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Performance Watch: Japan Housing Finance Agency And Government Housing Loan Corp. Residential Mortgage-Secured Pass-Through Notes

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U.S. Housing And Mortgage Outlook 2022

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European CMBS Monitor Q4 2021

European Structured Finance Outlook 2022: Clearer Skies

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Performance Watch: Japan Housing Finance Agency And Government Housing Loan Corp. Residential Mortgage-Secured Pass-Through Notes

Rated Transactions
GHLC series 1 to 53 residential mortgage-secured pass-through notes
GHLC series S-1 to S-10 residential mortgage-secured pass-through notes
JHF series 1 to 172 residential mortgage-secured pass-through notes
JHF series S-1 to S-18 residential mortgage-secured pass-through notes
JHF series T-1 to T-9 residential mortgage-secured pass-through notes
GHLC--Government Housing Loan Corp. JHF--Japan Housing Finance Agency

Notes issued by Japan Housing Finance Agency (JHF) and its predecessor, Government Housing Loan Corp. (GHLC), are stable after a challenging couple of years (see notes 1 and 2). Now the impact from pandemic appears to have peaked, and trends seem to have returned to normal.

Below, we detail performance trends in the underlying pools of loan receivables backing the notes that JHF issued up to the end of August 2021 (see note 3).

We separately examine:

  • The performance of the overall series pool, which consists of all pools of loan receivables backing all regular monthly notes and is mainly made up of loans JHF purchased from private sector financial institutions;
  • The performance of the receivables pools backing each individual series of regular monthly notes, broken down by fiscal year of issuance (see note 4);
  • The performance of the overall series S and series T pools, which consist of all pools of loan receivables that back all series S and series T notes and were extended by JHF itself; and
  • The performance of the receivables pools backing each series S and series T note, broken down by the fiscal year in which the loan agreements were made (see note 5).

Comments

  • The performance of the overall series pool temporarily deteriorated after a first state of emergency was declared in April 2020. States of emergency were then intermittently declared in 2021 because of resurgences of the pandemic, mainly caused by the emergence of new variants. However, we believe the states of emergency had a limited impact on underlying asset performance. This is because they were less restrictive on economic activity than the first state of emergency. The impact of the pandemic has peaked, and performances of the underlying loans are at pre-pandemic levels. However, underlying assets could come under stress again if economic activities are strongly restricted due to a resurgence of the pandemic.
  • Replacement and withdrawal ratios (see note 6) of the monthly notes had considerably risen, because of the pandemic, to around 1.7% on an annualized basis as of August 2020. However, the ratio is now back to its pre-pandemic level of around 0.5%. If we look at the delinquency rate, it is slightly lower than its pre-pandemic level. Therefore, we believe that replacement and withdrawal ratios are likely to remain stable for the foreseeable future. The pandemic had a limited impact on the replacement and withdrawal ratios of the series S and series T notes (see charts 5 and 9). Underlying pools backing the series S and series T notes have longer seasoning, and redemption of principal payments is further on for these notes than the monthly notes, which we think is contributing to their tolerance to stresses.
  • The delinquency rates of the monthly notes temporarily rose after the first state of emergency, but thereafter returned to pre-pandemic levels. The one-month delinquency rate of the monthly notes had been stable at around 0.5% since 2013. After rising to around 0.65% as of May 2020, its rate has been at 0.3%-0.4% in 2021, below the pre-pandemic level. We believe this is mainly because during the pandemic some borrowers with lower creditworthiness were removed from asset pools through replacements or withdrawals at a faster pace than usual. On the other hand, the delinquency rate of the series S and series T notes has been stable, with the pandemic having had a limited impact, similar to replacement and withdrawal ratios have shown (see charts 15 and 19).
  • Prepayment rates on loans in the monthly notes issued in the fiscal 2010 and 2011 (ended March 31, 2011 and 2012 respectively) have increased in the recent past, mainly due to the refinancing associated with the timing of steps-up in interest rates for the underlying mortgage loans. On the other hand, prepayment rates for the monthly notes issued in and after fiscal 2016, following the January 2016 introduction of negative interest rates by the Bank of Japan, have been low, at 1%-3%. We believe this is because the applied interest rates for the loans are generally low and borrowers have fewer incentives to refinance. The regular monthly notes issued in and after fiscal 2016 represent about 66% of the recent outstanding balance of the overall series pool. Therefore, prepayment rates have been gradually declining. While the prepayment rates of the series S and series T notes have been stable recently because of the completion of the step-up timing in interest rates of the underlying pools. In our view, most outstanding obligors in the underlying pools are less sensitive to moves in interest rates because their prepayment rates are stable even when market interest rates have fluctuated. Its rates are gradually declining and are now about 5%-6% (see charts 23 and 27).
  • The loan receivables backing regular monthly notes issued in and after fiscal 2016 represent about 66% of the recent outstanding balance of the overall series pool. Thus, we expect these notes to have a considerable effect on the current pool's performance.
  • JHF exercised call options on notes for which the outstanding balance had fallen to less than 10% of their initial issue amount. It exercised options on the GHLC series 15, 30, and S-1 to S-5 notes in October 2021. The GHLC series 1 to 16, 18, 26, 30, and S-1 to S-5 notes and JHF series S-13 to S-15 notes have been fully redeemed.

