Short-term Fix: Reserve In $320m Mortgage Deal

Sydney Morning Herald

Monday April 21, 2008

Stuart Washington

THE total freeze in the securitised home loan market and the consequent dangers to ordinary Australian home loan borrowers have been recognised in an unusual Reserve Bank action to buy mortgagebacked securities.

On Friday the Reserve Bank bought $320 million in mortgage-backed securities, providing much-needed liquidity to a bank or non-bank lender that had packaged a series of home loans for on-selling.

But in the current market, afflicted by the credit crisis, no mortgage-backed securities have been sold this year after investor confidence in these products dropped dramatically - packaged home loans worth $45 billion were sold in the first half of last year and in the second half the figure was just $6 billion.

The packaging of home loans into securitised vehicles until now has provided a valuable additional source of home loan financing to bank and non-bank lenders alike.

It moves the loan from an institution's balance sheet, giving it extra liquidity for other loans or allowing it to meet its regulatory capital requirements. The result for home loan borrowers is that more loans have been available, meaning more competition and cheaper home loans.

Non-bank lenders have been leaving the market rapidly, with Macquarie Group among those to cut back or exit altogether, because of the difficulty of gaining the necessary financing for mortgages at a favourable rate.

The Reserve Bank action is seen as an acknowledgement of the difficulties banks are facing in their ability to on-sell mortgage-backed securities.

But the terms of the Reserve Bank purchases are less than a year and the money has been provided only on the basis that the securities are repurchased by the original institution.

"The positive thing is ... it solves the short-term liquidity issue which is obviously very pressing," says Greg Medcraft, the chief executive of the industry lobby group, Australian Securitisation Forum.

"What it doesn't do is solve the long-term liquidity issue."

Only last September and October, the Reserve Bank included mortgage-backed securities among the securities it would buy from banks and accredited non-bank lenders. Friday's purchase was one of the few sizeable transactions to date.

Mr Medcraft said this facility was not well known among most lenders. Previously, he said, most banks and other lenders had not attempted to use it.

This was partly because of the stigma of being seen to need Reserve Bank help to restore liquidity, a move that could be portrayed negatively and frighten investors.