It’s not often you see Macquarie Bank/Group blink and retreat from lending people money.
After all it’s what it does best, for a fee and a commission or two.
But that’s what we saw yesterday as the formerly aggressive investment bank revealed plans to wind back its mortgage funding and lending business.
After rising during the morning and early afternoon, the market turned on Macquarie and the shares fell $2.20 to $48.55.
Macquarie’s move is the latest in a string of decisions from non-banks as the mortgage lending and origination market continues to contract.
The credit crunch has effectively handed back control of the home lending market to our mainstream banks, at a time when corporate lending is in trouble and the housing market looks ready to fall as interest rates rise.
Recent figures from the Reserve Bank suggest that non-bank mortgage lending has shrunk 40% or more since late last year, with most of that business returning to the big five: CBA, St George, Westpac, the NAB and the ANZ.
Rams has gone, absorbed by Westpac with the rump of existing mortgage loans slowly contracting; Bluestone has been cutting back and several others are contracting as the credit markets remain closed to securitised loans and high risk deals.
The departure from the Australian loan securitisation market at the end of this month of the huge French bank, Societe Generale, means a major funder of the non-bank sector won’t be around.
This is forcing other non-bank lenders to try and find new sources of finance and support, put themselves on the market, or think seriously about closing down.
Macquarie’s decision was a bit of a surprise, but such is the irresistible force of the credit crunch, it has decided to quit and go early.
The decision means that Macquarie can be ruled out as being interested in some of the half dozen or so non-bank groups now said to be on the market, lead by the likes of Mobius, which is part of Allco.
Macquarie said yesterday that it will significantly reduce its Australian residential mortgage business because of high funding costs.
The move came a day after the Reserve Bank raised interest rates to 7.25%, the highest in almost 12 years, but money market rates are much higher for the sort of money Macquarie accesses. It prices its funding off bank bill rates and they were around 7.96% for 90 day bills and 8.15% for 180 day bills.
At these rates (and more because there would be a premium loaded on to the funds raised by Macquarie because of its reputation as a financial engineer) the bank would be finding it hard to lend at a profit.
As well the amount of business available to non-bank mortgage originators and funders has been disappearing as more and more businesses head back to the big banks.
In the statement to the market, Macquarie said its subsidiary, Macquarie Securitisation Ltd, also was reacting to ”current conditions in the global mortgage securitisation market”.
The head of Macquarie’s Banking and Financial Services Group, Peter Maher, said the Bank would ”substantially reduce” origination of new residential mortgages in Australia from March 7, 2008, but would continue to provide full service to existing customers.
Macquarie says it has customers in Australia with 95,000 facilities with the bank.
"There will be no impact on these customers and we will continue to provide to them the range of existing customer services including mortgage variation services,” Mr Maher said.
"It will be business as usual for our existing customer base."
He said new mortgage business would still be written, at much reduced volumes.
Macquarie’s chief financial officer, Greg Ward said in the statement "We have previously advised the market that in full year 2007, the retail and wholesale residential mortgage businesses represented less than one percent of Macquarie Group profits. The impact of the decision to wind-back the business is not financially material.
"We have also previously advised that the mortgages business has no sub-prime exposure, default rates are low and the credit quality of the portfolio is good," Mr Ward said.’
If it was that small but of such good quality, why quit?
Because Macquarie, like St George, Rams and others, has been finding it very hard to sell off mortgages and other loans into those securitised packages. If you can’t do that, you can’t raise enough capital to keep writing new home loans.
Macquarie is full of clever people able to read the financial writing and pay heed to the messages they might be seeing.
This decision is based on the bank understanding that securitising home loans is not going to be easy for some time to come.
And the problems in this area were highlighted yesterday in a speech by Reserve Bank assistant governor, Guy Debelle who overseas the financial markets.
He told a conference on the domestic bond market in Sydney:
"The securitisation market has been among the most affected by the strains in financial markets.
"At the short-end, investors have been reluctant to rollover asset-backed commercial paper (ABCP) – spreads have increased sharply, maturities have shortened and investors are demanding greater transparency about the underlying collateral.
"Issuance in the longer-term securitisation market has been particularly low. In the second half of 2007, $8 billion of asset-backed securities were issued compared to $48 billion in the first half.
"Since the beginning of 2008, there has only been one RMBS issue.
"In combination with only a small number of RMBS deals taking place, average deal size has also been small: deal size has averaged around $370 million since September 2007 compared to around $1.6 billion prior to August 2007.
"The RMBS that were issued
