* A$ asset-backed offers seen as high as A$30 bln this year
* Small mortgage lenders to dent major banks domination of
* Lower home loan rates to help housing market recovery
By Cecile Lefort
SYDNEY, Aug 14 Australia's home-lending market,
dominated by four major banks, is ripe for a shake-up as
investors rediscover their appetite for mortgage-backed
securities, setting the scene for more competition, an explosion
of new issues and lower rates.
This, in turn, could help take some pressure off the Reserve
Bank of Australia (RBA), which last week cut interest rates to a
record low in a bid to shore up the economy as the country's
decade-long mining boom cools.
Residential mortgage-backed securities (RMBS) volumes are up
35 percent since January, compared with the same period in 2012,
Reuters data shows, and a very healthy deal pipeline could see
total issuance top A$30 billion ($27 billion) this year, said
Kevin Lee, a division director at Macquarie Bank.
That would be the largest volume since the global financial
crisis in 2008.
Australia's home loan market is notoriously cosy, with four
banks - Australia & New Zealand Banking Group,
Commonwealth Bank of Australia, National Australia Bank
and Westpac Banking Corp - controlling 90
percent of the A$262 billion mortgages written last year.
These banks have faced criticism over their reluctance to
pass on the full benefits of lower official interest rates to
their customers. This is a big issue in Australia where most
home loans carry variable interest rates.
The four big banks have increased their market share from 70
percent in 2006 as many smaller mortgage providers vanished when
the financial crisis shut the country's RMBS market.
Among the biggest home loan companies that disappeared were
RAMS and Australian Mortgage Securities, which were bought by
Westpac and GE Capital, respectively. Weaker ones such as
Allco went into receivership.
The fallout would have been worse if it was not for the
government debt agency (AOFM) putting in place a programme to
buy RMBS to help mortgage lenders survive.
The AOFM ended its programme earlier this year now that RMBS
spreads have fallen to levels low enough for mortgage lenders to
fund themselves again.
Spreads on new AAA-rated RMBS sold by Australian issuers
have tightened to 95 basis points in June, with traders
predicting they could fall as low as the 80s by year-end.
This would be a huge improvement from the 140 basis points
seen at the peak of the crisis, although still a long way from
levels in the teens before 2008.
As the RMBS markets re-opens, so too will the opportunity
for new home loan providers to enter the market and for existing
ones to lend more aggressively, challenging the major banks.
"The more the market opens, the more it opens the way to
other mortgage lenders and the more competition it brings," said
Nick Vamvakas, chief risk officer at ME Bank, one of the issuers
looking to sell a mortgage-backed offer later this year.
The RMBS market's prospects are looking better by the day.
Yield-hungry investors are increasingly warming to the
once-shunned asset class following a sharp correction in credit
spreads worldwide as the United States shows signs of economic
Additionally, investors are realising that Australia's RMBS
market is very different from the United States market, where
the collapse of the sub-prime market in 2008 sparked the global
Unlike in the United States and Europe, none of Australia's
A$75 billion of securities on issue has ever defaulted. This is
due to the Australian Prudential Regulation Authority being one
of the world's toughest regulators and imposing strict standards
Securitisation is particularly important in Australia where
real estate is a national hobby and families often spend
weekends at property auctions to "stay in touch with the
market", even though they are not selling or buying.
One-third of Australians own a home outright, another third
have a mortgage and the rest rent.
Homeowners would welcome rising RMBS issuance because it
allows increased competition in a sector where it is lacking.
"For the economy, it would be very helpful because it will
allow more competition in lending which will hopefully encourage
more credit creation," said Matthew Johnson, a strategist at
"Taken to an extreme, increased securisation and easier
credit stance in the economy would be a substitute for further
rate cuts by the RBA," he added.
The RBA has slashed interest rates by 225 basis points to
2.5 percent since 2011 to help the economy cope with the end of
a record mining boom.
($1 = 1.0899 Australian dollars)
(Reporting by Cecile Lefort; Editing by Kim Coghill)