Balikatan Sale Transaction - A Boon to Pension Fund Members
The National Home Mortgage Finance Corporation (NHMFC) has replied to the charges raised by Davao City Councilor Danilo Dayanghirang before the Office of the Deputy Ombudsman for Mindanao concerning the transfer of highly-delinquent loans from NHMFC to Balikatan Housing Finance, Inc. (BHFI).
NHMFC's position points to the transaction as being beneficial to the members of the Social Security System (SSS) and the Home Development Mutual Fund (Pag-Ibig).
This echoes the result of the public hearing conducted last June by the House of Representatives Committee on Housing and Urban Development on House Resolution No. 604, entitled: Resolution Directing The Committee On Housing And Urban Development Of The House Of Representatives To Conduct An Inquiry, In Aid Of Legislation, Into The Foreclosure Of Low-Cost Housing Units That Are Now Owned By Balikatan Finance, Inc., sponsored by House Speaker Prospero Nograles.
Balikatan Transaction Beneficial To Pension Funds
During the hearing, Mr. Florentino Espana of Pag-Ibig manifested support for the Balikatan transaction, citing the P498 Million payment received by Pag-Ibig from NHMFC following the sale of the highly-delinquent portfolio that resulted in the creation of 1,700 new homes, with a net multiplier effect estimated at P3.7 Billion to the economy. The payment by NHMFC of its obligations afforded Pag-Ibig the opportunity to pursue and continue their loan origination and housing programs. On the matter of foreclosure, he cited that enough time and opportunity had been given the Balikatan borrowers to settle their loan obligations over the years. While Pag-Ibig recognizes the borrowers' concerns, Pag-Ibig also has to think of keepings its provident fund intact for its more than seven million members who are the direct beneficiaries of the fund.
SSS similarly declared support for the Balikatan sale and transaction. Ms. Luz Generoso recognized that the sale transaction enabled NHMFC to pay its outstanding obligation to SSS, and acknowledged the effectiveness of BFS' asset management and loan servicing processes that ensured SSS' continued receipt of the proceeds of the loan resolutions.
The Unified Home Lending Program
Responding to the allegations of Councilor Dayanghirang, NHMFC pointed out that through the Unified Home Lending Program (UHLP) in the 80s, NHMFC used the funds of the SSS, Pag-Ibig, and the Government Service Insurance (GSIS), to finance the housing loans of their members through accredited financial institutions and subdivision developers nationwide.
The borrowers of the UHLP therefore were members of the formal sector and had capacity to pay. The UHLP was not deemed to address the needs of subsidized or socialized housing borrowers. Other agencies were instead tasked to address this sector.
Unfortunately, NHMFC encountered great difficulties due to uncollected loans and low repayment rates. NHMFC began to accumulate a huge portfolio of non-performing loans.
Accordingly, NHMFC engaged an independent financial advisor to conduct a due diligence review on some 195,040 mortgage loans of the UHLP Portfolio, estimate the value of the portfolio, and propose a restructuring and disposition strategy for the portfolio. Eventually, the UHLP portfolio was classified into three categories: low delinquency loans, moderate delinquency loans, and high delinquency loans.
The Highly-Delinquent Loan Portfolio
High delinquency loans referred to loan and mortgage accounts with little or no collection at all since takeout by the buyers. The borrowers had very high arrearages and had experienced proportionately high penalty billings. These loans produced less than 8% of the total collections of the UHLP portfolio and less than 5% of the cash flow of the UHLP portfolio, but required significant collection resources and expenses on the part of the NHMFC. Each one had been arrears for more than four years; in fact most were delinquent for 10 to 15 years. The outstanding obligations of these accounts were at almost 400% of the original principal and in all these accounts, less than 20% of the original principal had been repaid. Moreover, 30% of the high-delinquency loans had made no payment since takeout. That meant that more than 15,000 of these borrowers had lived in the property for almost twenty years without paying a single monthly amortization.
The Disposition Strategy
Following the advice of its financial advisor, NHMFC awarded some 52,000 highly delinquent loans to the highest bidder in the first-ever open-competitive bidding for mortgage loans in the Philippines, won by DB Global Opportunities Fund (not Deutsche Bank as previously reported). NHMFC and DBGO then entered into a joint-venture arrangement, known as Balikatan Housing Finance, Inc., where the highly-delinquent accounts were transferred.
The assignment went through the necessary legal processes and complied with the all requisites involved. It was done through a public bidding, conducted by a Bid and Awards committee composed of representatives from the DOF, HUDCC, COA, and NHMFC. The public bidding was held only after the disposition of the NPLs was approved by the boards of directors of NHMFC, SSS, and HDMF, and by the NEDA Executive Committee. The Department of Justice, the Office of the Government Corporate Counsel, and the Office of the President likewise approved the transaction.
The government strategy of selling its non-performing loans to the private sector was a landmark transaction that was hailed by the Department of Finance as the "model NPL resolution transaction" for distressed assets. The sale was also cited by the Asian Development Bank as "a highly visible, precedent-setting transaction (that) will send a clear signal to the global community that the Philippine Government is committed to resolving its and the Philippine financial sector's nonperforming loan problem in general, and to restructuring its housing finance sector in particular."
More than just sending a message however, the government reaped the benefits of this pioneering transaction.
Beneficial to the Government and Pension Funds
As a result of the public bidding, the Philippine Government received, as purchase price, P5.12 billion, which met the floor price fixed by NHMFC, SSS, HDMF, and DOF. In addition, consistent with the approval obtained from the Office of the President of the Philippines, NHMFC retained a 49% equity interest in Balikatan after transferring the highly-delinquent loans to it. Thus, NHMFC was assured of an equitable share of future collections as a stockholder of Balikatan, and it realized as well savings and other cost benefits from the transaction.
All these means that the SSS and Pag-Ibig will continue to reap the benefits of Balikatan's collection efforts from highly-delinquent borrowers who have refused to pay NHMFC after having enjoyed, and continuing to enjoy, properties purchased under the UHLP as far back as 15 years ago. As pointed out by Pag-Ibig, this will help keep the provident fund intact and protect its more than 7 million members.