Investors in Australian residential mortgage-backed securities (RMBS) continue to benefit from the strong credit performance of the underlying residential mortgage portfolios. However, there is only muted growth in new RMBS issuance activity where real-money investors, including limited foreign investors, are gradually re-emerging. Until quite recently, the Australian government’s partake in Australian RMBS has been heavily relied on to underpin the utility of Australian securitization as a source of funding for mortgage originators–who themselves are experiencing a reduction in demand for credit.
Any sustained increase in issuance is dependent on the renewed confidence of offshore investors, who held close to two-thirds of Australian RMBS when the total outstanding RMBS were at their peak in 2007. Some of those investors have exited the market and are not likely to re-emerge, while others are focusing on managing their existing investments.
The Australian economy has performed strongly in 2012, benefitting from the economic conditions in the Asia-Pacific region and demand for its commodities, especially from China. Residential property prices in most areas have softened during the past 12 months (charts 25-31), easing concern over a major price correction. Households have remained cautious with their financial management, evidenced by a significant increase in household savings (chart 14) and a decrease in credit demand. Housing-loan market participants–industry bodies and regulators–continue to take measures to restore investor confidence, including strengthening lending practices and regulations, simplifying debt structures, providing additional creditor protection, and finding ways to enhance information flow and transparency.
Australian RMBS Outlook
The Australian RMBS market experienced very strong growth until mid-2007, with total issuance amounts exceeding A$60 billion in 2006. Before the financial crisis, many Australian RMBS issuers met strong investor demand by issuing fewer transactions, with larger volumes and tight margins. At the peak of issuance, more than 60% of the RMBS issues were placed with offshore investors, but these markets essentially closed to Australian RMBS issuers since mid-2007. The new issuances since 2007 have been predominantly to domestic investors and the Australian government through its Australian Office of Financial Management (AOFM).
After the virtual closure of securitization markets at the end of 2007, most of the lenders who rely heavily on RMBS as a source of funding have curtailed lending and revised their business models. Continued investor aversion to securitization, coupled with secondary market overhang, has contributed to the limited new capital-market issuance until recently. However, the scope of new issuance activity will be constrained by a small investor base, which is predominantly domestic and some Asian investors.
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