Just yesterday I noted that intervention by the government to restore confidence in mortgage-backed securities was on the cards. Today, it is on the table and out the door. From the Treasurer:
Today I announce that the Australian Office of Financial Management (AOFM) will purchase Australian residential mortgage backed securities (RMBS) as part of the Government’s commitment to strong and effective competition in Australia’s mortgage markets.
The Rudd Government is committed to ensuring that Australia’s financial markets continue to perform strongly and provide Australian households with a wide range of financial products at competitive prices.
Since the deregulation of the financial system in the 1980s and 1990s, the RMBS market has provided an important source of funding for new and smaller mortgage lenders to compete with the major banks.
Australian RMBS are of high quality, and continue to experience low rates of arrears. However, due to recent extraordinary developments in international capital markets, liquidity in the primary Australian RMBS market has been reduced. Quarterly issuance has fallen to around $2½ billion since mid-2007, compared with $18 billion over the previous year. This has weakened the capacity of mortgage lenders reliant on the primary RMBS market as a source of funding to compete.
To reinvigorate the Australian RMBS market and support competition in mortgage lending, I will direct the AOFM to invest in AAA rated RMBS in two initial tranches of $2 billion each.
This is not an Aussie Mac as a long-term institution but is along the lines we had been suggesting earlier as a short-term or transitional measure and, more recently, as critical piece of insurance, as the crisis grew deeper. Aussie Mac was designed for the future. This use of the AOFM is for right now. It is an appropriate move and my expectation is that it will have an effect on those markets right way. Hopefully, we will see the non-banks and smaller banks get right back into this market and we will be able to turn the ticker on aussiemac.org off.