EPFO move may see home loan rates slide

In what could bring down home loan rates, the central board of trustees of Employees Provident Fund Organisation (EPFO) is toying with the idea of investing in mortgage-backed securities (MBS) as part of its multi-pronged strategy to raise returns on assets.

"MBS could turn out to be a viable proposition to invest in, but many measures are needed in developing the market," officials said, adding that National Housing Bank (NHB) was in touch with EPFO on the issue.

EPFO is viewing investments in MBS as a more favourable route as risks are much lower than investing in equities, which promises high returns but are fraught with high risks.

"The EPFO board, which is to meet on February 21, could take up the issue since the bulk of MBS originates from housing loans where the default rate is very low," officials said.

Under MBS, mortgage loans of consumers are bundled into one asset and sold to prospective investors. MBS offers interest like any other debt instrument. "Banks and housing finance companies can sell MBS in the
market and raise additional funds at lower rates, which in turn would help them lower home loan rates," officials said.

Through MBS, banks and housing finance firms can reduce their reinvestment risks, which is the risk of earning lower return from cash
flows from prepayment of loans.