Securitization: A complex knot for simple senators

Not well known to the public is a bill pending before the Senate which if approved would not only address the country’s inability to pool capital needed for economic growth, but would also give millions of Filipinos an alternative means of investment.

To many Filipinos, the alarming fact of living in the Philippines is that after slaving so hard to earn and scrimp and save, there just won’t be enough money to comfortably live on after retirement.

You may be one of those lucky persons who get retirement pay. But if opening a sari-sari store or tienda is not your cup of tea, you will soon realize that investment opportunities are very limited. And those that are currently available have yields that are frustratingly and pitifully paltry. With cost of daily sustenance ever increasing, your retirement pay (if, as I said, you are one of those who gets one) may fade away even before you do.

The savings account option is, well, not really an option with the current two-percent yields. And this is before taxes. No wonder that the Philippines had in 2000 a low 15-percent savings rates, compared to Indonesia’s 20 percent, Thailand’s 32 percent, Malaysia’s 45 percent and Singapore’s 51 percent.

Based on the average Filipinos’ low level of disposable income, savings is currently the option he can best use. But if he thinks that he can live off the interest income from his savings account, this will not see him through during his senior years.

Of course, he can also look forward to his Social Security System (SSS) or Government Security Insurance System (GSIS) retirement pay. That is, if these funding institutions find a solution to managing their funds so they don’t go bankrupt.

The stock market option, on the other hand, is a daunting arena for the everyday Filipino. It is notoriously perceived as a big boys’ exclusive playing den. To the average earner, the ancillary cost of investing in stocks (broker fees, documentary stamps, etc.) is not worth the earnings if the capital is not big enough. In other words, talo ka kung maliit lang ang puhunan mo.

Occasionally, the government issues retail Treasury bonds (RTBs) that earn relatively better rates. They’re not on the table everyday though. The most recent offering at 12-percent interest for five years was subscribed for more than P40 billion. But again, because it was not well publicized and explained, it was investment houses, banks and other institutions awash with cash that gobbled up the bonds.

It is interesting to note that the earning power of Treasury bonds is also going down. There was a time when you could get RTBs at more than 15-percent interest.

What the country definitely lacks is a deep and wide array of savings and investment choices, which will widen an individual’s opportunity to earn and at the same time aid in the country’s economic recovery.

Proposed Securitization Act opens new doors

The proposed Securitization Act is expected to lay down the legal and regulatory framework for securitization, a process wherein assets are sold on a without-recourse (walang balikan) basis to a special purpose vehicle (SPV) and are paid in the form of asset-backed securities.

If we are to make an analogy, the Special Purpose Asset Vehicle bill will lay down the framework for the creation of SPAVs that would buy banks’ unwanted assets. The securitization bill, meanwhile, would provide SPAVs the mechanisms on how to go about disposing these assets and in the process free up liquidity for lending.

It is a financing technique not really new, but is not widely familiar to most Filipino investors except among banks and other financial institutions.

Those who are hopeful the bill would be passed expect securitization to provide an alternative means to pool capital through the creation of a securitization market where middle-class Filipinos would be given the opportunity to invest.

More than being an investment tool, securitization when applied to banks’ mortgage portfolios, would allow them to free up more capital that is now tied up with non-performing assets, enabling them to bring down interest rates in the process.

As an end result, more money would be available for lending, giving Filipinos the opportunity to have their own house and car and even have access to credit cards at relatively low interest cost. (In earlier columns, I pointed out the out-of-line interest cost being charged by credit card companies. So outrageously high that it is bordering on usury.)

Once the securitization process becomes retail-based following a mechanism similar to that of the stock market, more Filipinos could become investors in asset-backed equities and bonds. Widening the equity market is essential to attaining a stronger economic base.

Most business groups are strongly endorsing the speedy enactment of the securitization bill since the measure is expected to deepen the capital market with the offering of varied investment instruments such as secondary mortgages. Furthermore, the process would likewise unlock funds currently tied up in long-term loans that are mostly non-performing.

Among other things, the securitization measure is expected to rationalize taxation. As of now, transactions of this nature are taxed to such an extent that the package becomes less attractive to small investors.

In the housing sector alone, it is estimated that about P100-billion worth of portfolios could be securitized and could be relent over and over again to address the country’s housing needs.

These include assets and loans held by the bankrupt National Home Mortgage and Finance Corp. (NHMFC) and even the housing portfolio of the SSS that also run to the billions.

Drop the politics and use some brains

The securitization bill was submitted in the Senate plenary during the first weeks of May, but senators found it too technical to be discussed extensively that not a single interpolation was made since then.

The bill, just like the SPAV, should be given priority once Congress resumes regular session in the third week of July.

My unsolicited advice is this: our respected senators should take time off from politics, and instead start some readings and pencil pushing to get a better grasp of what they claim is a very technical bill. A little bit of homework and study should not hurt.

Using some brainpower to give Filipinos new investment opportunities is the least our senators can do to recover some of the lost glitter of the Senate hall.

For insights you may wish to share, write me at Link Edge, 4th Floor, 156 Valero St., Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. You may also visit my website at http://bizlinks.linkedge.biz.