International investors flock to Aussie RMBSs

Speaking to Mortgage Business, ASF chief executive Chris Dalton said that over the past six to nine months, the Australian RMBS market has seen increased participation in transactions by international investors.

“They can be representing up to 25 and 30 per cent of the investors in RMBS transactions,” Mr Dalton said.

“The reality is the Australian market is one of the few functioning RMBS markets in the world.

“When you look at 2013 in terms of private label RMBSs – that is, when you look at the US and exclude the issues through Fannie Mae and Freddie Mac – there was only a total issuance of private label RMBSs of US$18 (AU$19.15) billion.

By comparison, the Australian market had AU$26 billion, while UK banks issued the equivalent of EUR5.7 (AU$8.4) billion in 2013.

“In terms of private label RMBSs, the Australian market was the largest in the world in 2013,” Mr Dalton said.

With the limited supply overseas, international investors now look to Australian issuances as an opportunity where they have portfolios and mandates to invest in RMBSs and ABSs (asset-backed securities).

Primary issuers include Firstmac, Pepper Australia, Resimac, Liberty, Columbus Capital, AFG and Heritage Bank, which recently re-joined the market after a long absence.

“It’s a market that at the present time is providing funding to the large institutions but also the smaller mutual and credit unions and non-banks,” Mr Dalton said.

“The RMBS market in Australia is as healthy as it has been since the financial crises of 2008.”

As that RMBS market improves it is allowing smaller banks and non-bank institutions to get back into the mortgage market, JP Morgan executive director Scott Manning told Mortgage Business, adding that smaller lenders will also need to diversify their funding structures. 

“You need a more balanced approach going forward,” Mr Manning said. “I don’t think you can exclusively rely on RMBSs as a funding source.

“Non-banks, regionals and all of the smaller players who would have had a high proportion of RMBS funding previously will need to diversify their funding sources.”

In its most recent Australian Mortgage Industry Report, JP Morgan notes how quickly ‘disrupters’ can adversely impact major bank profitability, in the growth of non-bank lenders supported by fluid RMBS markets.

According to the report, prior to the peak of the GFC in 2008, RMBS issuance by mortgage originators peaked at AU$8 billion per quarter, comprising 40 per cent of total RMBS issuance.

“This resulted in the share of housing approvals by wholesale lenders rising to 15 per cent, well above their market share of 10 per cent, indicating they were still growing strongly at the time,” it said.

The report notes that with broker usage back at record highs of 45 per cent and RMBS senior tranches now pricing at BBSW+~80 basis points (well inside the ‘break even’ point of BBSW+120bp), a recovery in RMBS markets is allowing the first signs of renewed competition from the sector to emerge.