Subsidy for Suncorp

The timing may be coincidental with the GFC II, that now seems to be under way, but Australian Office of Financial Management announced yesterday that it is moving once again to actively subsidise primary RMBS issuance.

Admittedly, under AOFM's first RMBS Investment Program it was not only subsidising RMBS issuance, it was underwriting the most part of it.

AOFM invested A$8.0 billion under its first RMBS Investment Program that ran from November 2008 to August 2009. During the early part of this period, at the height of the GFC I, AOFM was typically buying the entire 'Class A2' tranche and this would account for the majority of the RMBS issue. AOFM's take up steadily diminished over the latter part of the period, as private sector participation increased.

Since AOFM commenced its second A$8.0 billion RMBS Investment Program it has invested only A$700 million in the more than A$9.8 billion of prime RMBS issued to date. With this volume of issuance, it could be argued that the market is now functioning fine and further AOFM participation is not required.

However, in the last two months, as global financial markets have again taken a nose dive, there has been no prime RMBS issuance, with the exception of the recent restructure of an old, prime, low-doc RMBS issue by FirstMac.

Suncorp-Metway announced a A$500 million prime RMBS issue yesterday, in which AOFM intends to subscribe for the entire Class A2 tranche (rated AAA). The tranche amounts to a relatively modest A$150 million but has a weighted average life of 6.0 years.

AOFM intends to subscribe for the tranche at a margin of 110 basis points to 130bps over bank bills. Institutional investors will have the opportunity to buy the A$315 million Class A1 tranche (AAA), with a WAL of just 1.5 years, at an indicative spread of 100bps over bank bills.

There is also a A$25 million Class B tranche (AAA) and a A$10 million Class C tranche (AA-), both with a WAL of 5.3 years.

AOFM argues that its mandate under its investment program is to support competition for residential mortgage lending and lending to small business. Moreover, pricing in the primary RMBS market has stabilised around current levels, 130bps to 135bps for a standard Class A2 tranche with a WAL of around 3 years, for an extended period of time.

AOFM says it is now willing to invest at tighter levels but this will be balanced by the need to encourage continuing private participation. Consequently, it specifically requested Suncorp to modify this issue to allow its intended participation.

AOFM has some A$7.3 billion left to invest under its second RMBS Investment Program, of which A$3.1 billion has already been allocated. It is now inviting further RMBS proposals with a similar structure to this Suncorp issue.

The question that needs to be asked, if AOFM's decision to become more active in the market again is not due to the current turmoil in global financial markets,  is whether it is appropriate for a government-controlled body to interfere in a functioning market, specifically to drive down pricing? The question seems particularly pertinent when AOFM's activities will lower the cost of mortgages at a time when there is broad community concern over exorbitant house prices.