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What we can learn from the US mortgage crisis
By Phan Manh Ha, Complex Equity Manager Local Equity, Anphu Fund Management Company.
Current turmoil
Until now the global credit crisis has been a story of pheripheral interest to most Vietnamese. Last week, a large California-based mortgage lender with loans of about US$33 billion, IndyMac Bank, was placed under the regulatory control of the Federal Deposit Insurance Corporation after $1.35 billion in deposits was withdrawn in one month, a run that sent it to the wall. The bank’s business resumed under a new name, IndyMac Federal Bank, but the cost to American taxpayers of keeping the bank alive and avoiding any wider avalanche effect will be substaintial.
The solvency and liquidity of Fannie Mae and Freddie Mac are no longer in their hands. These two giants in the mortgage market own or guarantee about 40 per cent of American’s home loans.
Like IndyMac Bank, they will not be allowed to fail or rather cannot be allowed to fail but the cost of federal intervention, should it be required, will be a test of the US economy.
Fannie and Freddie orginated the use of mortgage-backed securities in the US, which in turn encouraged the issue of non-securitised loans to borrowers with little or no income, no jobs and no assets (so-called ‘No logo’ mortgages).
They were principal causes of the housing bubble, so the fact their executives and boards look like being spared the consequences of their folly is ironic although, of course, the US government and its regulatory authorities, which turned a blind eye to the reckless lending practices in the belief they would extend home ownership, also stand condemned for imperilling the American economy.
Lessons for Viet Nam
Viet Nam’s financial system has been undergoing a fundamental transformation since the country joined the World Trade Organisation in 2007.
To strengthen its financial system and prepare for anticipated fierce competition from foreign financial institutions, Viet Nam may launch a pilot programme allowing local banks to issue asset-backed securities (ABS).
A mature ABS market would offer Vietnamese banks the chances to diversify risks, increase liquidity and raise capital more efficiently. However, we need to create a solid legal basis for the pilot programme avoiding the American’s example.
The fundamental concept of an asset securitisation transaction is that by setting up a bankruptcy-remote SPV (special purpose vehicle), certain financial assets of the originating entity will be isolated and investors will look to the isolated assets to evaluate the investment risks and returns.
Thus, significant legal impediments on establishing a separate and independent SPV should be imposed. Moreover, Vietnamese bankruptcy law should create criteria for substantive consolidation analysis.
The credit rating industry should be encouraged to develop following the growth of financial markets.
Something similar to a Credit Agency Act is strongly recommended for the very near future.
The strong and independent Vietnamese credit rating agencies play a very central role for stable development of the financial market. Last but not least, regulatory involment should focus on disclosures.
VNS
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