Super to fund mortgage securitisation

Speaking at the Actuaries Institute Financial Services Forum in Sydney this week, Mr Brogden said a natural partnership will form between superannuation and the banking sector as the Murray Inquiry looks to the financial system to fund the Australian economy.

“We will have so much money available [in superannuation] that we look for very long term, very predictable outcomes in Australia with good strong predictable returns,” Mr Brogden said.

“You can’t go past home mortgages in Australia when you are looking for that,” he said, adding that Australians have a cultural connection to housing second only to the UK in terms of percentage of home ownership.

“Australians would eat baked beans before they default on their mortgage,” Mr Brogden said.

“We all know it; you will get down to your last penny and you will make every effort to repay your mortgage.”

While Mr Brogden sees this as a “cultural connection” to housing, there is also the absence of ‘jingle mail’, or strategic default, a system that prevails in the United States.

“When you know you can simply mail the keys [to the property] back it creates a disincentive because all the risk is with the lender and not with the borrower,” AMP Capital chief economist Shane Oliver said.

“Whereas in Australia, default rates are low partly because even when home owners do get into stress they will do whatever they can to keep the payments up, rather than having a situation with negative equity and posting the keys off.

“The institutional nature of our market is a relatively strong one, and we never had the credit deterioration that occurred in other parts of the world,” he said.

According to ASF chief executive Chris Dalton, the Australian RMBS market is currently one of the few functioning RMBS markets in the world.

“When you look at 2013 in terms of private label RMBSs – that is, when you look at the US and exclude the issues through Fannie Mae and Freddie Mac – there was only a total issuance of private label RMBSs of US$18 (AU$19.15) billion,” Mr Dalton said.

By comparison, the Australian market had AU$26 billion, while UK banks issued the equivalent of EUR5.7 (AU$8.4) billion in 2013.

“In terms of private label RMBSs, the Australian market was the largest in the world in 2013,” Mr Dalton said.

Last month, non-bank lender Pepper and mortgage aggregator AFG  both issued RMBS deals.

FSC chief John Brogden can see no better investment for Australian superannuation, now the fourth largest pool of funds in the world. 

“Superannuation is looking for a strong investment,” Mr Brogden said.

“We don’t want to be banks, but we will partner with banks in providing the capital that is securitised and then loaned out,” he said.

The partnership between superannuation and mortgage lenders will see a cooperative effort from what Deloitte partner James Hickey calls the “two engines Australian economy”.

“I always like to say there are two big engines driving this financial services sector,” Mr Hickey said.

“We’ve got superannuation at $1.7 trillion and mortgage credit lending at $1.3 trillion.

“They are really the two engines driving the economy forward at the moment.”