Cheaper securitisation to lower mortgage lending costs for small banks and non-banks: RBA

Smaller banks and non-bank lenders may be able to compete more effectively with the major banks in the mortgage market on the back of improving securitisation markets.

Securitisation, where home loans are packaged together and sold to institutional investors, was a cheap source of wholesale funding for many non-bank lenders prior to the GFC, but the market virtually froze following the crisis with many lenders unable to fund new loans as a result.

In a speech in Sydney this morning, assistant RBA governor Guy Debelle noted the issuance of securitised mortgage debt “has picked up of late and spreads have tightened considerably following the earlier sizeable tightening in covered bond spreads”.

“Encouragingly, recent issuance has been completed with little or no support from the Australian Office of Financial Management (AOFM) due to strong private investor demand, and primary market spreads are at their tightest level since 2007.

Since September 2008, the AOFM has acted as a cornerstone investor in residential mortgage-backed securities in an effort to encourage competition in the mortgage market.

“This spread tightening will lower the cost of mortgage lending for small banks and non-bank lenders who rely on securitisation for a large part of their funding,” said Debelle.

In February, Bendigo and Adelaide Bank launched an $850 million residential mortgage-backed securities (RMBS) offer, backed by prime residential mortgages, at 95 basis points above the one-month bank rate.

Bendigo and Adelaide Bank managing director Mike Hirst said this was the best-priced securitisation offer since the GFC.

In his address in Sydney, Debelle noted an overall improvement in global debt market compared with a year ago.

“This time last year, debt markets globally weren't in great shape, though the local market wasn't faring too badly.

“A year on, global debt markets are in a much better position, with issuance strong across most parts of the market, spreads considerably lower and the absolute level of yields very low by historical standards,” said Debelle.