Small lenders reject RBA's view on RMBS pricing

Reserve Bank assistant governor Guy Debelle opened yesterday's Mortgage Innovation conference in Sydney by declaring that small lenders were coming back and the mortgage market was contestable, and was immediately challenged by a number of industry players.

At issue were different views about the cost of funds for small lenders and their ability to control their margins.

Debelle said the securitisation market had returned as a viable source of funding for lenders.

In the RBA's view, with spreads for issues not supported by the Australian Office of Financial Management at around 130 to 135 basis points over the swap rate, the cost of issuance was "a little below break-even at 160 basis points".

ING Direct chief financial officer Mark Mullington said RMBS issuance was still a costly exercise. He estimated that in addition to the 130 basis point spread on AAA tranches, issuers paid extra coupon on their subordinated tranches, 40 basis points of fees and servicing costs, 10 basis points for pool insurance and 30 basis points on the cash to bill spread.

The total cost over cash for securitisation was more like 2.2 per cent, which was equivalent to the margin over cash for a basic variable mortgage.

Mullington said the big four banks enjoyed a pricing advantage over their smaller rivals of around 50 basis points in the wholesale term funding market. He estimated that gap would get wider as the composition of liability portfolios changed, with new debt replacing the old.

Mullington said smaller banks also paid more than the majors for retail at-call and term deposits. "When you blend it all together the funding gap is widening. The cost of funds will continue to go up faster for the non-majors."

A problem for the industry was that all ADIs were aiming for high levels of retail deposits but the savings pool was not getting any bigger. He estimated household and business savings at $792 and said competition only resulted in a reallocation of the savings, not growth in the pool.

FirstMac chief financial officer James Austin said he agreed with Mullington's analysis. Securitisation was no better than a break-even proposition, although the market was still in the early stages of recovery.

Austin said all the RMBS issues done so far had been vanilla portfolios - full doc loans with conservative loan to valuation ratios. He said he was keen to see an issuer get different classes of mortgage securities away without blowing out the spreads.

He said that if groups like FirstMac could not get funding for different classes they were forced to write full doc loans and compete with the majors on price. His preference was "to go for the niches".

The director of securitisation at Resimac, Mary Ploughman, said her group had looked at alternative sources of funding but discovered that everything else was more expensive than securitisation.

Westpac Institutional Bank head of structured and asset finance, Craig Parker, said he was optimistic that investor demand would allow issuance to continue at a healthy level and that pricing would come in.