- David Uren in The Australian
- Adrian Rollins in the Australian Financial Review
- Nassim Khadem in The Age
- Business Spectator
- Ian Rogers in The Sheet
- Daily Telegraph
Interestingly, in a speech here at the University of Melbourne today, in talking about the government’s reponse to the global financial crisis, the Prime Minister said that:
We will continue to monitor the Australian financial system in light of the current turbulence to ensure that it remains efficient, flexible and competitive – including maintaining competition and choice in the Australian domestic loans market for the benefit of consumers.
This is a good sign.
Federal Government action needed to resolve credit crisis
In a new report published today by MBS’s Centre for Ideas and the Economy, Professor Joshua Gans and Rismark International’s CEO, Christopher Joye, show that the global financial crisis has had major adverse effects on Australia’s securitised mortgage markets. Importantly, Gans and Joye argue that this will result in a significant reduction in competition amongst lenders to the long-term detriment of Australian borrowers and SMEs.
In order to resolve these problems, Gans and Joye propose an innovative policy solution: they argue that the Federal Government should establish a government agency, “AussieMac”, which would-at little-to-no cost to taxpayers-use the Commonwealth’s AAA credit rating to issue very low risk bonds that would then fund the acquisition of high credit quality home loans off Australian lenders. In this way, AussieMac could provide immediate liquidity to the Australian securitisation markets that have been effectively closed by the global credit crunch. Similar government agencies were established decades ago in the US (ie, Freddie Mac and Fannie Mae) and in Canada (ie, the CMHC) where they now provide critical funding for securitising home loans in those countries. Importantly, these overseas agencies do not require any direct taxpayer funding-in fact, they are profitable concerns that support liquidity in private markets.
“Over a decade of intense competition in the Australian home loan industry was enabled by the emergence of liquid securitisation markets, which placed tremendous pressure on the major banks’ margins,” Professor Gans said. “As a result of the US sub-prime crisis, which has nothing to do with the Australian economy, lenders have for the time being lost their ability to securitise low-risk home loans. This makes little sense. As a result of problems overseas, Australia now faces a return to major bank control and higher interest rate margins.”
The report’s co-author, Christopher Joye, notes, “Australian mortgages have the lowest default rates in the developed world, and a fraction of the credit risk of similar US loans. Yet we’ve seen Macquarie Bank and RAMS forced to withdraw from the home loan market while other smaller lenders, such as Adelaide Bank, Challenger, and Suncorp, have had to slash their loan volumes. All of this has occurred because of a foreign crisis that has wrought economic havoc at home. By establishing “AussieMac”, the government could effectively protect Australian borrowers, and the institutions that lend to them, from future financial market shocks without needing to draw on meaningful taxpayer funds. AussieMac would therefore be a liquidity provider of last resort.”
“If the government does not address these problems,” Professor Gans adds, “we face the real possibility that when the Reserve Bank moves to push down interest rates, home lending rates will not always follow. No one wants to see that happen–least of all working families.”