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Securitisation: Levelling the playing field?

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Malavika Santhebennur 10 minute read

The securitisation market has been growing in Australia since the 1980s, with residential mortgage-backed securities a major contributor to this growth. This feature looks at what has driven this growth, why it is vital for competition and choice in the lending market, and how government funding has kept this competition alive through the COVID-19 crisis.

The coronavirus pandemic wreaked havoc on nearly all areas of the global economy in 2020 as unprecedented restrictions and initiatives caused many to go into hibernation mode. From individual borrowers to small businesses right through to multinational conglomerates, all areas of the market were impacted.

The Australian securitisation market – which is particularly critical for non-bank lenders as it is a key way in which they access funds so that they can continue to lend to SMEs and individuals – was no exception.

In 2020, the pandemic resulted in a drop in public residential mortgage-backed securities (RMBS) as well as asset-backed securities (ABS) issuances.

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A brief history of securitisation in Australia

But before the onset of the pandemic, the securitisation market had demonstrated resilience and growth in Australia. In fact, the Australian securitisation market has been developing strongly since the 1980s, with most major and medium-sized financial institutions that lend having established securitisation programs.

Asset securitisation – which is the process of converting a pool of illiquid assets such as residential mortgages into tradeable assets – increased from around $10 billion in March 1995 to $160 billion in June 2004, according to the Reserve Bank of Australia (RBA).

The RBA attributed the rapid growth in the ABS market during this period to the securitisation of residential mortgages, which increased from $5 billion to $116 billion between 1995 and 2004, and accounted for 70 per cent of the assets of Australian securitisation vehicles, while other asset classes included auto and equipment receivables.

According to data provided by Clayton Utz, the Australian market surged in 2007, when up to one in five mortgages was reportedly funded through securitisation. However, the global financial crisis (GFC) disrupted the market, which prompted the federal government to provide support for the sector during this period through an investment program managed by the Australian Office of Financial Management (AOFM). It purchased over $15 billion in RMBS issued by smaller lenders between November 2008 and August 2012.

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The securitisation market recovered following a slump during the GFC, and in 2017, it reached its peak issuance volume since the GFC, with $37.8 billion in RMBS and $8.1 billion in ABS issued.

According to the Australian Securitisation Forum, as at September 2019, total issuance volume stood at $30.4 billion, up $7 billion from the same time the previous year.

Once again, this was dominated by RMBS issuance, which totalled $26.5 billion, and originated by authorised deposit-taking institutions (ADI), while non-ADIs continued to be the major issuer in the non-conforming sector.

Non-bank lenders and securitisation

Securitisation has been building in popularity over the past few years. Various players in the mortgage market have been turning to securitised bonds transactions such as RMBS to raise funds from investors in order to grow.

But it’s not just the established lenders looking to utilise this stream. Aggregators and brokerages have also been looking to break into this area to fund their own mortgages and offer the products to their broker networks.

For example, aggregation group Australian Finance Group (AFG) has issued 10 RMBS transactions since 2013, with the total paper issued to the market by AFG Securities (a wholly owned subsidiary of AFG and is another lender on the AFG panel of lenders) coming in at just under $4.1 billion.

Franchise brokerage Yellow Brick Road (YBR) has also branched into this area. The long-held aspiration of YBR executive chairman Mark Bouris was realised last year after the group partnered with international alternative asset manager Magnetar Capital to launch a joint venture mortgage-backed securities securitisation business, Resi Wholesale Funding (RWF).

The asset manager assumed 50 per cent ownership of RWF, which secured a $120-million warehouse facility in 2019. This limit rose to $250 million in January of this year, and the availability period extended to 21 February 2022, which YBR chairman Mark Bouris said was “great news for YBR and its partner Magnetar, and will put [its] distribution networks in a better position to compete in this market”.

Securitisation – source of competition and choice

According to AFG CEO David Bailey, the growing popularity of residential mortgages securitisation can be explained by the fact that it enables more players to provide lending products, which helps drive competition in the marketplace.

Speaking to The Adviser, Mr Bailey says: “Securitisation provides an ability for lenders without a deposit base to offer funding for home loans in the marketplace.

“An active securitisation market provides liquidity, which enables lenders to lend money to consumers for home loans. It’s an increased level of funding source as investors are chasing yield.

