How RMBS was brought to Australia

The executive chairman of the Stargate Corporation Group, Vernon Spencer, has unpacked the history of residential mortgage-backed securities (RMBS) in a new podcast with Mortgage Business.

Speaking to the Mortgage and Finance Leader podcast, Mr Spencer reflected on how he helped establish mortgage securitisation in Australia, issuing the first RMBS in the 1970s.

The journey began when Mr Spencer travelled to the US to learn more about the mortgage market there.

It was there that he became inspired by how colleagues working at Ginnie Mae (the Government National Mortgage Association), Freddie Mac (the Federal Home Loan Mortgage Corporation), and Fannie Mae in the US were issuing mortgage pass-throughs.

Ginnie Mae, for example, guaranteed the first mortgage pass-through security of an approved lender in 1968, while Freddie Mac issued its first participation certificate in 1971 and Fannie Mae issued its first mortgage-backed security in 1981.

He said he was fascinated by the fact that these companies were not writing loans on their own balance sheets, they were guaranteeing and trading them.

Moreover, he was attracted by the high yields of Ginnie Mae’s offerings and thought he could bring mortgage-backed certificates to Australia. However, he noted that the main barrier was the paperwork required in trading mortgages – particularly as mortgage loans required a substantial amount of paperwork.

As such, his company – Central Mortgage Registry of Australia – worked with lawyers, stamp duty specialists, and trustees to “be able to take a whole bunch of mortgages, give them to a trustee, and then have – out of all of that – just one piece of paper issued”.

By issuing a certificate for each mortgage, these were able to be packaged up and traded through the instrument Annie Mae (so named as “it was a promise to the guys at Fannie Mae that if they came out here, they wouldn’t lose the rights to the Fannie Mae”, Mr Spencer revealed), with every loan holding a mortgage insurance policy from the Housing Loans Insurance Corporation (HLIC), a body previously owned by the Australian government to provide Lenders’ Mortgage Insurance (LMI).

“Annie Mae suddenly had for every loan a mortgage insurance policy. And as you can imagine, people loved it,” he said.

The group then created pools of mortgages and issued certificates from the pools, rather than issuing single mortgage-backed certificates. The first residential mortgage-backed securities (RMBS) were issued a year later.

Mr Spencer suggested that this was “probably the best yield instrument that existed by a long time”.

He continued: “For a while, no one really copied it because they didn’t really figure out what the hell we were doing.”

After selling the business to Prudential in the 1980s, Mr Spencer went on to create Interstar Securities. With strategic funding and warehousing partnerships with large capital markets firms, Interstar Securities was able to grow its securitisation business and develop a secondary mortgage market in Australia.

“It made sense. We were fortunate to have strategic funding and warehousing partnerships with several, very large capital markets firms. We also wanted to improve the whole mortgage origination process by working with brokers and getting volume to feed the insatiable demand,” he told Mortgage Business.

The Interstar Securities Group went on to become one of the nation’s largest non-bank wholesale loan financiers – funded by the issuance of its mortgage-backed securities to major institutions and investors in Australia – while providing training and support to brokers and tailoring their securitisation activities to suit institutional investors.

In 2001, Interstar Securities was sold to the giant US insurer Prudential. The company had grown to employ approximately 220 staff and had a book value of around $20 billion.

You can listen to the full Mortgage and Finance Leader episode with Vernon Spencer here:

[Related: MORTGAGE AND FINANCE LEADER: How Vernon Spencer brought RMBS to Australia]