Industry body proposes government-backed mortgage bonds

The Australian Securitisation Forum (ASF) released a discussion paper on 9 April 2008 proposing that the Federal Government consider establishing what would essentially be a government guaranteed, mortgage-backed securities market. The ASF intends to consult with members of the industry, investors and the government and establish a taskforce to develop the proposal further. The objective of the proposal is to increase liquidity in the term securitisation market and lower borrowing costs for consumers.

The ASF paper proposes that a Canadian model be followed with a Federal Government entity being established to buy mortgage pools originated by Australian banks and other financial institutions. That entity would issue mortgage-backed securities which would be guaranteed by another Federal Government entity. That government issuer would need to meet specific eligibility criteria. Under the ASF-recommended Canadian model, the government entity would issue securities on a quarterly basis and pay monthly interest. Interest rate risk would be hedged through swaps with counterparties having a minimum rating of A.

There are a number of interesting aspects to this proposal, including:

• whether the Federal Government will be willing to guarantee this type of mortgage-backed security
• how this proposal would inter-relate with the RBA’s widening of its repo-eligibility criteria to include AAA-rated Australian RMBS and APRA’s 13 March 2008 paper concerning asset securitisation for contingent liquidity purposes
• what the impact would be for Australian home loan lenders on their funding flexibility and diversity
• whether quarterly liquidity will be sufficient and how this structure would integrate the need for short term funding of home loan pools
• the possible tiering of the RMBS market and any impacts for ineligible lenders or loan pools
• whether the Federal Government might reconsider allowing covered bond issuance by ADIs, with appropriate modifications to the depositor protection regime and APS 120 (which currently disallows covered bonds).

Freehills is actively involved in the ASF and will engage in the consultation process on this issue with our clients and other members of the industry. If you have any queries in relation to this ASF proposal or securitisation/structured products, please contact:

Name : Tessa Hoser
Title : Partner
Office : Sydney
Phone : +61 2 9225 5049
Fax : +61 2 9322 4000
Email : tessa.hoser@freehills.com

Name : Lachlan Roots
Title : Partner
Office : Sydney
Phone : +61 2 9225 5337
Fax : +61 2 9322 4000
Email : lachlan.roots@freehills.com