Demand for residential mortgage-backed securities on the rise

The Australian 10:43am March 14, 2018

Samantha Bailey

The issuing of residential mortgage-backed securities last year hit its highest level since 2007, before the GFC, says Reserve Bank assistant governor Christopher Kent.

Mr Kent, who oversees financial markets, said in a speech in Sydney today that the demand for residential mortgage-backed securities rose while supply also increased, partly due to extra issuance by non-bank financial institutions.

Non-bank financial institutions, which account for about 1 per cent of mortgage lending in Australia, issued $16 billion in mortgage-backed securities, a type of asset-backed security secured by a mortgage or a collection of mortgages.

It came as non-bank lenders saw a pick-up in home lending in 2017, as the growth of lending by major banks eased.

“That in turn reflected the decline in the growth of the major banks’ investor and interest-only loans as the banks responded to the Australian Prudential Regulation Authority and ASIC’s actions to tighten lending standards,” Mr Kent said.

Last year, the banking regulator launched new rules, requiring banks to limit the number of interest-only loans, as ASIC cracked down on past poor lending practices.

Of the total volume of residential mortgage-backed securities issued in 2017, just 13 per cent was accounted for by the major banks, the lowest level since 2010, Mr Kent said.

“One reason the majors have not been more active is that, even with the decline in residential mortgage-backed security spreads, pricing is not particularly attractive for them,” he said.

“Rather, alternative sources of funds — such as unsecured wholesale markets — remain more attractive because spreads in those markets have also narrowed.”

The diversity of corporate bond issuers also increased, with utility companies stepping up their issuance as resource-related companies have become increasingly inactive over recent years, Mr Kent said.

“Indeed, combined issuance across non-resource-related sectors was at a record high in 2017,” he said.

“I should note that we would expect issuance to grow in nominal terms as the economy expands. Regardless, it is worth noting that the market is not dominated by resource companies in the way it has been in the past.”