Public RMBS system would improve mortgage competition: Greg Medcraft

The chairman of aggregation group Australian Finance Group (AFG), Greg Medcraft, is calling for the creation of a public securitisation market in Australia to ensure that there is a more equitable funding model for mortgage lenders and to drive down costs for borrowers by improving competition.

Speaking to Mortgage Business for the Mortgage and Finance Leader podcast, the securitisation specialist and former chairman of the Australian Securities and Investments Commission (ASIC) outlined that he has been a proponent of having a public residential mortgage-backed securities (RMBS) market in Australia for decades – and believes that such a system could improve mortgage competition.

Mr Medcraft highlighted that other countries that have a public securitisation system, such as Canada, have been able to create a stable funding model that enables smaller lenders to compete with larger banks on a more even playing field and attracts new investor classes.

While Canada has a similar major bank oligopoly to Australia, he flagged that the Canadian public RMBS market has been in place for 30 years and was a good example of how this model could work.

Mr Medcraft particularly flagged its “very good risk-sharing model with the private sector”, its very stable funding margin (about 0.3 over the cash rate) due to its “very liquid securities”, and its ability to “actually allow either non-bank or the smaller banking institutions, credit unions, etc to actually fund on a level playing field, but also on a stable, level playing field”.

“We do have problems in the securitisation market,” he said, emphasising that whenever investor appetite pulls back, funding becomes much harder and deposit-taking institutions therefore become more dominant, given that they can pull on this funding base.”

However, he added that because the public RMBS system in Canada is government guarantee “backstopped”, it attracts “a whole new investor base for mortgage-backed securities”.

Speaking on the podcast, he explained that a public RMBS would therefore become attractive to Australian pension funds and super funds, stating: “It’s an ideal security because they can say they’re supporting housing, but they’ve actually got something that’s very liquid and it’s a long-term fixed income security.

“I think it’s a great way of building our capital markets because, at the moment, in Canada, 50 per cent of mortgages are funded through the capital markets. In Australia, I think it’s 10 or 15 per cent.

“So it develops our capital markets, accesses our funding base. So I see a lot of potential in it.”

While the AFG chairman acknowledged that the larger institutions may be loathed to back such a scheme, he said he believed that “it’s probably the right time to think about it because we have a lot of talk at the moment in this country about productivity and competition and removing costs from the system”.

Indeed, he said that a public RMBS regime would likely reduce the cost of mortgages, suggesting that it proved successful in bringing more competition into the Canadian market and resulting in mortgage rates dropping by “about 70 bps” as a result of the lower cost of funding.

“It also acts as a catalyst because, if you have enough of it, it actually forces the big ones to bring down their rates,” he continued.

“Basically, at the moment, the big four are the price leaders in the market. And so if the price leaders see somebody … bring their rates down, guess what happens? It’s about competition ... They actually have a far more competitive rate delivered to the consumers.

“So, I think we just need to adjust the dial a little bit to give a bit back to the consumers ... It’s healthier to have a more competitive banking system.”

You can listen to the full Mortgage and Finance Leader podcast with Greg Medcraft below:

[Related: MORTGAGE AND FINANCE LEADER: Why Greg Medcraft believes Australia should have a public RMBS]