Mortgages Creep Back Through Reserve's Window

Sydney Morning Herald

Friday May 16, 2008

Jacob Saulwick and Stuart Washington

CITIGROUP yesterday sold the first tranches of securitised mortgages issued since the credit crisis shut down markets last year, as Australian banks move to tie together home loans as assets that could be exchanged for cash with the Reserve Bank.

Citigroup will announce details of the issue today, but the deal is understood to involve $500 million worth of mortgages sold to investors receiving about 9.25 per cent interest - well above rates charged before the crisis hit last August.

The rate represents a 145 basis point premium to the bank bill swap rate. Before the crisis, a typical premium was 9 basis points.

Banks and other lenders will appreciate the first signs of movement in the market for home loans, but the price suggests there is still a long way to go before it once again becomes a viable source of funding.

Mortgages packaged as securities provided the funding for more than $100 billion worth of home lending in 2006 and last year, on figures from nabCapital.

Suncorp yesterday joined a growing list of banks tying up mortgages in securities so that, even if they cannot sell them on to investors, they could possibly swap them for the Reserve Bank 's cash.

In case there is another breakdown in short-term funding markets, banks are packaging the mortgages as securities as an emergency measure to tap a funding window set up by the Reserve Bank in September last year.

The window was opened when the Reserve widened the list of assets that it would exchange for cash in its daily market operations to include securities based on home mortgages.

"Internally banks are much more focused on liquidity and I'm sure that regulators are as well," a money market source said.

The Reserve Bank governor, Glenn Stevens, said last month that in "periods of particularly unusual market duress" central banks should be prepared to "provide liquidity against a broad range of assets and over a longer maturity than might normally be considered". But he said a central bank should add a "haircut" to the deal to protect its own position, and should be prepared to restrain markets that had a high appetite for risk.

Suncorp's portfolio involves $2.6 billion in mortgages, $2 billion of which are rated highly enough to be used in the Reserve's window. "This is purely a safety measure," a Suncorp spokesman, Mark Ley, said.

Last week the Commonwealth Bank said it had put together packages of mortgage-backed securities worth $15.6 billion. National Australia Bank is putting together a $11 billion package.

The executive general manager of Commonwealth Bank's treasury, Lyn Cobley, said the bank would only use the window for mortgage-backed securities, apart from a trial, as "a last resort" because it had other assets such as banks bills and bank bonds that it could use in repurchase agreements.