S&P Global Ratings believes the new omicron variant is a stark reminder that the COVID-19 pandemic is far from over. Although already declared a variant of concern by the World Health Organization, uncertainty still surrounds its transmissibility, severity, and the effectiveness of existing vaccines against it. Early evidence points toward faster transmissibility, which has led many countries to close their borders with Southern Africa or reimpose international travel restrictions. Over coming weeks, we expect additional evidence and testing will show the extent of the danger it poses to enable us to make a more informed assessment of the risks to credit. Meanwhile, we expect the markets to take a precautionary stance and governments to put into place short-term containment measures. Nevertheless, we believe this shows that, once again, more coordinated, and decisive efforts are needed to vaccinate the world's population to prevent the emergence of new, more dangerous variants.

Composition Of Pools By Fiscal Year Of Issuance Or Contractual Fiscal Year

Table 1 (a)

Composition Of Pools (Regular Monthly Notes)
Fiscal year of issuance 2001* 2002 2003 2004 2005 2006 2007 2008
Series GHLC series 1 to 5 GHLC series 6 to 10 GHLC series 11 to 17 GHLC series 18 to 29 GHLC series 30 to 41 GHLC series 42 to 53 JHF series 1 to 12 JHF series 13 to 23
*Includes GHLC series 1 issued in March 2001.

Table 1 (b)

Composition Of Pools (Regular Monthly Notes)
Fiscal year of issuance 2009 2010 2011 2012 2013 2014 2015 2016
Series JHF series 24 to 35 JHF series 36 to 47 JHF series 48 to 59 JHF series 60 to 71 JHF series 72 to 83 JHF series 84 to 95 JHF series 96 to 107 JHF series 108 to 119

Table 1 (c)

Composition Of Pools (Regular Monthly Notes)
Fiscal year of issuance 2017 2018 2019 2020 2021*
Series JHF series 120 to 131 JHF series 132 to 143 JHF series 144 to 155 JHF series 156 to 167 JHF series 168 to 172
*Fiscal 2021 includes issuances from April 2021 through August 2021.

Table 2(a)

Composition Of Pools (Series S and Series T Notes)
Contractual fiscal year 2000 2001 2002 2003 2004 2005 1996 1997
Series GHLC series S-1 to S-3 GHLC series S-4 to S-10 and JHF series S-1 to S-3 JHF series S-4 to S-7 JHF series S-8 to S-9 JHF series S-10 to S-11 JHF series S-12 JHF series S-13 to S-15

JHF series T-1 to T-2

JHF series S-16 to S-18

JHF series T-3 to T-4

Table 2(b)

Composition Of Pools (Series S and Series T Notes)
Contractual fiscal year 1998 1999
Series JHF series T-5 to T-8 JHF series T-9

Outstanding Balance Of Receivables

Chart 1

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Chart 2

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Chart 3

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Chart 4

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Performance

Replacement and withdrawal ratios

Chart 5

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Chart 6

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Chart 7

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Chart 8

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Chart 9

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Chart 10

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Chart 11

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Chart 12

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Cumulative replacement and withdrawal ratios

