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Australia govt. RMSB plan in doubt as “fund dwindle”

Posted on: June 10, 2009


Reuters – Tuesday, June 9

SYDNEY, June 9 – Australia’s A$8 billion ($6.31 billion) plan to revive non-bank mortgage lending is in doubt as a government fund runs out of money to pump into mortgage-backed bonds, with no word yet on whether funding will be renewed.

The programme, launched late last year, aimed to boost competition in home lending by purchasing new residential-backed mortgage securities issues originated by small lenders crippled by the U.S. subprime mortgage crisis.

Now, with A$6.2 billion already spent by the government as a cornerstone investor, the initial RMBS fund will soon run out, prompting questions on what the next move may be.

“It is a matter for the government and I don’t know what their decision will be,” said Neil Hyden, chief executive of the Australian Office of Financial Management , the government’s bond issuance body, said on Friday.

The government could decide the future of the plan in the third quarter of the year, he said. Hyden declined to shed light on what his advice to the government on the matter would be.

A large number of market participants expect the government to renew, in some form or another, an RMBS support plan because competition among mortgage-lenders is seen as crucial in a country obsessed with real-estate.

“One of the great vulnerabilities that Australia has probably to the global credit crisis is that Australia happens to be indebted property-wise very much more so than most parts of the world,” Vic Edwards, senior lecturer at the Australian School of Business of at the University of New South Wales.

Household debt is equal to 159 percent of disposable income, with housing around 135 percent.

However, many experts say the current RMBS purchase plan has failed to provide much-needed liquidity because the spreads offered by the new RMBS issues bought by the government are artificial and far below those seen in the secondary markets.

New triple A-rated RMBS, sold by non-bank lenders FirstMac or Resimac, typically offer a margin of around 140 basis points over bank-bill swap rates, compared with about 400 to 500 bps in secondary markets.

Such a difference has left the Australian government doing most of the buying as fund managers stay on the sidelines.

The government has bought nearly 80 percent of the new issues since last October.

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