Is the Reserve Bank trying to kick life back into the dormant home mortgage securitisation market?
It seems this could be the case after the bank yesterday stepped up its purchases of mortgage backed securities in a significant shift in strategy.
The securitisation of mortgages into Residential Mortgage Backed Securities (RMBS) and selling them off to investors here and around the world has stalled in 2008 as investors have gone right off them, for whatever reason.
That mirrors similar situations overseas and was thought to be a symptom of the credit freeze, which it was.
But the freeze-like conditions have eased noticeably in the past month in the wake of the rescuing of Bear Stearns by the US Fed.
The RBA’s cash rate has risen by 1% since last August, and banks have added another 0.35% to 0.40% on top; bank bill rates rose sharply but have stabilized, but lenders and securitisers have not rediscovered their appetite for RMBS.
Some, it would seem, equate these securities with low doc or no doc housing loans which are high arrears rates, by Australian standards, while other lenders apparently think ‘subprime mortgage’ or dodgy commercial paper.
Banks and non-bank lenders who have depended on securitising their home loans to generate fresh capital have been doing it tough. St George is one, Rams is another, even now that it’s inside Westpac, while some have exited the home loan market, such as Macquarie Bank which was one of the pioneers of the technique.
Now the RBA appears to be taking quite deliberate action to tell the market that it’s OK to do deals and to resume securitizing housing loans.
The central bank has purchased $1.1 billion of these securities in varying quantities and with varying maturities on Friday and yesterday.
Some $320 million was purchased on Friday and a further $780 million was done yesterday. All are called repurchase agreements where the seller undertakes to buy back the securities at a pre-determined date. In the case of these securities it’s almost a year’s time: around March-April 2009.
The bank purchased $600 million in one tranche yesterday morning which was the largest purchase so far since it expanded the range of securities it would deal in last September.
That $600 million deal was for 353 days at 7.85%, another $80 million for 346 days at 7.78% and further $100 million for 22 days at 7.45%.
That 353 day duration would see the selling institution have to buy them back on April 9 2009.
The previous largest deal was a $500 million purchase on February 14.
Dealers say the bank is injecting money directly into a difficult part of the money market at the moment.
No bank or non-bank lender has been able to securitise a home loan this year. Even the majors like the Commonwealth, NAB and Westpac have been forced to adopt different techniques, such as self-securitising inside the bank.
Even though home lending is falling as the interest rate hikes bite, the major banks have been able to hold their own because they have had a huge inflow of cash into term deposits from retail and business customers.
Some smaller banks and most non bank home loan lenders have struggled, especially those with small depositor bases or who have financed themselves heavily off the securitisation markets and the short term money markets. St George Bank and Adelaide Bank (now absorbed by Bendigo Bank) have been heavy users of the securitisation and short term money markets to finance much of their balance sheet, especially housing.
The RBA has now bought a total of $2.35 billion of Australian mortgage-backed bonds in repo arrangements since last September. The past two days have seen more activity than at any time. Apart from the 22 day repo for $100 million done yesterday, the other $1 billion in repos on Friday and today have been for the longest duration of all and suggest they might have gone to one or two participants in the market.
Dealers say the RBA appears to be deliberately trying to ‘securitise’ some loans directly by buying them in for longer than normal terms. The banks selling to the mortgages would be able to securitise those when the market re-opens and then buy them back from the bank.
It’s what the Bank of England last night said it would be doing in Britain when it and the Government revealed a $US100 billion facility to help pump liquidity in mortgage lending.
The Federal Reserve has also done a similar thing in the US on a more complex scale as it pumps money daily and fortnightly into different sections of the markets with the aim of leaving enough liquidity in the system, to give banks and other lenders confidence to resume deals.
Financial shares got a big kick along on the ASX yesterday in a market that jumped 3% overall.
ANZ put on $1.45, or 7.23% to $21.50, NAB gained $1.72, or 6.2%, to $29.45, Commonwealth Bank added $2.24, or 5.38%, to $43.90 and Westpac picked up $1.46, or 6.54%, to $23.78.
