We need to think long-term

News today that the Reserve Bank is actively intervening to support liquidity in the mortgage-backed security market.

THE total freeze in the securitised home loan market and the consequent dangers to ordinary Australian home loan borrowers have been recognised in an unusual Reserve Bank action to buy mortgagebacked securities.

On Friday the Reserve Bank bought $320 million in mortgage-backed securities, providing much-needed liquidity to a bank or non-bank lender that had packaged a series of home loans for on-selling.

But in the current market, afflicted by the credit crisis, no mortgage-backed securities have been sold this year after investor confidence in these products dropped dramatically – packaged home loans worth $45 billion were sold in the first half of last year and in the second half the figure was just $6 billion.

The packaging of home loans into securitised vehicles until now has provided a valuable additional source of home loan financing to bank and non-bank lenders alike.

And appropriately so. We don’t have any other institution to step into the breach. But short-term action does not support long-term competition. The RBA action recognises that it is appropriate for a public role in supporting liquidity. But good public policy demands a careful consideration as to whether such discretionary action is enough.

Let’s face it. To provide a basis from competition and a greater capacity to lend, a foundational basis for government action in these markets is needed. AussieMac is one idea to promote this. It is important that the Federal Government consider carefully what its role in our financial system should look like into the future. It is that which will inspire and generate long-term confidence and bring back this market for the good of consumers.

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