Today I announce an extension to the Government's investment in Australian residential mortgage‑backed securities (RMBS) to further support competition in Australia's mortgage market.
The Government will direct the Australian Office of Financial Management (AOFM) to provide up to a further $8 billion of support to new issuances of high-quality RMBS, depending on market conditions.
This investment will provide a major boost to smaller lenders and promote competition in the mortgage market, helping to put downward pressure on borrowing rates over time.
This additional investment in RMBS does not add to net debt, as the Government will be investing in, and become the holder of, high quality AAA-rated assets.
The Government is committed to ensuring Australia has a competitive and healthy banking system, which gives consumers a wide range of financial products at competitive prices.
Securitisation is an important source of funding for smaller mortgage lenders, and enables them to compete with larger lenders.
The Government's temporary extension of the program will help smaller lenders to continue to issue RMBS in the short term as the securitisation market recovers from the impacts of the global financial crisis.
Should market conditions improve sufficiently, the Government will assess whether the full $8 billion extension program is required.
This investment will also support competition in the small business lending market.
I will direct the AOFM to extend eligibility for this initiative to high quality, AAA-rated RMBS backed by a greater proportion of prime residential mortgages used by small business owners to fund their business.
This will help small business owners who access finance for their business using loans secured against residential property.
This decision follows the near completion of the Government's $8 billion investment in RMBS announced on 26 September and 12 October 2008.
To date, this initiative has helped five non-major Australian banks, four building societies and credit unions, and four non-ADI lenders to raise over $10.4 billion in funding.
This supported competition in the mortgage sector at a time when the private securitisation market had collapsed and the global financial crisis brought banking systems around the world to their knees.
Specifically, the Government's investments in RMBS has enabled smaller lenders to lend at competitive rates of interest and maintain a higher level of lending and market share than would otherwise have been possible.
It has also helped to maintain the operation of the RMBS market and preserve its infrastructure, which will help its recovery as investor sentiment turns.
In the past few months, there has been a notable improvement in investor sentiment in both primary and secondary RMBS markets.
Selling pressures have decreased and investor appetite for RMBS has improved.
Prices have fallen from spreads of around 450 basis points above the bank bill swap rate to as low as 150 basis points today.
Over the past six weeks, ME Bank and Suncorp-Metway raised over $2.5 billion from private investors.
However, the RMBS market continues to be affected by the fallout from the global financial crisis, and pricing and volumes have not yet improved enough to support affordable new issuance from a variety of smaller lenders.
To further encourage private investment in RMBS and complement independent issuances, I have asked the Treasury and AOFM to consult with industry on the merits and commercial feasibility of delivering part of the support through a fee-based liquidity facility rather than direct investments by the AOFM.
The liquidity facility would provide reassurance to private investors that, should financial markets be affected by further liquidity pressures, they would be able to access liquidity by selling eligible RMBS to the AOFM. The facility could also be structured so as to address investors' concerns about extension risk.
As with the first initiative, issuers would be required to apply to the AOFM for their RMBS to be eligible for this facility. The RMBS would be subject to strict eligibility criteria.
Treasury and the AOFM will consult with industry over the coming weeks on the liquidity facility and the extension of the program to support residential mortgages taken out by small business owners with a view to commencing the new program following the conclusion of the current program.
The Government is committed to ensuring the banking system works for Australian families and businesses, not against them, and today's announcement helps deliver on that commitment.
11 October 2009