The Federal Government's commitment to rekindle strong and effective competition in Australia's mortgage market is being met with increasing apprehension by mortgage managers who fear funders won't pass on funds. Jill Fraser reports...
On 26 September the Federal Treasurer Wayne Swan announced the government's plan to invest an initial $4bn into residential mortgage-backed securities (RMBS) to boost the non-bank lending sector, eroded by the credit crunch and the drying up of funds on international wholesale money markets.
The hope was that this injection of funds, which is being handled by the Australian Office of Financial Management (AOFM), would deal non-bank lenders back into the game and restore competition to the business of mortgage lending.
The rescue plan came after non-bank lenders' share of the market collapsed from 15% to 4% within a period of 18 months. In October, the government committed a further $4bn to the rescue scheme.
In principle at the outset the Government's initiative received unqualified support from the non-banks. But scepticism and cynicism is starting to replace optimism.
Not a priority
At the outset the government's initiative received unqualified support from non-banks. But skepticism and cynicism are starting to replace optimism.
"The devil is in the detail," says Resi Mortgages head of consumer advocacy, Lisa Montgomery.
Her confidence in the implementation of the scheme was seriously undermined by a comment made during a tele-conference between RESI and the AOFM following the Government's announcement and subsequent instruction to the AOFM to purchase mortgage-backed securities.
"They told us that they were in the long grass regarding how they would go about it and that implementing the government's mandate to underpin competition in the marketplace wasn't a priority," says Montgomery.
Aussie executive chairman, John Symond maintains that while the injection of funds is a step in the right direction it won't help the majority of non-bank lenders "because in order to really benefit you have to have your own securitisation vehicle".
"It will help a few of the non-banks empty out part of their warehousing funds that they've been stuck with but it won't create a lever for competition in the way that Rudd intended," he says.
"The Government has done this quickly and without consultation and from my perspective it's not having the desired impact or assisting those who brought on the competition," says Symond noting that he introduced securitisation to the Australian mortgage industry in 1994.
"That created the funding model that others copied. Off the back of that the home loan industry was born," he says.
MFAA CEO, Phil Naylor welcomes the Government's initiative but concedes, "the Government acted fairly unilaterally and maybe not all considerations have been taken into account".
Naylor anticipated that the AOFM would set the scheme in motion after the House of Representatives Standing Committee on Economics had delivered its report on its inquiry into competition in the banking and non-banking sector. But this was not the case.
"I thought that recommendations would have been made in that report after all the various submissions had been taken into account," he says.
Funding and pricing concerns remain
The primary concerns of retailers (mortgage managers) relate to the availability of the funds and their pricing.
The issue of pricing and the possibility that the risk that funding bodies won't pass on the liquidity that will come from the AOFM's investment into RMBS, but instead will use it to wash through their existing portfolios, is creating nervousness among mortgage managers.
The Government's scheme won't be effective unless it reaches the retailers and at a price that will enable them to compete on the front foot with the banks.
Montgomery maintains that initially the AOFM didn't fully understand the complexity of the securitisation factor within the non-bank sector.
"The AOFM now realise that the retailers don't securitise and don't have a warehouse facility and therefore they are not going to be directly receiving these funds," she says.
Neil Hyden, CEO of the Australian Office of Financial Management told MPA that part of the selection criteria requires arrangers of RMBS issues to give an assurance that funds will be passed onto retailers.
He acknowledges however that this is not something "that one can make totally watertight".
He also admits that the AOFM will undertake fine-tuning of both the process and the selection criteria "in the light of experience" prior to the next request for proposals, due to take place in February.
FirstMac and Members Equity were the first lenders to benefit from the Government's $8bn RMBS scheme.
The AOFM selected the two lenders from a total of 12 submissions and plans to invest up to $500 million in each.
"We will participate as a cornerstone investor," says Hyden.
The AOFM is "encouraging" the commissioned lenders to bring in other investors. But there is no stipulation that this will occur.
Proposals will be assessed on the contribution made to maintaining competition in housing lending. But mortgage managers maintain that because of the number of unknowns and grey areas they are at the mercy of their lenders.
Promises made
FirstMac Managing Director, Kim Cannon grants that the requirement to pass on funds is not watertight.
He arranged for a commitment letter to be signed by each of FirstMac's warehouse providers stating that the funds will be passed on
"We're relying on the banks that we're dealing with to be honourable," he says.
Regarding the pricing of the funds. "God knows," he exclaims confessing that this is still a huge unknown.
Challenger's General Manager of Residential and Commercial Lending, Steve Weston, agrees that the return that the OAFM will want remains a question.
"The OAFM will want a commercial rate of return on the RMBS but if the cost of the funds is very expensive it will continue to make life difficult for the non-banks because it's one thing to get access to funding the next is that it needs to be economical," says Weston.
"The non-banks need to be able to on-sell it at a margin. If the costs of funds are too high when you add your profit margin it will mean that you are more expensive than the banks and that doesn't do a whole lot for competition."
Challenger along with FirstMac and RESIMAC are the three remaining non-bank funders following the departure of GE Money and Macquarie.
Weston says that Challenger plans to submit a proposal to the AOFM when the next intake is announced.
The first $4bn has been allocated for Authorised Deposit Taking Institutions (ADIs) - banks, building societies, credit unions and non-banks. The second $4bn is only for non-ADIs.
"This whole package is aimed at increasing competition and now that the ADIs have got the Government guarantee both for term funding and retail deposits it makes sense that the majority of the Government's investment into RMBS goes to the non-bank sector," says Weston.
Replying to the concerns raised by mortgage managers Weston states that Challenger intends to continue providing funding at cost effective rates to its mortgage managers.
"We plan to be around for a long time," he says. "And as the name suggests, being a challenger to the majors, and that means continuing to support our mortgage managers."
Deloitte's head of securitisation practice in Australia, Graham Mott, says the requirement of the AOFM for beneficiaries to find other investors has become difficult.
Mott notes that the landscape has changed considerably since the Government announced its objective to stimulate mortgage activity in the non-bank sector by acting as a cornerstone investor in RMBS.
"That objective has been confused by the Government's decision to act as guarantor for the banks in the deposit issuance," he says.
The government has said that it will invest in AAA securities. The design of the model is to allow the issuers (funders) to attract investors to stand alongside AOFM and subordinate the AOFM. In other words, sell more risky AA securities to investors.
Mott points out that the appetite for AA securities is very low at the moment.
Cannon disputes this. FirstMac stitched up a deal earlier this month where all the AA notes were sold and the Government has bought into the paper.
"The price is the issue," says Cannon. "In the old days we would have done AA notes at 28 bps over bank bills. Today it's somewhere between 350-450 bps over bank bills."
Despite the assurances from their funding partners mortgage managers remain in a vulnerable position.
"If all the funders decided that they weren't going to fund the mortgage management sector it would not exist," declares Montgomery.
A mandate to restore competition is all very well, says Symond arguing that the Government should have been better briefed on how securitisation filters through the non-bank sector.
