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Mortgage bonds - to try or not to try?

A few weeks back I did something I never thought possible - I defended the banks’ relentless interest rate rises. And worse still I did it on the ABC Midday News program. The news presenter didn’t expect it.
My words were something like: “I have made a nice career out of bashing banks but right now they are borrowing at very high rates overseas making the rises understandable.”
Of course, if they were prepared to cop a bigger smack to their bottom lines than they have already, they could have avoided these extra rises, which, in some cases, has added around an extra 0.7 per cent over the cash rate. Anyone who thought that was possible would not be a shareholder of banks or would hail from cloud cuckoo land.
Understanding bank behaviour might be one thing but accepting it is another and that’s why federal Treasurer Wayne Swan should have a good think about the recommendations of the Mortgage & Finance Association of Australia’s (MFAA) to copy the Canadians and their ‘mortgage bonds’.
Why should the federal Government contemplate anything that could be accused of being a Freddie Mac or Fannie Mae waiting to happen?
Well, for starters, it would be different from these businesses. Secondly, it has worked well in Canada and finally, non-bank lenders can’t be allowed to whither on the vine leaving us in the hands of the banks for our home loans.
Have a look at the chart that shows how the gap between the cash rate and the home loan rate came down from over 4 per cent to under 2 per cent because of securitisation in the 1990s.
So, how does the Canadian or Canada Mortgage Housing Corporation (CMHC) model work?
The CMHC puts out Canadian Mortgage Bonds and behind them, as security, is a collection of eligible mortgages backed up by mortgage insurance. Now these are turned into virtual government bonds because the Canadian Government stands behind them. They also access the money at good interest rates because of the standing of the Government.
The idea is to have a government-backed method of providing cheaper funding to institutions that package home mortgage loans into market securities for non-bank lenders first and, if there’s money left over, it can go to banks.
There are eligibility criteria to secure a loan. They must be first mortgages, they’re for owner-occupier borrowers and there are other conditions to make them the opposite of the US sub-prime loans that caused the credit crisis.
Currently, there is a local group called the Australian Securitisation Forum talking up the benefits of us home-growing our own version of this loan-funding model. Unfortunately, some bright sparks or ‘enemies’ of the idea have called the funding strategy - AussieMac .
Given the US bad press about lending groups with ‘Mac’ in their names, this has not been a bright idea.
Phil Naylor, who is the chief executive of the MFAA, said his body supported the Canadian model in its submission to the Inquiry into Competition in the Bank and Non Bank sectors, which is currently underway in Canberra.
“The Canadian Mortgage Bond system assists competition by ensuring there is a quality flow of securitised funds available to non bank and bank lenders,” he explained. “This ensures there is a wider range of lenders in the mortgage market offering mortgage loans.
“We would argue more lenders means greater competition and, therefore, a downward pressure on interest rates.”
It sounds good in principle but could we end up with a US-style ‘Mac’ problem?
“These problems have resulted from poor lending practices in US, which did not occur in Canada or Australia, rather than a problem in the system,” Naylor argued. “Our view is that any system which enables more lenders to be viable in the market will produce interest rates which are lower than they would be with a small number of lenders in the market.”
The impact of lower interest rates on home loans, and the resultant wealth effects, should not be ignored by homeowners, nor federal Treasurers.
Take the case of someone who took out a $300,000 home loan in 1994 and lived in a world where banks had no competition, meaning he paid 9 per cent instead of 7 per cent on average on his home loan.
After 14 years, a borrower would have paid $57K more and, if you factor in what they could have earned on this saved amount, we can see a strong case for Government to ensure competition.
Securitisation, pioneered by the likes of John Symond at Aussie Home Loans and Mark Bouris with Wizard, changed the lending landscape, making it possible for many of us to grow our retirement nest eggs at a much faster rate because we were saving money on our home loan repayments.

Bank experts say securitisation is dead and the Government should think about breathing some life back into it. 

Published on: Tuesday, July 29, 2008

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