Reuters | September 29, 2008

SYDNEY: Australia's plans to invest A$4 billion in mortgage-backed securities to boost competition in home-lending were welcomed by industry groups, but insiders doubt it will be enough to ultimately bring down mortgage rates.

In a tiny echo of the government intervention seen across the Pacific, the Australia's Labor government said on Friday it will start buying triple A rated prime residential mortgage-backed securities on competition grounds.

"It will provide a sentiment boost and a bit of a confidence boost, said Paul Dowling, principal analyst at Sydney-based banking research firm East & Partners.

"This is politically motivated. It's cleary an attempt by the government to say to home borrowers 'look we are doing something'," he added.

Home lending rates remain stubbornly high in Australia because banks have increased their rates at a faster pace than the Reserve Bank of Australia, citing soaring funding costs since the global credit crisis started 13 months ago.

Australia's Treasurer Wayne Swan did not give more details on the plan but experts say the government is likely to focus its investments on home debt originated by non-banks.

Non-banks in Australia have suffered greatly since the US subprime mortgage crisis blew up because they are exclusively reliant on the securitisation market to fund their operations, unlike banks which can use their balance sheet or deposit base.

Issuance of Australian residential mortgage-backed securities (RMBS) slumped in the first half of the year to just under A$2 billion Australian dollars ($1.7 billion) from A$47 billion a year earlier.

A sharp increase in funding costs makes it nearly impossible for non-banks to access vital funding so they can write loans.

As a result, their home lending market share dropped to 4 percent from 17 percent in just 18 months, according to East & Partners.

The government's plan is to buy RMBS to stimulate the market and allow non-banks to compete again. Experts, however, seriously doubt it would ever spend enough to influence the funding costs of a market that has A$166 billion in outstanding mortgage-debt.

"It's a drop in a bucket... Two or three dozen lenders are going to bid for a piece of this A$4 billion and the real impact will be negligeable," said East & Partners' Dowling.

A a much larger injection was needed to change the economics and get non-banks to lend again.

"The Treasurer would have to look at the A$10 billion mark to open those competitive channels again... Any less would not make much difference," he said.

Even that is not enough for another expert who said A$50 billion might make a difference, and also questioned the government's action.

"If the government was prepared to buy A$50 billion, it would have a pricing impact on RMBS, but I doubt they can do it," said the banker who asked not to be named because he is not authorised to speak to the press.

"And it's not the government's role to do it anyway," he added.

Before the crisis, Australian banks and non-banks used to pay 15-20 basis points over the bank bill swap rate for triple A rated RMBS before the crisis. They now have to pay 120-130 bps, a cost that is way too high for most non-bank lenders.

"The general concern is to bring cost down to under 100 basis points, that's a level where non-banks would get to start competitive again," said Phil Bayley, an independent market analyst.

Non-bank Bluestone Group, Liberty Financial, Resimac, FirstMac have all significantly cut their home lending, while RAMS was forced last year to sell part of its business.

Bayley estimates non-banks would securitise loans if their cost was under 100 bps, a level that was not far away just a couple of months ago before the financial markets deteriorated.