In a Business Spectator opinion piece yesterday, Mr Kohler said that while the resurgence of the mortgage bond market is good for competition, a large and growing proportion of the securities are backed by non-conforming or sub-prime loans.
“These are about half ‘low doc’ and half to borrowers with bad credit ratings,” he said.
Mr Kohler said that one RMBS issuer told him the buyers are “apparently church funds, health insurance companies and state treasuries that prefer the risk/return equation of sub-prime mortgages”.
“But most of the RMBS being issued are AAA securities and, surprisingly, a lot of them are being bought by banks, which are, in effect, funding their competitors,” Mr Kohler said.
“They are doing it because the furious competition, and therefore high interest rates, for retail deposits has filled their coffers and there isn’t enough demand for credit to soak it up,” he said.
“Buying AAA-rated mortgage securities is an easy way to make a return, even if you don’t know the end customer and can’t sell them insurance or super.”
Money has been pouring into bank deposits for a few years, and now, once again, it is pouring into the arms of ‘shadow banks’ at lower interest rates, reminiscent of the non-bank lending boom between 2003 and 2007, Mr Kohler said.
“The typical AAA-rated RMBS issue is at 105-120 basis points above the bank bill swap rate, which is 2.7 per cent at present,” he said.
“That puts the wholesale cost of funds at 10-50 basis points below retail deposit rates, and is allowing the non-bank lenders, as well as smaller banks, to gnaw away at the massive market shares of major banks.”
However, Mr Kohler believes the problem with this increased competition is the upward pressure it is putting on property prices.
“There simply isn’t enough land being released in Australia to match either the demand for housing or the supply of credit,” he said.
According to Mr Kohler, the supply of credit for mortgages - both prime and sub-prime - is only going in one direction: up.
“It wouldn’t take another sub-prime mortgage bubble to produce a glut of cash available to be lent against real estate,” he said.
“By far the best solution would be a big increase in the supply of serviced land in the outer suburbs of Sydney and Melbourne, but it would be slow and the infrastructure would be expensive – too expensive for the first home buyers themselves to pay - or for governments, for that matter.”