Login
ISCOVER
Diversity is helping Australia out-perform its international counterparts
Looking at the statistics, even though arrears are expected to increase the Australian mortgage market is not performing as badly as in the US and other parts of the world. You might be wondering: why?
To continue reading the rest of this article, please log in.
Looking for more benefits? Become a Premium Member.
Create free account to get unlimited news articles and more!
Looking for more benefits? Become a Premium Member.
There are a number of features of the US and Australian markets that are different and have had an effect on the way they have performed.
The “originate to distribute” model is not prevalent in Australia as was the case in the US. The major banks are and have been the major lenders in the Australian market and they have securitised to diversify funding rather than offloading risk.
When a loan is written, it is not known whether it will be securitised and who is liable for any losses – the bank or any noteholders.
The non-bank originators were a relatively small part of the market and in the main they wrote to the criteria of the lenders’ mortgage insurers. So the same incentive to write any loan regardless of quality did not exist as it did in the US.
Another factor was that the non-conforming home loan market was different both in size and characteristics to the US sub-prime market – it was only approximately one per cent in the last couple of years where as in the US, the market peaked in 2003 to be around 20 per cent of new originations.
In addition, there was not a large number of credit impaired borrowers in the Australian market with the majority being self-employed borrowers who for some reason did not fit the standard bank or mortgage insurer criteria with, for example, higher loan balances or loan-to value ratios.
The product suite offered was also very different. There were no adjustable rate mortgages or negative amortisation loans, while less “affordability products” such as low or no deposit loans and low documentation loans were generally less common.
Lenders in Australia have full recourse to all of the assets of the borrower in the case of a default whereas in the US the lender only has recourse to the property so in Australia there has been very little of the “mailing back keys” that has occurred in the US.
The US tax system provides for tax deductions for interest paid on owner-occupied properties as an incentive to increase home ownership but at the same time there is little incentive to pay down the loan so the balance remains high for a longer period of time.
The above are just some of the factors that can help explain the difference in performance.
As at the end of July, there were 15 RMBS transactions with the Australian Office of Financial Management (AOFM) as the main investor with a total issuance of approximately A$8.7 billion of which approximately A$6.7 billion was invested by the AOFM.
In July, Suncorp-Metway Ltd and Greater Building Society Limited were mandated as the next transactions. Suncorp-Metway issued early August.
The AOFM also announced that there will be a further selection round and as the funds invested by the AOFM in ADI-sponsored transactions will be close to the $4 billion limit, the next round will likely be restricted to non-bank originators.
