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.

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

Table 1 (a)

Table 1 (b)

Table 1 (c)

Table 2(a)

Table 2(b)

Outstanding Balance Of Receivables

Chart 1

Chart 2

Chart 3

Chart 4

Performance

Replacement and withdrawal ratios

Chart 5

Chart 6

Chart 7

Chart 8

Chart 9

Chart 10

Chart 11

Chart 12

Cumulative replacement and withdrawal ratios

Chart 13

Chart 14

Delinquency rates

Chart 15

Chart 16

Chart 17

Chart 18

Chart 19

Chart 20

Chart 21

Chart 22

Prepayment rates

Chart 23

Chart 24

Chart 25

Chart 26

Chart 27

Chart 28

Chart 29

Chart 30

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

• Methodology And Assumptions For Rating Japanese RMBS, Dec. 19, 2014

Related Research

• Performance Watch: Japan Housing Finance Agency And Government Housing Loan Corp. Residential Mortgage-Secured Pass-Through Notes, June 7, 2021
• How Will COVID-19 Affect Japanese Structured Finance? April 8, 2020