The cause of the global financial crisis has been debated solidly for many years now but one sector in the US has received most of the blame – residential mortgage backed securities. RMBS involves the packaging of mortgages into securities which are subsequently bought by investors.
RMBS in Australia were never beset by the problems experienced in the US and have been reasonable high yielding investments in the main. Despite this, there has been a global push by banking regulators to review the rules regarding securitisation and after many years of delay a discussion paper has finally been released by APRA.
A particular concern in some quarters has been the potential extension of rules to non-bank lenders which are presently not regulated by APRA regarding the warehousing of loans by banks before they are actually turned into securities which can be subsequently sold to investors.
It would appear that the concern has been addressed and non-bank mortgage funding via mortgage backed securities will largely remain as it is at present and so continue to be an important source of lending. APRA has said it would remove any specific reference to warehousing in the new rules. Instead it will take a “principles based approach” meaning that the regulator will assess risks on a case by case basis.
Warehousing of loans is what allows non-bank competition to exist but APRA acknowledges there are potential systemic issues because whilst loans are being warehoused, there is no institution actually holding capital against the risk of default.
The discussion paper and draft APS 120 can be found on APRA’s website at http://www.apra.gov.au/adi/PrudentialFramework/Pages/Revisions-to-the-Securitisation-Framework.aspx