OPINION -- Light on the horizon

By Patrick Tuttle, managing director and chief executive officer, Pepper Homeloans

For most of Australia’s securitised mortgage lenders the global financial crisis (GFC) really began in August 2007, even though the visible impact on the Australian economy emerged much later.

For Pepper, our last RMBS issue was completed in November 2007, more than two years ago. It is against this backdrop that I am now able to reflect on where Australian securitised lenders have been and where I believe we are heading over the coming 12 months.

By global standards, the Australian story is a pretty remarkable one. Our economy, including key macro measures such as the unemployment rate and average house price growth, have continued to defy even the most optimistic of expectations.

Through a combination of good luck, the China growth story, the federal economic stimulus package, a sound regulatory environment, our four pillars policy, and a highly competent central bank, Australia was one of the few bright spots in the developed world during 2009. Our economy actually grew by more than 2.5 per cent in 2009, at a time when almost everyone else went backwards.

DOMESTIC STRENGTH

For the Australian securitisation market, the emergence of the Australian Office of Financial Management (AOFM) as a cornerstone investor in new RMBS issues during the second half of 2009 has been an important feature. With the AOFM’s support a number of securitised lenders, including non-banks such as RESIMAC, Firstmac and Liberty Financial, have been able to reactivate their respective securitisation programmes, albeit at much reduced volumes and at a considerably higher cost of funding.

This has meant that Australia has been one of the few debt capital markets on the planet where new securitisation issues are continuing to occur, supported by real money (mainly domestic) investors willing to dip their toe in the water again.

With the bulk of the notorious secondary market overhang of cheap mortgage-backed securities now largely sold off, Australian securitised lenders are now returning to the debt capital markets with a degree of confidence. Already in 2010, we have seen three new RMBS issues from AMP Bank, Bank of Queensland and Credit Union Australia.

These follow on from the ME Bank and Westpac deals that were completed in late 2009. This deal activity has resulted in the pricing of AAA-rated mortgage-insured prime RMBS deals settling around the 130 basis point level (as a margin over 30 day BBSW).

Investor support for these recent transactions has largely come from domestic investors, although there are also a small number of European buyers that have recognised the relative value of Australian RMBS in comparison to other investment alternatives.

BULLISH OUTLOOK

For the remainder of 2010, I expect the recent RMBS issuance trend to continue. I also expect to see a small number of 100 per cent low documentation RMBS deals brought to the market in coming months. This will be a further important step in the road to recovery of the Australian securitisation market as it will set a further reference point from which to price other asset-backed securities, particularly non-conforming RMBS.

As more deals come to market, I also expect to gradually see more investors return to the fray. In time, although currently waiting on the sidelines, this should also include a number of Asian investors who have previously had a good experience with Australian RMBS product.

Although there is no magic wand to make all these expectations come true, the current level of activity within the three major Australian ratings agencies suggests to me that securitised lenders are serious about bringing new deals to market.

This increased deal activity should also result in a gradual tightening of margins paid to bond investors, although I don’t expect to see too much margin contraction during the course of 2010.

Clearly, the confidence of RMBS investors will be heavily influenced by the ongoing resilience of the Australian economy and, to a lesser extent, the economic outlook for our major trading partners.

In the absence of any further unforeseen shocks to the global economy, I remain optimistic for the 2010 outlook. This means that a number of securitised lenders will be in a position to increase their lending volumes, most likely in the second half of 2010.

This will be welcome news to mortgage brokers looking for alternatives to the major banks, and a broader range of mortgage products for many of their customers who might be just missing out on a loan from their bank due to ever-tightening lending criteria.