Mortgage Backed Securities During the GFC

Australians have a strong homeownership culture, with Australians on average turning over property every eight years. The fact that Aussies like to own their own homes combined with the fact that their interest rate payments are not deductible mean that they like to build up equity in their homes. There are lots of parties involved in the Australian property market including banks, non-bank lenders, and mortgage brokers.

This can all be combined with the fact that capital gains tax is not charged on owner occupied property in Australia, making it an attractive investment vehicle for building personal wealth.

In recent years, the rental market has fallen behind demand. Landlords have seen their rental profits decline, although the capital returns on property have been fairly good during the same time period. When the share market lost two thirds of its value in the 2007-8 crash, and prominent banks and finance companies with exposure to the US market failed, the Australian property market retreated to its 2005 value - which was still a fairly good increase over its 2000 value.

The average Australian wage is about $49,000 per year. The average household income is about $100,000 per year combined and the average mortgage size is about $225,000. Over 68% of the population owns their own homes. Of these, about 60% live in the capital cities. That leaves a large portion of the population renting, and combined with population growth through immigration of about 115,000 people per year, the rental market is being stretched.

As long as home-ownership is such an elusive goal for Australians, people wanting strong fixed-interest returns will invest in mortgages and there will be independent sources of funds available for borrowers.

Investing in mortgage funds has always been popular in Australia, usually through law firms and solicitors’ mortgage funds. Whilst these firms charge higher rates of interest to borrowers, the fact that they are owned or managed by lawyers means that there is a better class of risk management which ensures safety for investors despite the fact that borrowers paying higher interest rates usually do so because their risk profile does not allow them to borrow at lower rates.

This is now being supported by Government policy in Australia. According to Treasurer Swann’s speech, recent Government initiative has helped five non-major Australian banks, four building societies and credit unions, and four non-ADI lenders to raise over $10. 4 billion in funding. This government intervention has provided a boost to the industry at a time with the private securitisation market has gone backwards thanks to the GFC.

The Government's investments in Residential Mortgage Backed Securities has enabled smaller lenders to lend at competitive rates of interest and maintain a higher level of lending and market share than would otherwise have been possible. This in turn will help mortgage brokers who need non-bank lenders to survive.

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