The benefits drawn by Mortgage Guarantee include

Expands Product Offering

Credit protection available to mortgage lenders through MG facilitates an enhancement of lender product offering.

  • Higher Loan Amount through higher Loan to Value (LTV) ratios on the underlying property. E.g., a lender may be willing to offer an LTV of 90% on a contract with MG cover as opposed to 80% LTV on a standalone basis.
  • Loans with longer repayment period: Extension of loan repayment tenure lowers borrower’s EMI or increases their eligibility for a higher loan amount.
  • Wider Reach and Access to New Borrower Segments: Mortgage guarantee also helps the lenders to tap opportunities present in new locations and emerging borrower segments.
Improves Risk Management

Mortgage Guarantee helps lenders to mitigate credit risks, which could have arisen over the long cycle of a mortgage due to economic cycles or a decline in housing prices. Engagement with IMGC has helped lenders to achieve greater operational efficiency through additional layer of checks and balances required under IMGC’s due diligence process. Over time this has led to standardization of practices and processes at our lender partners’ end.

Improves Cash Flow

Mortgage Guarantee on a loan enables a lender to receive cash flows on delinquent contracts once classified as NPA i.e. 90+ days overdue. After a claim is filed and approved, IMGC clears all overdue (principal and interest) and makes payment of EMIs of the housing loan until the earlier of:

  • Borrower restarts paying EMIs
  • Settlement of incurred loss following disposal of the collateral
  • Total claim payments equal maximum amount of coverage under MG agreement

Mortgage Guarantee has enabled lenders to manage their cash flows during the period in which a borrower has defaulted or until a settlement / foreclosure is concluded.

Besides helping a lender to manage its cash flow during the period in which a borrower is in the default, presence of Mortgage Guarantee has assisted the lender and the borrower arrive at a settlement, without any shortfall, (either principal or interest) which is recoverable from IMGC, subject to the maximum amount of coverage.

Settlement however requires the consent of IMGC.

Provides Capital Relief

Mortgage Guarantee is recognised as a valid Credit Risk Mitigant for capital adequacy computation purposes.

From regulatory perspective, there is an element of risk transfer from the lenders’ balance sheet to the balance sheet of IMGC, which allows the lender to release capital (regulatory capital and economic capital).

Delivers better return on equity

Using Mortgage Guarantee has resulted in an improvement in Return on Equity for the lenders. The impact of mortgage guarantees standalone and MG as credit enhancement for securitization transactions is a function of

  • Capital relief
  • Reduction in credit cost
  • Guarantee fee

In addition to the above, the economics of a mortgage guarantee transaction for a mortgage lender depend upon whether the lender or the borrower is servicing the guarantee fee. In case of Flow/ loan by loan transactions, the guarantee fee is paid by the lender, which being an up-front payment, is amortised over the tenure of the mortgage loan to assess the impact on the lender’s ROE. However, in case of Bulk/on book transactions, the guarantee fee could be paid by either the lender or by the borrower depending upon arrangement and product offered.

Lenders typically incentivize a borrower to pay the premium by offering:

  • Lower down payments on a loan, or conversely a higher loan amount for a given level of down payment
  • Elongation of loan repayment tenures, which brings down the EMI or increases the loan amount eligibility of the borrower

Impact on the Return On Equity for Securitisation transactions

Mortgage Guarantee provides greater impetus to the securitization market as the requirement of credit enhancement to be provided by the lender comes down if the underlying loans included in the securitized pool have Mortgage Guarantee cover. The actual reduction in credit enhancement depends on the underlying transaction structure, target rating of the transaction and characteristics of the lender’s portfolio and specific pool to be rated, extent of Mortgage Guarantee coverage, and rating of the Mortgage Guarantee Company.

Lender Partners