Chart 13

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Chart 14

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Delinquency rates

Chart 15

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Chart 16

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Chart 17

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Chart 18

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Chart 19

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Chart 20

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Chart 21

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Chart 22

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Prepayment rates

Chart 23

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Chart 24

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Chart 25

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Chart 26

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Chart 27

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Chart 28

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Chart 29

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Chart 30

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Notes for charts 5 to 30
  • Figures for loan pools by fiscal year of issuance or contractual fiscal year are weighted averages of the outstanding balances.
  • Breakdown of loan pools by fiscal year of issuance or contractual fiscal year: Our 12-month moving average starts at the first month, which we define as the month after the one in which JHF issued its first series for that fiscal year.
  • The rightmost portions of trendlines in some charts with seasoning show volatility until a full 12 months of data are accumulated for each fiscal year.

Notes

1. In this report, "JHF" refers to the former GHLC and JHF, unless otherwise noted.

2. In this report, "JHF notes" refers to notes that either the former GHLC or JHF issued, unless otherwise noted.

3. This report updates "Performance Watch: Japan Housing Finance Agency And Government Housing Loan Corp. Residential Mortgage-Secured Pass-Through Notes," which S&P Global Ratings published June 7, 2021. We periodically publish surveillance reports on the structured notes that JHF, formerly GHLC, issued. In this report, we have added the performance data for the collection period from March 2021 to August 2021. The performance data in this report includes that of fully redeemed notes.

4. We aggregated the loans underlying the series of regular monthly notes by fiscal year (ends March 31 of the following year) of issuance. As a result of the relatively short ages of the underlying loans at the time of their entrustment, aggregated data by fiscal year of issuance are almost identical to aggregated data by contractual fiscal year (the fiscal year in which the loan agreement was entered into). Given that only the GHLC series 1 notes were issued in fiscal 2000, we included these notes in our calculation of the performance of the fiscal 2001 pool.

5. For the series S and series T notes, there was a significant period of time between the extension of the underlying loans and JHF securitizing them. We therefore aggregated the loans by contractual fiscal year.

6. JHF has a replacement scheme for the regular monthly notes it issued before March 2007, and for the series S notes. For regular monthly notes issued in or after April 2007 and the series T notes, JHF has a withdrawal scheme, in which it applies an amount equivalent to the principal on loans close to default and other loans to payment of the JHF notes and withdraws such loans from the entrusted assets. JHF defines receivables close to default and other receivables as:

  • Receivables that are four months overdue,
  • Receivables that JHF deems defaulted,
  • Receivables with extraordinary amendments to terms and conditions,
  • Receivables subject to changes in obligor (contracting party) names, and
  • Other receivables.

The fiscal 2005 loan pool included multiple other receivables that JHF replaced shortly after the transactions closed. These receivables were ineligible for inclusion in the underlying pools of JHF's structured notes because mortgage rights on the condominiums were not established as required. We thus excluded all other receivables for the five-month period following entrustment from the fiscal 2005 pool. The fiscal 2016 loan pool includes the JHF series 108 monthly notes, for which an administrative error at a partner financial institution has led to multiple withdrawals. We thus excluded all "other receivables" for the one-month period following entrustment regarding the JHF series 108 monthly notes.

Appendix: Calculation Of Indices

Replacement or withdrawal ratio (annualized)

Receivables replacement or withdrawal ratio for a term "t" = Amount of receivables subject to replacement or withdrawal for term "t" (principal) / Receivables outstanding at beginning of term "t" (principal) x 100 x 12

Cumulative replacement or withdrawal ratio

Cumulative replacement or withdrawal ratio for term "t" = Cumulative amount of receivables subject to replacement or withdrawal from note issuance to end of term "t" (principal) / Initial receivables outstanding (principal) x 100

Delinquency rate

Delinquency rate for term "t" = Amount of delinquent receivables for term "t" (principal) / Receivables outstanding at beginning of term "t" (principal) x 100

Prepayment rate (annualized)

Prepayment rate for term "t" = Amount of prepaid receivables for term "t" (principal) / Receivables outstanding at beginning of term "t" (principal) x 100 x 12

Related Criteria

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Hiroshi Sonoda, Tokyo (81) 3-4550-8474;
hiroshi.sonoda@spglobal.com

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