Japan enters Aussie mortgage market

ScreenHunter_399 Nov. 26 08.34

By Leith van Onselen

Bank of Tokyo-Mitsubishi has launched the first major salvo by a Japanese bank into the Australian mortgage market, extending a $500 million one-year mortgage-backed facility to AMP Ltd.

Under the arrangement, Bank of Tokyo-Mitsubishi will provide AMP with short-term “warehouse” financing while mortgages wait to be split into pools and then sold-off to investors as residential mortgage-backed securities (RMBS).

According to the AFR, the deal corresponds with a recovery in Australia’s mortgage securitisation market, where $26 billion of RMBS have been issued in 2013, which is more than twice the amount sold in 2012. AMP is said to be a relatively small player overall, holding only a 1% share of the Australian mortgage market, compared to the big four banks’ 85% market share.

The deal should, therefore, help to boost competition in the Australian mortgage market, although it could (at the margin) also raise financial stability risks.

A key risk in the securitisation process is that lenders typically borrow funds on a short-term basis (e.g. less than a year) and then lend those funds out long-term in the form of 25 to 30 year mortgages. In the event that the securitisation market was to freeze, mortgage securitisers could then find themselves facing a liquidity freeze and unable to pay-off their loans. This is precisely what happened during the GFC to many non-bank lenders.

While details are scant, these liquidity risks appear to be present in Bank of Tokyo-Mitsubishi’s deal with AMP, given the very short-term nature of its warehouse financing facility.

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Comments

  1. I hope AMP have separate and distinct legal entities handling Superannuation and mega mortgages. Last thing we need is Superannuation funds mixed up with TBTF sub-prime lending.

    • ARE YOU NUTS!?!? That’s their “insurance” policy!

      On topic in a 180 degree sorta way, anyone else catch this on SMSF(?) buying into the American RE dead-cat bounce re-bubble? What could possibly go wrong there?!

      http://www.nytimes.com/2013/11/20/realestate/commercial/brooklyn-homes-draw-australian-investors.html?_r=2&#h%5B%5D

      “What, 70? 72?” he asked, raising his eyebrows in question at a group of investors, contractors and designers standing nearby. […] It’s easy to understand why it might be difficult for Mr. Dixon to keep track. In just two years, the investment fund he oversees for Australian investors and retirees has purchased more than 538 homes, townhouses and brownstones from Jersey City to Queens and Brooklyn.

  2. If the mortgages are floating rate, then the issuer bears no risk in the event of a liquidity crunch, as higher rates can be passed onto the borrower. That is, unless there is some sort of regulation that prevents floating rates being X basis points higher than the cash rate. Are you aware of any such regulation?

  3. Welcome to the late 80s. They got crunched then and they’ve come back just at the right time for another helping.