Taxpayer Aid Sought for Mortgage Bond Trading: Australia Credit

Apr 07, 2014 12:38 am ET

April 7 (Bloomberg) -- A year after taxpayer support for Australia’s mortgage bonds ended, lenders want it back as issuance languishes at half the levels seen before the global financial crisis.

Deutsche Bank AG predicted last month sales of residential mortgage-backed securities will slip to A$23 billion ($21.4 billion) in 2014, down from last year’s A$26.1 billion, the most since 2007 when issuance was double that amount. The government should restart RMBS purchases, focusing on the secondary market to encourage investment, the Australian Securitisation Forum, an industry association whose members accounted for 94 percent of last year’s issuance, wrote in a submission to the Financial System Inquiry dated March 31.

A year after the government judged the market had returned to health and ended a A$20 billion support program, issuers say trading volumes have failed to revive despite a housing boom fueled by record-low interest rates. The industry body will have to persuade Prime Minister Tony Abbott, who is focused on spending cuts and says he doesn’t believe in a “government by checkbook.”

“One of the biggest issues with Australian RMBS is that in the secondary market, there’s not a great deal of turnover and that tends to put off some foreign investors,” said James Austin, chief financial officer at Firstmac Ltd., a Brisbane- based non-bank lender that sold A$1.64 billion of mortgage notes to the Australian Office of Financial Management. “To the extent that the AOFM could play a role in promoting market turnover, that would be a good outcome,” he said by phone on April 1.

Offshore Issuance

About half the almost A$50 billion of mortgage debt sold by the nation’s lenders in 2007 was denominated in a foreign currency, according to the ASF’s report, citing data from Macquarie Group Ltd. Issuers haven’t sold any new foreign- currency bonds this year after sales slumped 39 percent in 2013 from a year earlier, data compiled by Bloomberg show.

Offshore demand for home loan-backed bonds was a “significant factor” in boosting Australian issuance and compressing costs before the financial crisis, according to the ASF. While overseas accounts are still buying Australian dollar- denominated mortgage-backed bonds, poor secondary-market liquidity is inhibiting their return, the ASF said.

“Most managers and asset consultants see the securities as being illiquid, so that influences how much they buy,” said Chris Dalton, chief executive officer of the organization. “For the AOFM to continue to buy and sell over time could provide another useful component to helping liquidity in the secondary market,” he said by phone from Melbourne on April 3.

Government Purchases

The AOFM would ideally be permitted to buy notes in either the primary or secondary markets, Dalton said. This would maintain the agency’s experience and expertise with the asset class and allow the government to efficiently deploy support if another market shock made that necessary, he said.

The ASF is also lobbying for an exchange facility, run by the AOFM, which would allow funds to switch discounted RMBS for government bonds during market disruptions.

Credit growth in Australia is slowly picking up, Reserve Bank of Australia Governor Glenn Stevens said in a statement April 1 after holding the cash target at 2.5 percent. The central bank has cut its benchmark rate by 225 basis points since late 2011 to stimulate lending. The benchmark 10-year bond yield fell to 4.09 percent as of 8:45 a.m. today in Sydney from 4.51 percent before the RBA started its current cutting cycle.

Home Prices

Housing finance climbed 5.8 percent in February from a year earlier, the biggest jump since September 2011. Firstmac is writing an average A$140 million to A$150 million of new loans every month, back to levels last seen before the financial crisis, according to CFO Austin.

Home prices in Australia’s capital cities rose 10.6 percent in the year through March 31, the biggest annual gain since July 2010, according to the RP Data-Rismark Home Value Index. Prices rose 2.3 percent last month from February, the measure shows.

Late payments of more than 90 days rose to 0.57 percent in January from 0.53 percent a month earlier, according to Moody’s Investors Service. That compares to a 1.9 percent delinquency rate in the U.K. in the three months through August, the ratings company wrote in a report published last week.

Australian banks, from the nation’s four majors to regional lenders, are paying the least to sell mortgage-backed bonds since the financial crisis. Issuers that were frozen out of the market through the crisis due to ballooning costs are also returning, with Columbus Capital Pty and Bluestone Group Pty pricing their first offerings since the financial crisis.

Market Functioning

“I like the idea that people are thinking about what to do in times of stress but when markets are functioning reasonably well, I think it’s better to let the market work out its own levels,” Peter Casey, deputy treasurer at ING Bank Australia Ltd., said April 2. “We’ve seen good demand come through over the last few years with a very solid base of investors. That investor base may look different to seven years ago but it seems to be more sustainable.”

The government bought A$15.5 billion of RMBS between October 2008 and April 2013 to foster competition in Australia’s mortgage market after funding costs blew out following the collapse of subprime lending in the U.S. The AOFM’s mandate restricted purchases to the primary market.

The government now owns just over A$7 billion of the debt, according to the AOFM’s Michael Bath. The agency has selectively sold notes since March 2010 “in the interests of secondary market transparency,” according to its website. The case for further sales this year is however not strong after the agency sold down its holdings of mezzanine RMBS, Bath said in an April 2 phone interview, speaking as acting chief executive officer.

Financial Inquiry

“It’s not for us to comment on what the government may or may not tell us to do,” said Bath, when asked about the ASF’s proposals. “It clearly would represent a significant change to our mandate if we were to either make a market or be a buyer of last resort under some sort of facility arrangement.”

The Financial System Inquiry is reviewing Australian markets to create a blueprint for the nation’s financial sector. The committee is due to release an interim report in mid-2014 and then consult the market again on its conclusions. Any changes that result after the panel makes its recommendations to the government in November aren’t likely until well into 2015, according to the ASF’s Dalton.

“The market could certainly do with more liquidity but I’m a bit reserved about expectations for significant volumes of turnover occurring in short periods of time,” Stephen Maher, head of debt markets analysis in the fixed income and currencies team at Macquarie Bank Ltd., said April 3. “It’s a buy and hold market.”