 12 '09. 1 2 3 4 5 6 7 8 9 10 11 12 '10. 1 2 3 4 5 6 7 8 9 10 11 12 '11. 1 2 3 4 5 6 7 8 9 10 11 12 200 Bogeumjari loan origination(L) Interest Rate Gap(Bogeumjari loan - Banks' Mortgage) (R)

11 HF Underwriting Criteria for Long-term FRMs Qualification Maturity § § Not registered in KFB’s Bad Financial Transaction Information DB CB grade is within 1 st to 9 th grade Number of houses owned by the borrower ≤ 1 Income proof required § From 10 years to 30 years (30 years unavailable for Prime Rate Bogeumjari) § 60~70%(Depending on DTI and House Type) Max. LTV Ratio Max. Loan Amount Max. DTI Ratio 1) - Apartment(70%), Other types(65%) § KRW 500 million § 40%(44% if income tax deduction requirement is satisfied) § Residential properties(Apartment, Multiplex, Detached Houses and etc) Collateral § Max. Appraisal Value = KRW 900 million § Not eligible under Legal Process Purpose § Purchase, Refinancing * 1) DTI = {(Monthly P&I Payment Amt + Estimated* Interest Payment Amt of Other Debts) / (Monthly Income)} * Estimated Interest Rate = Weighted Avg. Loan Interest Rate published by the Bank of Korea

12 Mortgage Securitization (MBS Issuance) HF MBS Issuance Structure FSC Registration of Securitization Plan & Transfer/Trust Sales of Mortgages Lenders (Seller/Servicer) Issuance of MBS Trust HF Trust (Trustee: HF) Guarantee Fee Trustee Fee MBS P&I Repayment Mortgages Monthly Repayment of P&I Borrowers Servicing Fee Investors Guarantee on MBS P&I payment

13 Mortgage Securitization (MBS Issuance) (cont'd) HF completed 93 MBS deals. Monthly HF MBS Issuance & Mortgage Portfolio Balance (Dec. 2011) Underlying assets are mostly FRMs originated by financial institutions. Mortgage-MBS Swap transactions backed by ARMs implemented Cross-border CB deal completed in Jul. 2010 (KRW in billions) 4000 2, 500 3500 2, 000 3000 2500 1, 500 2000 Total MBS Issuance Amount 1, 000 1500 $40. 5 billion (Dec. 2011) * SLBS $7. 2 billion not included 1000 500 Mortgage portfolio increased sharply since 4 Q 2008 0 '04. 6 10 '05. 2 6 10 '06. 2 6 10 '07. 2 6 10 '08. 2 6 10 '09. 2 6 10 '10. 2 6 10 '11. 2 6 10 500 $13. 4 billion (Dec. 2011) MBS (L) Source : HF Mortgage Portfolio (R) 0

14 Cross-border HF Covered Bond USD Proceeds(Closing) Swap Provider KRW Proceeds(Closing) KRW (P&I) Payments HF Cover Pool Test Administrator Cover Pool USD (P&I) Payments Bond Trustee Covered Bond USD Proceeds (Closing) CB Holders USD (P&I) Payments (Investors) Transaction Structure § HF issues Covered Bond. § CB holders have priority claims on the Mortgages in Cover Pool. § HF enters into Swap Arrangement with Swap Provider for hedging interest & FX risks. § Trustee acts as a paying agent of CB. § Cover Pool must pass Asset Coverage Test (ACT) and Portfolio Yield Test.

15 Housing Finance Credit Guarantee Service to obtain the Chonsei Loan from Bank Guarantee for Chonsei loans Guarantee service to obtain loan to pay installments for a newly built apartment Guarantee for installments Guarantee service if the house is not sufficient as collateral for buying house Guarantee for home purchase Guarantee service for loans from banks to purchase land build homes Construction loan guarantee Individual House Builders

16 Housing Finance Credit Guarantee (cont’d) HF provides guarantees through Housing Finance Credit Guarantee Fund for individual households or housing builders that are short of collaterals or have relatively lower credit. $64. 6 billion of guarantee provided since 2004. (As of Dec. 2011) Individual households : $59. 8 billion (used by 2. 7 million households) Housing builders : $4. 7 billion Housing Finance Credit Guarantee Structure Supply of Housing Finance Credit Guarantee (KRW in billions) Financial Institution ( Bank ) Borrower Provide Loan (Households, Housing Builders ) (단위: 억원) 20, 670 210, 000 180, 000 11, 490 150, 000 9, 655 120, 000 Trust the Contract of Guarantee HF 96. 9% 6, 760 90, 000 60, 000 30, 000 0 3, 852 4, 805 86. 7% 5, 089 4, 121 90. 2% 87. 0% 88. 0% 86. 6% 81. 3% 18. 7% 13. 3% 13. 0% 12. 0% '04 '05 '06 '07 For Housing Builders 13. 4% 9. 8% '08 '09 97. 0% 3. 0% '10 For Individuals Households 4. 0% '11

17 Housing Finance Credit Guarantee (cont’d) Guarantee on chonsei loans covering about 52% of total guarantee for individual households in 2011. Guarantee on construction covers about 83% of total guarantee for housing builders For Individual Households (2011) For Housing Builders (2011) (KRW in billions) Installment Loans for New House Purchase 5, 031 (45. 2%) House Rental (Chonsei Loans) 5, 767 (51. 8%) (KRW in billions) Funds for construction 289 (82. 6%) House purchase 340 (3. 1%) Project Financing(PF) 61 (17. 4%)

18 Reverse Mortgage Guarantee (Joo. Taek. Yoen. Keum) Joo. Taek. Yeon. Keum (JTYK) is a reverse mortgage guarantee program launched by HF in July, 2007. JTYK provides financial and housing security to seniors who own their residence but lack of stable income. 7, 286 seniors used JTYK totaling $10. 3 billion since July 2007. ( Dec. 2011) JTYK Guarantee Originations JTYK Structure (KRW in billions) Financial Institutions Reverse Mortgage (Monthly Payment) Borrowers (Seniors) 4, 500 4, 100 2, 936 4, 000 3, 500 3, 036 3, 000 2000 1, 747 1, 124 2, 000 1, 500 1, 000 603 515 1500 1000 863 695 500 HF 3000 2500 2, 016 2, 500 JTYK Guarantee 3500 0 0 '07 '08 guarantee amount (L) '09 '10 '11 number of seniors (R)

19 Reverse Mortgage Guarantee (Joo. Taek. Yoen. Keum) (cont’d) Eligibility and Payment Type Borrower’s Eligibility Payment Type Term Repayment Homeowner of 60 -year-old or older Appraised value under 0. 9 Bil. KRW Tenure : equal monthly payment Modified Tenure : equal monthly payment with credit line As long as borrowers live Until the property is sold Repayment obligation cannot exceed the property value