SYDNEY, March 27 (Reuters) - Australia’s non-bank residential lenders may soon be unable to raise funds in the United States by securitising their mortgage assets unless U.S. regulators give them special relief from tough regulatory requirements - potentially denying them access to the world’s major capital market.
International securitisation markets are important to Australian independent mortgage lenders because their large pools of investors provide liquidity, lowering funding costs and supporting home loan competition in Australia.
“If issuers are to be captive to just the Australian domestic market, it will put some sort of cap on the size of their business because investors will have a limit on particular names,” said Chris Dalton, chief executive officer of the Australian Securitisation Forum, an industry body.
From December, U.S. regulators will require issuers to retain 5 percent of the assets they intend to securitise to encourage prudent behaviour, and this requirement would be a major obstacle to Australian borrowers issuing there.
Australia is the world’s most active residential mortgage-backed securities (RMBS) market with around A$30 billion ($23.61 billion) issued in 2014.
Issuance by Australian RMBS borrowers in U.S. dollars has dropped from around US$20 billion at its height before the global financial crisis to less than US$1 billion last year, according to Reuters and bank estimates, due in part to the high cost of repaying U.S. dollar loans with the weak Australian currency.
Non-bank lenders provide financial services such as mortgages and rely on securitisation because unlike commercial banks they do not have access to customer deposits to fund their lending. Non-bank lenders are considered essential in Australia because they compete against the “Big Four” major banks, which have about 80 percent of the home loan market.
Unlike in the U.S., there has never been an Australian RMBS default and only around 1 percent or so of securitised mortgages are in arrears by 30 days. This is well below Spain’s 8 percent and Italy and Britain’s 4 percent, according to Standard & Poor’s data.
Securitisation involves the borrower packaging and selling a pool of interest-bearing assets - such as mortgages or car leases - into securities which entitle investors to an income stream and redemption value.
“The U.S. risk retention rules do not suit our capital model and it’s a significant impediment for continuing our 144a programme,” said Andrew Marsden, director of capital markets securitisation for non-bank lender Resimac. (Rule 144a exempts qualified institutional buyers from stringent U.S. registration requirements.)
Real estate is an obsession in Australia, with two-thirds of households owning their homes, either outright or through a mortgage. Recent record-low interest rates have driven house prices to new highs.
U.S. regulations allow for U.S. lenders to be exempted from the 5 percent retention rule for securitised assets considered “extremely safe”. The Australian Securitisation Forum is considering asking U.S. regulators for similar relief for Australian RMBS.
However, to be eligible for such an exemption, high-quality housing loans must meet conditions including verification of borrowers’ incomes through U.S. Internal Revenue Service tax forms.
“The underwriting standards are very U.S.-centric and non-U.S. mortgage originators won’t be able to satisfy the requirements,” said Laura Sheridan Mouton, Australian head of U.S. capital markets at law firm Herbert Smith Freehills.
“The best course for the industry will be to seek interpretive relief from the U.S. Securities and Exchange Commission,” she said, adding that without a legal exemption Australian securitisation issuers in the U.S. market will need to comply with the 5 percent risk retention rule, which is prohibitively costly.
$1 = 1.2705 Australian dollars Reporting by Cecile Lefort; Editing by Nachum Kaplan and Eric Meijer