Securitisers ready for more

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From Banking Day today comes a glimpse of the future as the AOFM withdraws from the RMBS market:

You might expect the financial services industry to argue that, long term, a market should be allowed to fail if it cannot support itself without government support, but there are a large number of industry participants who believe government should play an ongoing role.

…The chief executive of the Australian Securitisation Forum, Chris Dalton, said the ASF’s preferred option was to maintain the AOFM program as a revolving facility, to be brought into play during periods of severe market disruption. It would also give the AOFM a wider mandate.

..The Mortgage and Finance Association of Australia has been a supporter of the Canadian model. The association’s chief executive, Phil Naylor, said: “We want an ongoing support mechanism that will help arrest a worrying long-term trend where smaller lenders are being squeezed out of the market.

“To be honest, we have not had much success, apart from words of comfort from various committees. If the Coalition wins the election and holds a big financial industry inquiry we will put our case again.

…The Australian Bankers’ Association agrees with the Treasury view that a market is not viable if it needs permanent government support to work.

The ABA’s chief executive, Steven Munchenberg, said: “It is appropriate that the securitisation market stand on its own two feet. It is doing that now.

“However, this week’s decision assumes that the current benign conditions will continue. There may be a need for assistance in future and we probably need to have a discussion about that. There was no consultation on this week’s announcement.”

Boy oh boy, is this inquiry going to be fun.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Deus Forex Machina

    Securitisation is an important tool for smaller lenders to access funds in a self liquidating way so they can remain both competitive and liquid.

    Australian banking is not just the Majors around 4 million Australians are members of mutuals so they remain relevant as do the regional lenders.

    However regardless of what side of the aisle you stand on I think Munchenberg just made Naylors point in the above quote.

    Cheers

    Greg

  2. Securitisation is the preferred approach to funding residential real estate investment as it does not involve maturity transformation hocus pocus.

    Better all of it was done that way.

    If people want to borrow for housing issue bonds for the length of the line.

    If people want to invest they buy and sell the bonds.

    The fact at times the market for new issuance dries up tells us there is a serious problem as there should always be a market if the price is right.

    The problem is the debt ponzinomics and house price bubble blowing of the RBA.

    • It’s not just the central banks. The bankers can’t be trusted with securitisation either.

      If it has enough of an equity tranche to prevent abuse it is no longer economic. If it has no equity tranche then it’s open to abuse.

      • Yes – originate and dump is a problem and limiting how much is offloaded is important,

        I guess my main point is that the securitisation market is competing with the maturity transformation money and central banking fiddling on that front undermines the securitisation market.

        When a market depends on flogging its products to the govt or a central bank it is clearly sick.

        The causes of that illness may not be the product on sale in that market.

      • HnH, could you please wrap some numbers around your comment re appropriate levels of equity? What if with enough equity, it is economic?

  3. “If it has enough of an equity tranche to prevent abuse it is no longer economic”

    First I am out of my depth here but do you mean by “no longer economic” that interest rates would be too high for the housing ponzi to continue?
    That realistic interest rates that reward the saver are not “economic”?

    • Securitisation is made economic by its not needing to reserve capital against the mortgages that have been passed to investors.

      However, if you have no equity tranche in the issue – that is – a piece of the bonds that is retained by the issuer – it is basically responsibility free lending.

      If you retain the equity tranche then it is going to require capital reservation.

      In the US it was the equity tranches that became the toxic assets. Having retained them, issuers then chopped them up again and and reiused them as CDOs.

      They kept an equity tranche of that too. Then reissued it as a CDO squared. Eventually they ended up with ultra-concentrated, uber-leveraged, super garbage assets on their books.

      Amazing story, really.

      There may be solutions to all of this in bringing greater transparency to the what underlies each bond. At least then investors have much greater responsibility for what they are buying and can act as a brake on the system. That is what the RBA and others are working on.

          • HnHs

            You’ve managed to suck me in to this discussion

            You are correct it was a tale of daring dash and arithmetic rape.

            However it was also crass, unprofessional and messy but greed sucked the lazy investors in.

            Securitisation is a very complex arrangement but done by the experts, always and I repeat always, is beneficial to financial stability. Done by thieves and vagabonds it becomes very dangerous.

            Brain surgery is beneficial when done by the experts but not when you’ve got the 3 stooges with a chisel, a drill and a hammer.

            I would only trust a handful of people in Australia to be able to structure properly any securitisation with little risk to investors and the system.

            Governments of all persuasion should stay out of the securitisation market, it warps pricing and risk. Dalton should shut his mouth as he’s not representative of his members

      • Funny, a rule permeating capital markets in the wake of Basel III is the 5% retention (or aligned portfolio requirement)…..but I suppose that this isn’t capital.

        Most securitisers in Australia retain their subordinated (i.e. capital support tranches). The typically consumes the same, if not more equity than that required to support the original portfolio on balance sheet.

        The issue is more complex for non-ADI issuers, but many of these also retain their own risk (using their own capital).

        In any event, if as an issuer you want to issue into Europe (and they do), you have to satisfy risk retention requirements in maximise issue liquidity for investors.

        For the past five years, this has largely been the standard for issuers in the Australian market. I think that the risk transparency has largely been present in the Australian market both prior to and following the financial crises. And if anythinf, we know see “better” quality portfolios being issued in the Australian RMBS market – lower LVRs, higher seasoning etc…plus higher levels of capital support with minimums which are arguably higher than that required for on balance sheet lending.

