Government mortgage financier not exposed to low-doc risk: AOFM chief executive

The federal government’s Australian Office of Financial Management (AOFM) has defended itself against claims that it bought fraudulent, high-risk low-doc loans with taxpayers’ money.

Since November 2008 the AOFM has invested in residential mortgage-backed securities worth $11 billion under a government program to maintain competition in mortgage lending.

The program was set up in the wake of the GFC, when non-bank lenders and other smaller lenders could no longer sell their packages of home loans to offshore investors – a process known as securitisation.

The claims against the AOFM were levelled as part of submissions made to the Senate Inquiry into the post-GFC banking sector, where public hearings resuming on Friday in Canberra.

Giving testimony to the inquiry on Friday, AOFM chief executive Rob Nicholl said there were “no 'sub-prime' loans amongst the mortgages underpinning the RMBS in which the AOFM has invested”.

Nicholl said the AOFM had taken a conservative approach to mortgage investments and had only participated in one transaction where the share of low-doc loans was greater than 10% of the underlying pool of mortgages.

In this case, the AOFM only invested $10 million, “of which over half has been repaid without incident”.

In total, Nicholl says low-doc loans account for less than 2% of all the loans it has invested in through the government scheme, with lenders required to insure themselves against the risk of borrowers defaulting.

In a worse-case scenario, only 0.5% of the AOFM’s investments would be at risk, Nicholl says.

The AOFM’s $11 billion worth of mortgage investments are part of a total pool of mortgages worth $25 billion (the AOFM acted as cornerstone investor) – of  which $400 million are sub-prime loans, reported Fairfax Media journalist Clancy Yeates.