The government has recently released Presidential Regulation No. 19 of 2005 on Secondary Mortgage Facilities (the “Regulation”) to support the financing effort of housing loans.

Indonesia has a relatively high housing demand with 800 thousands unit per year. The total housing demand in 2004 is 7,05 million units. Currently, contractors joining real estate organizations can only contribute 100 to 150 thousand units per year. [1]

So far, housing loan has been rendered by banks through the housing credit facility (“KPR”). However, KPR is a long term credit which may take from 10 to 30 years while at the same time KPR funding resources such as savings and deposits is short termed. Due to this maturity mismatch, banks are hesitated to finance housing loans.

To overcome the mismatch, the government created a Secondary Mortgage Facility (“SMF”) scheme that would provide financial support to banks in granting housing loans to developers. An important feature of the SMF is the establishment of a  mortgage company. The government-owned mortgage company then acts as a fundraiser by issuing securities at the capital market. The fund obtained from the offering will be used to finance housing loans. As a return, the company retains the right to hold the KPR and its mortgages from the bank to back its securities.

The Regulation clarifies that the asset-backed securities can be in the form of promissory note or participation letters and that it should be graded by an appraisal. A special purpose vehicle will be appointed to purchase financial assets along with the mortgages attached to it and issue either  promissory notes or participation letter. The purchase of financial assets from every original creditor may only be conducted subject to minimum design standardization, KPR documents standardization, risk analysis and real estate appraisal which will be determined further. Banks and every original creditor may only use the fund obtained from the sell of their financial assets for KPR purposes. Holders of the asset-backed securities will obtain payment from trustee, transaction administrators, custodian or other parties.

However, several prevailing regulation may come out as a stumbling block. Article 9 of Law No. 4 Year 1996 on Mortgage stipulates that holders of mortgage are creditors. Trustee, in this case acted only as a representative of creditors/investors. This means that the assets will be guaranteed by mortgage under the name of the mortgage company. Such scheme may complicate executions of the assets in the event of default. Among the alternative to smoothen the execution issue is by placing each investors attributable to the mortgage. Nevertheless, this would be very difficult given the number of creditors/investors may reach thousands. 

Another potential problem rises under Article 613 of the Civil Code which obliges creditor to inform debtors or obtain debtors prior written approval in case of transfer of account receivables to any third party. This provision may not be able to be practiced as there could be thousands of debtors that need to be notified.

At the time this article is issued, the government have not established any Special Purpose Vehicle or financial institution to operate the SMF scheme. It is reported by Republika Online on 14 February that the government has allocated IDR 1 trillion from the state budget for the SMF while the other 1,5 trillion will be derived from PT Jamsostek – a state owned instititution – pension fund. (mma)