APRA’s new powers would make RMBS ‘credit positive’

If Australian Parliament passes legislation to extend the remit of the Australian Prudential Regulation Authority’s to cover non-banks, it would make RMBS deals less risky and “credit positive”.

In last week’s budget announcement, it was revealed by the Hon. Scott Morrison MP, Treasurer of the Commonwealth of Australia, that the financial services regulator would be given power over non-authorised deposit-taking institutions (ADIs). Overall, non-bank lenders write around 6 per cent of total housing loans in Australia.

APRA’s new powers would be in addition to its March 2017 policy of monitoring the warehouse facilities that banks use to fund non-bank lenders, which gave APRA a level of influence over mortgage underwriting standards in the non-bank market.

The proposed move has been generally welcomed by those in the sector, with several heads of non-banks telling Mortgage Business that they believed the new powers could help ensure that the burgeoning non-bank sector “doesn’t pose a systemic risk to the economy”.

The sentiment was echoed by Moody’s credit rating, whose recent Credit Outlook stated that the new APRA powers to regulate non-bank lending would be “credit positive” for Australian residential mortgage-backed securities (RMBS).

According to the update, the move would positively impact the credit rating of RMBS as the regulatory oversight would “curb riskier mortgage lending by non-bank lenders amid rising housing prices, thereby reducing risks in RMBS portfolios”.

The outlook reads: “Empowering APRA to apply different macroprudential policies to different regions would allow the regulator to target specific parts of the country where the property market and lending activity pose the most risk.  

“Non-bank lenders have significantly increased their origination of riskier housing investments and interest-only mortgages over the past two years, a period over which APRA has introduced measures aimed at limiting growth of such loans by banks and other authorised deposit-taking institutions (ADIs)…

“Extending APRA’s powers to cover non-banks would allow the regulator to set limits that ensure that the loan quality from these lenders is not materially worse than that of banks and other ADIs.”

[Related: Non-banks ‘shouldn't be wary’ of APRA's new powers]

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