Prepayments in the Housing Financing Fund’s portfolio are within normal limits
The Housing Financing Fund’s (HFF) prepayment problem has been regularly discussed in the public arena with the general tone in the debate being that the problem is continuously growing. The conclusion that this is a problem is based on comparisons between new loans to customers and customer prepayments. If the prepayments, however, are compared to the Fund’s overall position this shows that the actual prepayments do not pose large problems to the Fund. To compare the current prepayments in the HFF’s portfolio are proportionally much lower than is recognised for alike foreign portfolios.
Prepayments are a part of lending operations
Prepayments are a normal part of lending operations and can occur for a number of reasons. These include changes in the circumstances of borrowers, improved terms in the lending market or increases in the number of property transactions.
The “big picture” is key
One must view the overall picture when assessing whether prepayments are a problem. Simply comparing prepayments with new loans is not sufficient. But are the Fund’s prepayments greater than may be considered normal for the portfolio over an extended period? In the case of the HFF, prepayments are within the normal range. They have rather been decreasing over the last years. The current HFF prepayments are thus not really a problem.
Second, one must also take account of the total payment flow of the Fund’s assets and liabilities, together with its liquidity position as current at any given time, in order to draw the correct conclusions about the issue. At present, the Fund’s liabilities are being paid at a faster rate than the loan portfolio. As a result, the prepayments are useful to bridge the difference in cash flow between assets and liabilities. Moreover the Fund’s finance and risk management has for the most part been able to maintain the interest rate spread between interest carrying assets and liabilities despite prepayments.
See the appendix to the attached monthly report for more detailed information.