China's property market may be troubled, but its lack of mortgage securities allowed it to skirt one of the systemic causes of the U.S. property crash, until now.
Postal Savings Bank of China (PSB) last month issued the mainland's first residential mortgage backed security (RMBS) since 2007, wrapping more than 23,000 mortgages totaling around 6.81 billion yuan ($1.1 billion) into a security. PSB didn't immediately return an email seeking comment.
But comparisons with the U.S. RMBS which became a global albatross from 2007, taking down property values as well as financial institutions across the world, may be premature.
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"The concerns in the U.S. RMBS were mainly related to the subprime RMBS," said Jerome Cheng, senior vice president at Moody's Investor Service (NYSE:MCO - News). "There are not subprime mortgages in China at the moment," he added.
Not only does PSB's RMBS has a weighted loan-to-value of around 61 percent, but China also does not offer "liar's loans," or mortgages without documentation of the buyer's income or credit history, Cheng noted.
Others also don't believe China's fresh foray into RMBS would matter much to the property segment.
"It's too early and too small," said Nicole Wong, regional head of property research at CLSA.
Indeed, PSB's offering doesn't just rank as the first since 2007, it's only China's third RMBS ever, after China Construction Bank (Shanghai Stock Exchange: 1939-SZ) (CCB) issued one for 3 billion yuan in 2005 and another for 4 billion yuan in 2007. CCB didn't immediately return an emailed request for data on how its RMBS have performed.
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By comparison, around $668 billion worth of mortgage-related securities were issued in the U.S. from January to July of this year, according to data from the Securities Industry and Financial Markets Association (Sifma).
It could be awhile before the segment could present the sorts of risks seen in the U.S. before the financial crisis, said Steve Wang, chief China economist at Reorient Financial, noting that securitization of loans in general is quite new on the mainland.
"China will try to keep it plain vanilla in the beginning, just to see how it works and to figure out how different loans default," Wang said. In the beginning, "the best assets [will be] in this and other asset-backed securities," he said.