Home loan mortgage business underpinned by the Labor Government

Australia’s Federal Labor Government plan to enter the home loan mortgage finance business will boost confidence in the non-bank mortgage sector and increase competition. Treasurer Wayne Swan said he will initialling invest $4 billion to revive the non-bank mortgage market and get the banks honest to pass on future rate cuts in full. Mr Mortgage hopes that we will see the day when Australia has the equivalent of a US Fannie Mae, though hopeful a better run business model, as in the US the majority of home loan mortgage lending is issued by non bank lenders. When Paul Keating introduced non bank mortgage lending to Australia in the 1990″s he missed the vital step of the Government allowing the raising of funds under the AAA rating of the Australian Governemnt, thus reducing funding costs and interest rates, and allowing real competition with the major lenders. The purpose is to give borrowers more options than the five major banks now dominating the market. This could start an interest rate war, which Mr Swan hopes will keep interest rates low and stimulate a housing market recovery. The problem for non bank lenders is that they have relied on overseas money to service customers, but the supply has dried up with the credit collapse in the US.
Lenders who rely on wholesale funding such as Macquarie Bank and Challenger Finance have either not been lending at all or have seen volumes plummet. This has allowed banks to dominate low-risk lending, taking as much as 90 per cent of new loans, because they have been able to use the reliable turnover of funds in their deposit accounts. Mr Swan revealed the Australian Office of Financial Management (AOFM) would buy mortgage-backed securities from smaller lenders, non-banks and building societies. There would be two tranches of $2 billion each, possibly more. Part of the money would come from the 2007-08 Budget surplus, which came in $2.9 billion higher than expected at $19.7 billion. The AOFM will buy residential mortgage-backed securities (RMBS), which are AAA-class arrangements and not the high-risk “toxic loans” plaguing the US. In the long term, the AOFM should make a profit.   “It gives liquidity to the market, to the smaller lenders, and brings real competition back to the market. We hope the money will be priced competitively and I already know everybody will receive money at the same rate, no matter the size of the institution.” “The RBA has been against this idea because they thought market conditions would improve, but they have got worse. The Rudd Government is to be congratulated on persevering with this initiative. The Government has seen that competition in the mortgage market came from outside the banking sector – from non-bank lenders and non-deposit-taking institutions.  
This move will keep the banks honest and drive mortgage interest rates lower. Special note. The banks have all dropped their rates on the 19th and 20th October 2008. This shows that the move was effective. Good on you Kevin and Wayne!

Tags: Add new tag, banking sectors, Home Loans, non bank lenders