Comments

Rising interest rates and 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 remains relatively stable. It has recovered to pre-pandemic levels, having temporarily deteriorated during COVID-19. Currently delinquency and replacement/withdrawal rates are on a slight upward trend. As of September 2024, we forecast inflation of between 1% and 3% through 2027. In addition, real wages have turned positive for the first time in two years, reflecting robust spring wage negotiation results. We thus expect inflation to have a limited impact on borrowers' ability to repay debt. We also forecast the policy rate in Japan will rise to 1.0% by 2027. However, rising market interest rates will not increase repayment amounts of underlying loans, which are all fixed-rate mortgages.

Replacement and withdrawal rates of loans backing the monthly notes are slightly higher than pre-pandemic levels.  These rates (see note 2) temporarily rose to about 1.7% during the pandemic before recovering. The current rate of about 0.6% is slightly higher than the pre-pandemic level of about 0.4% (see chart 3). The pace of increase in replacement and withdrawal rates for JHF monthly notes issued in and after fiscal 2020 (ended March 31, 2021) is slightly faster than the past ones (see chart 4). We observe this is partly due to changes in borrower attributes. We have seen an increase in borrowers who are self-employed rather than civil servants or regular employees. More borrowers now tend to have higher debt to income (DTI) ratios of 30%-35%. The proportion of self-employed workers after fiscal 2020 was about 41%; those with DTI ratios of 30%-35% was 32%. Both proportions are about 14 percentage points higher than fiscal 2015-2019 levels. Increased economic stress could have a bigger impact on the performance. However, as of September 2024, we assume that Japan's unemployment rate will remain low and stable at 2.5% through 2027, which will underpin the performance of mortgage loans. It is therefore unlikely in our view that replacement and withdrawal rates will rise sharply.

Delinquency and replacement/withdrawal rates for series T notes will remain stable.   Underlying pools that backed series S notes and back series T notes have longer seasoning. Redemption of principal payments is further on for the series T notes than for the monthly notes. Both delinquency and replacement/withdrawal rates remained stable during the pandemic. They display less sensitivity to stress environments compared with the monthly notes (see chart 6 and 14).

Delinquency rates for the monthly notes 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 pre-pandemic levels (see chart 11). As with replacement and withdrawal rates, the delinquency rates for the monthly notes issued in and after fiscal 2020 have increased at a faster pace. We consider this to be partly because of changes in borrower attributes. A decrease in the one-month delinquency rate during the pandemic was caused mainly by the temporary improvement in borrowers' repayment ability following government subsidies and support and restrained household spending.

Prepayment rates will remain low amid rising interest rates.  Prepayment rates of loans underlying the monthly notes issued in and after fiscal 2016 have been low, at 1%-2%. 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 (see charts 17 and 18). 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 20 and 21).

We expect the monthly notes issued in and after fiscal 2016 to considerably affect the current pool's performance.  Loan receivables backing these regular monthly notes are worth about ¥13.1 trillion, or about 76%, of the recent outstanding balance of the overall series pool. However, the outstanding amount has declined as recent issuance amounts have been shrinking. 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 ¥0.2 trillion, less than 5% of the all-time high. (see charts 1 and 2).

All of the GHLC notes and JHF series S 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 34, and JHF series16, S-11 to S-12 notes in October 2024. As of now all the GHLC series, including all S notes, and JHF series 1 to 9, 12 to 13,16, all S 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 July 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 April 2024: Rising Interest Rates And Prices Have Limited Impact," which we published April 18, 2024. 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 February 2024 to July 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 April 2024: Rising Interest Rates And Prices Have Limited Impact, April 18, 2024
• How Will COVID-19 Affect Japanese Structured Finance? April 8, 2020