By Jill Fraser for Lending Central

As concern grows about European debt problems, issuance markets in Australia reflect the fears of global investors.

But despite the recovery stalling due to risk aversion RESIMAC’s Director of Securitisation, Mary Ploughman says she is “incredibly optimistic” about a return of the securitisation markets.

Ploughman told Lending Central that the experience of RESIMAC shows that markets are continuing to thaw.

LC: Has the securitisation market recovered sufficiently to lift lender competition?

MP: The RMBS market is still very tight.

LC: Do you therefore feel that you’re being premature in stating optimism?

MP: Not at all: I’m optimistic the markets will stage a recovery in time.

Although a full-blown recovery of securitisation markets may still be 12 months off, the signs that we’ve seen in our last four transactions have been incredibly encouraging.

LC: What are you basing a 12 months timeline on?

MP:I based my estimation of a 12-month timeline on what has transpired since the Federal Government announced its first $8 billion boost.

In the subsequent 12 months engagement from the investor community increased with every deal, to the point that the deal we closed in November 2009 only required a $50 million investment by the government; while our most recent deal in May of this year only had a $10 million government. This is in comparison to the first deal when we managed only a $50 million external investment and the government picked up the balance.

Each time we go back to the market we are increasingly encouraged; although the market still remains subject to event risk.

LC: Recently you returned from a trip to the US during which you discussed the state of the Australian markets at the American Securitization Forum. Can we look at the difference between securitisation here and in the US?

MP: Let me begin by saying that I was in Washington DC earlier this year talking to some US investors about the situation over there.

A number of US investors are tired of having their money in government securities and earning no yield and they are once again looking for a risk return environment.

In this environment RMBS can recover.

LC: Are the US and Australian mortgage markets dramatically different?

MP: Absolutely and it’s an issue we present on a regular basis with American and European investors.

There is a view in the investor market that because of the performance of US and some European mortgages that all mortgages are at risk.

In Australia our mortgages don’t look like US mortgages. We have very strong lending underwriting policies. The Uniform Consumer Credit Code (UCCC), soon to be the National Consumer Credit Protection (NCCP) legislation, has controlled responsible lending and managed underwriting in this country.

When I was in the US, Congress was examining the successful way Australia handles underwriting. The widespread belief being that if the US understood underwriting it wouldn’t be in the pickle it is in today.

The US is a disintermediated market, with a lack of responsibility being taken for the lending decision. Everyone has a hands-off approach and makes their return on the way through for the role they play.

Now investors are saying; we want Australian mortgages. That means we’re being positively sought after.

So borrowers suffer ‘rate shock’. They start at 1% and end up at 8% after 12 months. This is illegal in Australia.

LC: But they’re currently addressing it.

MP: Absolutely. However there is a concern regarding the level of regulation constraining the efficient operation of the market.

Over-regulation often occurs after a crisis.

Going back to your first question about the securitisation market recovery, what is stopping offshore investors investing in Australian mortgages at the moment are the swap rates. Issuing into Euros, sterling and US dollars is incredibly expensive due to the distorted money flows courtesy of the GFC.

LC: When is that likely to change?

MP: The extent to which Australian banks have borrowed offshore over the past 12 months with the Government guarantee has created a distorted market and until the ‘kangaroo market’ recovers sufficiently that won’t occur.

The advice we’ve received is that it will be some time before the balance is restored to the funding flows.

LC: Would the Australian securitisation market be where it is today without the Federal Government’s contribution?

MP: Globally Australia is seen as a market leader because of how we responded to the global financial crisis; in particular the government’s response through the (Australian Office of Financial Management) AOFM program (the government’s $16 billion boost to mortgage securitisation markets, implemented by the AOFM).

This was the trigger to the market’s recovery and the re-establishment of competition.

Everyone is always quick to knock the government but this has been a fantastic win.

LC: Where would we be today if this hadn’t happened?

MP: There would have been a question mark next to the survival of organizations like RESIMAC who hold banks to account.

If the major banks reclaimed this market we’d regress to the 1980s and 1990s when the margins were 300 and 400 basis points, the banks decided who got mortgages and product enhancement and development was virtually non-existent.

LC: What is your opinion regarding the call for the Reserve Bank to acquire securitisations from non-banks such as super funds and other investors under a repurchase agreement to ensure liquidity remains in the market?

MP: We would support any moves by the government which would introduce liquidity, including defining RMBS as a liquid asset under APS210; allowing RMBS to be included in Banks liquidity portfolio.

LC: Do you have any comments regarding the pricing announcement from the Australian Office of Financial Management on its decision to purchase RMBS deals at tighter spreads in a bid to help smaller lenders compete on home loan origination?

MP: We are obviously in favour of moves like this which level the playing field.