3 October 2008

Treasurer Directs the AOFM to Invest in RMBS

Today I am giving a Direction to the Australian Office of Financial Management (AOFM) to invest in Australian residential mortgage-backed securities (RMBS) as part of the Government's commitment to strong and effective competition in Australia's mortgage market.

The Direction is issued under section 62A of the Financial Management and Accountability Act 1997 and implements my announcement on Friday 26 September that the Government would invest an initial $4 billion in RMBS to support competition in Australia's mortgage market. This follows legislation passed by the Government in June of this year to broaden the investment mandate of the AOFM.

The Government will continue to monitor the market closely to determine the desirability of investing in additional amounts of RMBS down the track.

The Direction sets out the Government's objectives in making this investment — that is, to support competition from a diverse range of lenders during the present market dislocation.

It also ensures the quality of the investment by requiring the securities purchased to be rated AAA or equivalent by one of the major credit rating agencies, and providing for other eligibility criteria — including limitations on the loan-to-valuation ratios and the proportion of low documentation loans — to be specified by the Secretary to the Treasury.

The release of the Direction follows consultation with industry since last Friday's announcement on the design of the transaction.

The Direction will be tabled in Parliament during the next week of sittings.