‘Time is right’ for government-backed RMBS: Greg Medcraft

On Wednesday (27 March), the House standing committee on economics released its Better Competition, Better Prices report, which made 44 recommendations to the government.

Among the recommendations were several initiatives to improve competition in the mortgages space, including that the government should consider adopting a government-backed residential mortgage-backed securities (RMBS) scheme.

Such a scheme has been backed by securitisation specialist Greg Medcraft, the current chair of aggregator Australian Financial Group (AFG) and former chair of ASIC, who fronted the inquiry on the matter last year.

Medcraft has previously called for the introduction of a public RMBS scheme, similar to a scheme already in Canada, as it would facilitate more equitable funding for mortgage lenders. This would level the playing field for smaller lenders and improve competition in the market.

Speaking to Mortgage Business following the release of the report, Medcraft said he “wasn’t surprised” the recommendation for a government-backed RMBS had been adopted, as it was “quite rational”.

He said: “It has actually already been recommended twice before to government. But I think now, with the passing of time and being through what we’ve been through [economically], I think it’s probably time.

“It will lower systemic risk for lenders, the government and taxpayers because it’s match-funded.

“It will fund a much more efficient banking system (because there’s zero capital requirement for mortgages funded through the public RMBS), and it would be attractive to investors because it means a release of capital.

“It offers more innovation, more competition, more choice, more stability.”

Speaking on the benefits of the Canadian RMBS scheme, Medcraft said that the model had “been successful for over 40 years” and saved approximately $870 million a year in aggregate mortgage funding costs.

He continued: “The Canadian scheme offers fixed and floating rate securities that back fixed and floating rate mortgages, which are much lower than rates currently being offered by the banks today.”

Medcraft suggested the case for a public RMBS scheme in Australia was “compelling” given the much-needed push to bring about cost savings.

“So, it probably is now the time – more than it was 10–15 years ago – to bring in the Canadian model,” he told Mortgage Business.

“The next step would be to think about doing a pilot project to see how it works in the domestic market,” noting it would be tailored to an “Australian context”.

Medcraft also commented on the committee’s recommendation for the government to consider implementing tracker mortgages.

He commented: “What we’re seeing at the moment is that run rates are rising and younger borrowers in particular, who are really facing cost-of-living pressures, are disproportionately impacted. It has a massive impact, which is not the case in countries which have, largely, fixed-rate borrowers.

“So having more competitive rates would actually create a much more resilient system where it doesn’t rely on just hurting already-strained consumers. In the current environment, I think that is quite important.

“The issue is – if you were a major bank – why would you want it? Because, at the moment, you can charge consumers whatever you want.

“When they [the banks] try to pass on out-of-cycle rises or falls, they hit their social licence and have massive consumer issues. They don’t do themselves any favours. Whereas, with tracker mortgages, the second the cash rate moves, the rate moves.”

However, Medcraft added that the Australian system should bring in a floor rate to avoid heard-learned lessons in other countries – such as the UK – where the cash rate dropped to zero and some tracker rates (which had margins under the cash rate) dropped into negative territory.

Other members of industry have also welcomed the RMBS recommendation.

Speaking to The Adviser, Peter White OAM, the managing director of the Finance Broker Association of Australasia (FBAA), said that while he supported the committee’s recommendation to introduce an RMBS scheme, he believed the banks should be excluded from using the public RMBS.

White said that the scheme should not be available to the banks as they had sufficient depth to support their own RMBS series.

Melina Morrison, chief executive of the Business Council of Co-operatives and Mutuals (BCCM), said: “We welcome recommendations to ensure customer-owned banks can compete fairly and equally with the big four banks.

“These measures would stimulate innovative product offerings and services from customer-owned banks, increase profitability and their opportunities to deliver benefits back to their members including in residential lending and small-business banking.”

You can find out more about why Greg Medcraft believes Australia needs a public RMBS in the Mortgage Business podcast episode, below:

[Related: Mortgage changes recommended by economics committee]