REDS, Pepper on a roll

Seven hundred and fifty million dollars in funding for prime home loans for Bank of Queensland and $78 million for Pepper for a pool of non-conforming loans marked a decent Monday for enthusiasts of non-bank financial intermediation.

The flow of money into mortgage securities appears to be picking up. Liberty, CUA and MyState all scooped up investors over recent weeks, and following leads set in early July by ME Bank and Bendigo.

The Australian Office of Financial Management sits at the centre of most of these fundings, though one - that for Pepper - is an independently organised affair.

Pepper said in a statement that the decision to call $77.5 million in securities on the Pepper Residential Securities Trust No 5 was made in light of "legitimate concerns from RMBS investors with regard to deal extension risk and their ability to accurately price the underlying securities."

The Pepper view is that investors want to hold a security such as a pool of mortgages for the time they planned for. Pepper made one other such call, on the preceding trust in late 2008.

Bank of Queensland is on the AOFM drip that steered MyState, CUA and Liberty to market, so the Australian government's willingness to invest is the cornerstone of this trend.

Other investors are joining them for the juicier yields that come with a modicum of additional risk. Some of this is bank money, some fund money, some privately managed, and many of them, most likely, used to enjoying the decent returns from mortgage pools.