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 action follows legislation passed by the Rudd Government in June which expanded the range of high-quality assets in which the AOFM can invest.
To ensure diversity in the new issuance and provide access to the facility to a wide range of lenders, purchases may be subject to a per-issuer cap. I will issue this direction following consultation with industry on the technical parameters of the transaction.
The AOFM's investment in AAA rated RMBS will be consistent with the investment activities it already undertakes in managing financial assets and liabilities on the Government's balance sheet. It is an investment, not expenditure — it simply exchanges cash on the Government's balance sheet for new prime AAA rated RMBS.
This investment is very different from the initiative proposed by US Treasury Secretary Paulson in response to financial market conditions in the US. Unlike the US, Australia's banking system remains profitable and soundly capitalised. Australian banks do not have significant exposures to troubled mortgage‑related assets, reflecting our robust lending standards and low rates of mortgage default. Whereas the US Treasury is being forced to issue debt to invest in existing troubled mortgage assets, such as securities backed by sub‑prime mortgages with high default rates, the AOFM will invest only in newly issued, prime, AAA rated RMBS that meet strict criteria in relation to the quality of the underlying mortgages.
This is a temporary initiative that responds to highly unusual conditions in international capital markets and their impact on Australia's mortgage lending market. I expect that the RMBS purchased by the AOFM will be held until redeemed or sold into secondary markets as and when market conditions normalise.
This initiative demonstrates the Government's determination to promote the efficient operation of Australia's financial markets and to ensure robust competition in the mortgage market to put downward pressure on mortgage interest rates.
26 September 2008