Slight inflation in Japan will have a limited effect on underlying loans.   The overall Japan Housing Finance Agency (JHF) series pool's (see note 1) performance is relatively stable, having temporarily deteriorated soon after the first state of emergency was declared in April 2020. We forecast annual inflation between 1% and 3% through 2027. We expect this inflation to have a limited impact on borrowers' ability to repay debt and the performance of mortgage loans. Moreover, we forecast the policy rate in Japan will rise to 1.0% through 2027. However, rising market interest rates do not directly impact the performance of underlying loans since they are all fixed-rate mortgages.

Replacement and withdrawal ratios of loans are slightly higher than pre-pandemic levels.  These ratios (see note 2) temporarily rose considerably to about 1.7% as of August 2020. The ratio has improved to about 0.5%, slightly higher than pre-pandemic levels at about 0.4% (see chart 3). The pace of increase in replacement and withdrawal ratios for JHF monthly notes issued after fiscal 2020 (ended March 2021) is slightly faster than the past ones (see chart 4). We think this is partly due to a change in borrower's attributes such as an increase in borrowers who are not civil servants or regular employees as well as borrowers who have higher debt to income (DTI) ratios at 30%-35%. However, we assume that Japan's unemployment rate will remain low and stable at 2%-3% through 2027. This strong unemployment environment will underpin the performance of mortgage loans in our view.

Replacement and withdrawal ratios for series S and series T notes remain stable.   Underlying pools backing series S and series T notes have longer seasoning, and redemption of principal payments is further on for these notes than for the monthly notes. Replacement and withdrawal ratios remained stable during the pandemic, showing lower sensitivity to stress environments compared with the monthly notes (see chart 6).

Delinquency rates are on a slight upward trend.   The one-month to four-month delinquency rates of loans backing the monthly notes have been rising slowly since 2022 and are now slightly higher than the pre-pandemic levels (see chart 11). On the other hand, the one-month delinquency rate in 2021 was about 0.1% lower than they were before the pandemic. We believe a decline in the one-month delinquency rate during the pandemic was mainly because borrowers' repayment ability temporarily increased as household spending was crimped and the government distributed subsidies.

Prepayment rates will remain low.  Prepayment rates of loans underlying monthly notes issued in and after fiscal 2016 have been low, at 1%-3%. Interest rates applied to loans executed since the Bank of Japan began its negative interest rate policy are generally low. In our view, lower incentives to refinance in the face of rising interest rates have eroded prepayment rates. Meanwhile, prepayment rates of loans underlying series S and series T notes have recently been stable at 4%-6%. In our view, most outstanding obligors in the underlying pools are less sensitive to movements in interest rates because of the completion of the step-up timing in interest rates of the underlying pools (see charts 17, 18, 20, and 21).

We expect regular monthly notes issued in and after fiscal 2016 to considerably affect the current pool's performance.  Loan receivables backing these regular monthly notes represent about 75% of the recent outstanding balance of the overall series pool, about ¥17.5 trillion. Series S and T notes backing loans directly extended by Government Housing Loan Corp. (GHLC), the predecessor of JHF, have not been issued since fiscal 2021, and the balance of outstanding loans is declining. It peaked at about ¥4.4 trillion in 2009, and is now about ¥0.3 trillion (see charts 1 and 2).

All of the GHLC notes except for GHLC series 34 were fully redeemed.   JHF exercised call options on notes for which the outstanding balance had fallen to less than 10% of their initial balance. It exercised options on the GHLC series 40, 49, and JHF series 2, 7, 9, 12, 13, S-7 to S-10 notes in April 2024. The GHLC series 1 to 33, 35 to 53, S-1 to S-10 notes, and JHF series 1 to 9, 12 to 13, S-1 to S-10, S-13 to S-18 notes have been fully redeemed.

Pool Composition 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

Performance

Replacement and withdrawal ratios

Chart 3

Chart 4

Chart 5

Chart 6

Chart 7

Chart 8

Cumulative replacement and withdrawal ratios

Chart 9

Chart 10

Delinquency rates

Chart 11

Chart 12

Chart 13

Chart 14

Chart 15

Chart 16

Prepayment rates

Chart 17

Chart 18

Chart 19

Chart 20

Chart 21

Chart 22

Notes for charts 3 to 22

• 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.
• Charts by year of issuance and contractual fiscal year exclude years for which all pools have been fully redeemed.

Notes

We detail performance trends in the underlying pools of loan receivables backing the notes that JHF issued up to the end of January 2024 (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).

1. In this report, "JHF" refers to the former GHLC and JHF, and "JHF notes" refers to notes that either the former GHLC or JHF issued unless otherwise noted.

2. JHF has a replacement scheme for regular monthly notes it issued before March 2007 and for series S notes. For regular monthly notes issued in or after April 2007 and series T notes, JHF has a withdrawal scheme that 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 months 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 following entrustment regarding the JHF series 108 monthly notes.

3. This report updates "JHF RMBS Performance Watch November 2023: Prepayments Down, Interest Rates Up," which we published November 6, 2023. We periodically publish surveillance reports on the structured notes that JHF, formerly GHLC, issued. In this report, we have added performance data for the collection period from August 2023 to January 2024. 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 series S and series T notes, there was a significant period between extension of the underlying loans and JHF securitizing them. We therefore aggregated the loans by contractual fiscal year.

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

• Global Methodology And Assumptions: Assessing Pools Of Residential Loans--Asia-Pacific Supplement, April 4, 2024
• Global Methodology And Assumptions: Assessing Pools Of Residential Loans, Jan. 25, 2019

Related Research

• JHF RMBS Performance Watch November 2023: Prepayments Down, Interest Rates Up, Nov. 6, 2023
• How Will COVID-19 Affect Japanese Structured Finance? April 8, 2020