Japanese Version of Fannie and Freddie

The United States didn't just export CDOs and MBSs around the world. It also exported the system to create such securities. Japan's Housing Finance Agency is one such system.

I don't how I got to that site, but after a series of clicking through different sites I landed on the homepage of Japan Housing Finance Agency. This used to be a government agency with full government backing to issue low-interest mortgages to home buyers. Now the agency has been turned into an "an Incorporated Administrative Agency" (another iteration of government-industry collaboration/collusion) as the result of "privatization" of government services under Prime Minister Koizumi in 2007 (which also saw the privatization of Japan's postal service), and guess what their main business is these days: mortgage securitization.

In Japan, the most common mortgage type for residential properties is Adjustable Rate Mortgage, with 3-year, 5-year, or 10-year fixed. Now under Japan Housing Finance Agency's securitization and guarantee programs, Japanese banks are encouraged to issue 35-year fixed mortgages. It is virtually risk-free for the mortgage issuing banks, as they don't need to carry the mortgages on their books.

Yes, you guessed it. The agency is modeled after Fannie Mae and Freddie Mac.

Japan Housing Finance Agency has AA rating from Standard & Poors, and the mortgage backed securities (MBS) that they issue carries AAA rating. (Well that sounds familiar.) As of August last year, the agency's president was very confident that Japan wouldn't be affected by the sub-prime loan debacle in the United States. (That sounds familiar, too, like the U.S. Fed chairman Bernanke saying sub-prime loan problem will not affect other loans or economy at large.)

On their site, I also found the names of the analysts who cover MBSs issued by the Agency. Usual suspects there, among a smattering of Japanese brokerages: Goldman Sachs, Credit Suisse, Deutche Bank, Citigroup, Merrill Lynch, Morgan Stanley, J.P. Morgan Chase, UBS. (Many of them happen to be advising the privatized Japan Post Bank, the largest bank in the world measured by total assets. What a surprise.)

The U.S. always leads, Japan follows. That pattern hasn't changed after all these years. It has also been said that when the U.S. sneezes, Japan develops full-blown cold. To be sure, there is no sub-prime lending in Japan. I hope I am over-sensitive because of the disaster that hit the world that resulted from debt securitization (CDO, MBS, ABS) and derivatives.

By the way, have you noticed an increasing number of analysts and traders saying Japan is a buy? (Hope for another bubble never dies.)

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