        I agree that equity and other lower rated risks tranches greatly abetted the financial crises…but when we look at the the range of markets that were affected by poorly performing (i.e. rubbish collateral), the range was very limited. There were, and are, many well performing securitisation markets supported by a variety of collateral globally.

    • I think he means no longer economic in comparison to funding mortgages using easy money from other sources.

      Buyers of real estate bonds may want a reward that implies an interest rate inconsistent with the private debt blowing techniques of the RBA ( low interest rates)

      Why try and raise money from investors when short term CB money is on offer and if that dries up the govt will ride to the rescue.

    • Also non-economic might mean by comparison with our other flim flam opportunities.

      After all if a bank issues $100M in mortgages – 30 years fixed interest 7% and issues $100M in bonds paying 5% it will be picking up a tidy 2% for collecting the payments etc plus 5% on the equity tranche they retain.

      What the hell is their problem with that?

      Nothing unless you are comparing it with debt driven ponzinomics.

      • Thanks pfh. I know I’m a simple man but in the end it all seems to get down to the fact that we have this great big ponzi that means we can create debt without anyone saving.
        That is unsustainable from financial, social and environmental sustainability viewpoints.
        Still don’t want to divert the intention of the post by HnH going over and over same stuff.

  4. The finance industry will always be ready to have government take the default risk while they take the profits!

    The highest return on investment activity of the finance industry is government lobbying.

    I don’t know why the manufacturing industry hasn’t cottoned on.

    They ought be running TV adverts showing the impact of the high AUD on the industry, employment and the NSW and Vic economies every night on TV and calling on the government to join the currency wars to protect Australians. Thye ought be highlighting how the Japanese have attacked Australian manufacturing jobs through the rapid debasement of the Yen over the last 2 months. They ought be decrying the peg/dirty float used by countries like Thailand to drag employment offshore from countries like Australia.

    What’s wrong with them? Have they no self interest?

    Having seen what happens when you try to adjust internally by reducing wages (eg Europe) as opposed to externally through the currency (just about everybody against AUD) why are they still bleating about wages and not running an anti AUD campaign against politicians, targeting the seat the Libs hope to win to get government?

  5. Diogenes the CynicMEMBER

    Whilst I can see the massive advantage of securitising for the banking industry, for everyone else it seems unattractive. It allows the banks to lend irresponsibly, shunt the dud loans to a gullible investor, pocket more transaction fees and ultimately do even more loans as no equity capital has been required to be reserved against the loans as they are now off book. Investors in these securitised products are often left holding the bag as per the GFC and the property bubble receives extra impetus from all of this merry go round lending.

    Without securitising, banks are forced to keep their loans on the books which encourages responsible lending and forces them to reserve capital against the loan. If some sort of minimum LVRs were in place and equity capital against mortgages raised to higher limits (4-5% seems a bit low) then we effectively remove many of the elements of our current crazy system with all of the taxpayer funded backstop that implies.

  6. Just another subsidy to the banking cartel.

    The reason there is a lack of private investors in RMBS is because it’s too risky and illiquid. Only the government is dumb enough to take on this risk.

    • Funnily, there are more than enough investors for the riskiest pieces of Australian RMBS……

      • Is that why the AOFM holds so much RMBS? Why don’t they sell all of their $10bn holdings?

        The market would collapse if $10bn was dumped on it, that’s why they can’t sell.

        • The short answer is that the AOFM could sell and the market wouldn’t collapse.

          There would be some price adjustment, but I suspect the wholesale liquidiation of AUD10bn worth of any asset would incur such. For their [AOFM] RMBS, I think that the cost would be less that 5% of adjusted face. At the height of the financial crisis, liquidated non-AUD Australian RMBS sold for just under 80cents in the dollar. Liquidated AUD Australian RMBS sold in the 80s and low 90s. Compared to many other asset classes (includeding non structured finance), this was a very good outcome. And many opportunistic investors benefitted greatly from taking advantage of that opportunity.

          I am happy to engage in further debate as I think that your comments have been made in ignorance.

          • The AOFM’s actions and what you are saying about the strength of the RMBS market does not match.

            If the market was strong they would be selling in greater amounts instead of drip feeding the market and holding the bulk to maturity.

            We know that Swan needs money and the very fact he’s only told them to stop investing when he could have said liquidate more RMBS signals a weak market.

  7. I think that it is important to acknowledge the AOFM RMBS mandate – that is, to support residential mortgage lending. I’m not aware that the mandate is now to liquidate the existing portfolio.

    This does not preclude the AOFM from “price-testing” the market, which it has done. And for a profit.

    All I noted was that it probably could liquidate at a small discount. I don’t see what bearing that has on not choosing to liquidate (even though this is outside the RMBS mandate).

    As for the Treasurer needing the cash. The RMBS are a zero summ game for the government – funded via issued debt. As the RMBS are sold or repay (and they will be nearly all gone by around 2016/2017) the debt is repaid.

    I should add that it is not a zero sum game in a risk sense – the AOFM has taken risk on board relative to the debt used to fund it. But that was a government policy choice. And for what it is worth, I’d argue that the government took on far more risk, and far transparently, through deposit and term issuance insurance.

    I should also add that I apologise for the “ignorance” comment. I was reflecting on yours and others comments on this post over the weekend and felt that the use of the word “ignorance” was inappropriate and rude. I appreciate you civil response.