HGC Guaranty Facilities & Benefits

The Home Guaranty Corporation is mandated under R.A. 8763 to extend guarantees on housing loans and other credit facilities to encourage funders and financing institutions to provide financing for home acquisition and mass housing development. The HGC guaranty provides the following known benefits to its clients:

• Risk Cover - If a guaranty call is approved, HGC pays 100% of the outstanding principal balance and guaranteed interest of up to 11%, for a maximum period of nine (9) months from the date of non-payment by the borrower.

• Tax incentive - Interest income on housing loans up to the extent of 11% is exempt from all forms of taxation while the account is current.

• Sovereign Guaranty - The HGC guaranty carries the unconditional guaranty of the Republic.

• Zero-Risk Classification - HGC-guaranteed loans have zero risk weight. Banks are exempt from providing risk capital reserves on HGC-guaranteed loans.

• Higher Loan Values - The Bangko Sentral ng Pilipinas allows a higher loan value, specifically 90% of appraised value of the collateral for loans of up to P3.5 million if it will be covered by an HGC guaranty. Otherwise, the loan is limited to 70% of appraised value.

• Easing of Administrative Burden - By calling on the guaranty and conveying the account to HGC, the client is relieved of the administrative burden of restructuring, foreclosure, redemption, eviction and the like as these are shifted to HGC. The clients are also spared the carrying costs of NPLs/NPAs.

A call on the guaranty is made in the event of payment default, which is generally defined as non-payment of six(6) monthly amortizations. HGC requires the assignment of the defaulted mortgge or the property subject of the cancelled Contract to Sell (CTS) to effect payment of the guaranty claim.

The two basic guaranty programs are the retail and developmental guarantees. The retail guaranty covers individual housing loand and contract-to-sell receivables while the developmental guaranty covers construction loans to developers for the development of subdivisions, townhouses, condominiums, apartments and dormitories.

Until the 1990s, HGC extended guarantees on the so-called Asset Participation Certificates (APCs) that were issued against a pool of assets. Proceeds from the APCs issued were used to fund housing-related urban renewal initiatives and other mass housing projects.

Presently, a guaranty on housing-related securities and securitized assets is classified under retail since it is extended to the individual mortgages or receivables backing the security. The idea is to ensure that the cash flows and values supporting the issued securities are intact and guaranteed. For selected issuances such as the Pag-ibig housing bonds, HGC guarantees the explicit commitments embodied in the bonds.

HGC is also mandated to administer the Cash Flow Guaranty Component of the Abot Kaya Pabahay Fund (AKPF) to provide credit insurance on the socialized housing loans extended by the Government Financial Institutions (GF's) such as the SSS, GSIS and HDMF. The AKPF is a subsidy fund. As such the guaranty is premium-free. The AKPF Cash Flow Guaranty does not offer any tax incentive.

The guaranty coverage may either be under a cash, standard, bond or cash flow guaranty coverage. These are defined as:

• Cash - Payment of guaranty claim in cash.

• Standard - Payment of guaranty claim shall be made in the form of HGC debenture bonds if default occurs during the first 5 years of guaranty coverage. Cash payment will be made if the default occurs after the 5th year.

• Bond - Payment of guaranty claim shall be made in the form of an HGC debenture bond whenever there is a call on the guaranty.

• Modified Cash Flow Guaranty - Payment of guaranty claim shall follow the amortization schedule of the defaulted borrower but the interest component shall be limited to the guaranteed rate.

• AKPF Cash Flow Guaranty - Payment of guaranty claim is made in two trances. Initial payment consists of 80% of the outstanding principal balance plus guaranteed interest for 3 months and foreclosure expenses. The 20% balance is paid upon disposition of the property.

HGC debenture bonds are classified as government securities. The debentures are negotiable, exempt from taxation, and fully guaranteed by the Republic of the Philippines. The interest of the bonds is the lowest of the prevailing market rate as posted in the PDEX, the mortgage or CTS rate, or 8.5% p.a. Its maturity ranges from 3 to 10 years.