Aaa fix called for in mortgage market

The prolonged lack of access to debt capital markets of most of Australia's non-bank home loan providers constitutes a "market failure", and one that warrants extension of the Australian government's Aaa credit rating to the now moribund market for mortgage-backed securities.

Or so argue Christopher Joye, managing director of Rismark International and Joshua Gans, professor of management at Melbourne Business School. Joye's firm is, indirectly, a niche mortgage funder as the force behind the shared equity loans marketed by Adelaide Bank.

Joye and Gans propose that the Australian government sponsor a mortgage funder along the lines of Fannie Mae and Freddie Mac in the US or the Canada Mortgage and Housing Corporation, two entities that buy prime mortgages from banks and other originators and rapidly sell them, through mortgage-backed bonds, to investors.

The two propose an Australian version (which they dub AussieMac in their paper) and that they say would have a "role as a long-term liquidity provider … during periods of capital market failure when third-party funding for Australian home loans can disappear with potentially dire ramifications for the financial system."

Joye and Gans argue that "market failures of the types we are seeing in the primary market for residential mortgage-backed securities … is akin to the problems associated with bank runs.

"Bad decisions can by virtue of a lack of transparency in certain markets, translate into increased costs and a lack of liquidity elsewhere. This is precisely what we have see in global debt markets over the last eight months."

This episode will, the authors say, "have long-term consequences for the cost, flexibility and availability of Australian credit".

The authors do not attempt to assess the costs, explicit and implicit, of setting up such a program. Rather, they emphasise the benefits of such a program in terms of the availability of liquidity and a low cost of funds for mortgages.