“They are looking to invest in RMBS because of its strong track record and good returns.”

He also tells The Adviser that the government and the regulators of the securitisation market (which includes the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority) have also recognised the importance of competition and choice in the marketplace, which he says would drive “better outcomes for consumers”.

“The more choice you have in the marketplace, the higher the level of competition, which therefore ultimately generates better outcomes for consumers in terms of interest rate and savings,” Mr Bailey says.

From a group perspective, perhaps another attraction of the securitised market is its ability to increase returns. From a revenue perspective, their products generate a net interest margin and provide brokerages with more flexibility and control over the mortgage (rather than being beholden to an external lender’s credit appetite, policies and costs).

The additional margin has the added benefit of enabling brokerages to re-invest back into the channel, particularly useful given the high costs of technology and increasing compliance requirements.

Securitisation and COVID-19

Well before the onset of the COVID-19 pandemic, the federal government provided support to the securitisation market with the establishment of a $2-billion securitisation fund in 2018, which was designed to improve access to finance for the SME sector.

The Australian Business Securitisation Fund Bill 2019, which officially passed both the House of Representatives and the Senate in 2019, aims to assist SMEs with financing from 1 July 2019 
to 1 July 2023.

The government funding helps to create a level of certainty in the marketplace and gives investors more clarity over the returns they could expect.

Once COVID hit, certainty (or lack thereof) was a key point of discussion in the market, as investments across the board dried up and disruption ensued due to the pandemic.

According to the National Australia Bank (NAB) Securitisation Insights Issue 38, as at 18 December, publicly issued RMBS in 2020 were down 26 per cent to $26 billion, while the number of deals were down by seven to 31. Public ABS issuance was down 27 per cent to $5.1 billion, with 13 deals finalised in both 2020 and 2019.

Indeed, the October 2020 Financial Stability Review noted that the ABS markets experienced some disruption and “dysfunction” during the peak of market stress triggered by the COVID-19 crisis in March and April 2020, which caused some non-bank lenders to cancel planned RMBS issuance.

“There was also limited ability for these firms to expand their warehouse funding from banks at that time,” the review noted.

“In response to the associated uncertainty about the future availability of funding, many non-bank lenders actively slowed their lending.”

Indeed, some of the hardest-hit areas were the players without deposits – particularly those relying on the markets to lend to SMEs. As such, in a bid to support continued access to funding markets for SMEs impacted by the economic impacts of the COVID-19 crisis, and to maintain competition in consumer and business lending, the federal government said in March 2020 that the AOFM would be provided with an investment capacity of $15 billion to invest in wholesale funding markets used by small ADIs and non-ADI lenders as part of the Structured Finance Support Fund (SFSF).

This funding capacity would allow the AOFM to support a substantial volume of expected issuance by these lenders over a 12-month period. It was given the ability to buy ABS directly at issuance and in the secondary market (this freed up capacity for investors to recycle these funds into new issuance) and invest in securitisation warehouses.

According to the RBA review, funding availability has since improved, which it partly attributed to the SFSF.

“RMBS (and other ABS) issuance by non-bank lenders has now resumed and is at similar levels to recent years, although pricing is still at higher spreads than prior to the pandemic. This improvement in funding availability has allowed non-bank lenders to start pricing loans more competitively,” the RBA review said.

Fair play for non-banks

Mr Bailey says the government’s funding scheme, which is administered by the AOFM, has resulted in investors having “continued confidence” in securitisation and the RMBS asset class.

Commenting on the importance of the fund during the COVID-19 crisis, Mr Bailey says: “As you come out of COVID-19, you want to make sure that all the competitors in the marketplace are still around.

“You want to make sure that it doesn’t become the domain of large deposit-taking institutions. I think the AOFM in particular has been excellent in their ability to react to the costs, and set about providing a solution, which provides clarity and certainty for investors, which underpin an active securitisation market.”

He concluded: “I think Australian RMBS has been a very successful investment class over a large number of years, and the way the government has stepped in through the AOFM means that investors have continued confidence that it’s an asset class that is safe to invest in.

“Securitisation is providing alternate funding into the marketplace, which is bringing external funding into the Australian mortgage market, which is a positive.” 

Securitisation: Levelling the playing field?
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Malavika Santhebennur

Malavika Santhebennur

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.

 

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