Raising funds for home lending through mortgage-backed securities is not a broken business model, federal Treasurer Wayne Swan says.

Mr Swan announced last Friday the use of $4 billion of taxpayers’ money to invest in new residential mortgage-backed securities (RMBS) to reinvigorate the market and provide competition for home lending.

Mr Swan said it was “completely incorrect” to suggest mortgage-backed securities funding for banks was a “broken business model”.

“What we’re dealing with here is mid-tier banks, deposit-taking institutions, and we are dealing also with non-bank lenders that have kept the major banks honest in recent years and made competition in the market fierce,” Mr Swan told ABC Radio.

“Through no fault of their own, and through no problem with their business model, they’ve not been able to access finance because of the crisis in global credit markets.”

The RMBS market has practically shut down due to the credit crunch with new issues of RMBS dropping to just $2.5 billion since mid-2007, compared with $18 billion over the previous year.

The RMBS market is an important source of funding, particularly for non-bank lenders, allowing them to repackage existing mortgages in return for new money and issue new home loans.

Difficult funding conditions have seen the four major banks claim 90 per cent of the home lending market.

“It’s a competition measure that puts downward pressure on rates,” Mr Swan said.

“All year I have made it very clear that the government will do everything it possibly can to put competition in the banking market, and this is a very important part of that.”

The government’s asset manager - the Australian Office of Financial Management (AOFM) - will buy through a tender process new AAA-rated RMBS in two tranches of $2 billion under the scheme.

The AOFM said consultations with RMBS issuers will start this week and it expected that the pricing and settlement of the first tender will be completed by December.

The second tender will then be conducted in early 2009.

AAP