Mortgage backed securities: An Indian perspective

Abstract

A mortgage backed security is an asset backed security in which the claims of future cash flow are based on the cash flows received by the mortgage loan. The increasing popularity of Mortgage Backed Securities, led to a housing boom in USA. The banks were willing to lend more as the risk associated with lending was not on their Balance Sheet because the assets were transferred to the SPV in the securitization process. Though this eventually led to a housing bubble, India cannot escape the fact that popularizing this instrument is necessary to meet the increasing demand for houses in India as it provides an additional source of fund for financing. Though securitization has increased at a rapid pace in India over the last few years, the MBS market has remained a very small fraction of the Asset Backed Securities markets. Since Mortgage Backed Securities is at a very nascent stage in India as compared to USA (current MBS issuance is 5% of market size, refer to market size estimation), certain legal, accounting and financial issues related to it are not standardized. It is necessary that such issues are resolved soon so that the investors and issuers can become ready to use it as a common security in India. The Indian Legal and Socio-economic environment is very different from that of USA hence the policies followed there cannot be directly replicated. In this project, we have aimed to estimate the potential of MBS in India, look into how suitable the current financial system and investor’s appetite is to accept the popularity of such instruments and come up with recommendations for the issuers and regulators related to taxing, accounting and other legal issues of a mortgage backed security.