August 13, 2013 / 9:02 PM / 4 years ago

Australian mortgage industry set to heat up

* A$ asset-backed offers seen as high as A$30 bln this year

* Small mortgage lenders to dent major banks domination of mortgage market

* Lower home loan rates to help housing market recovery

By Cecile Lefort

SYDNEY, Aug 14 (Reuters) - 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 improvement.

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 financial crisis.

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 on lending.

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 UBS.

“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)

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