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RMBS and the quest for higher yields

Updated: Oct 1


Supported by a combination of record-low interest rates and government support programs, the house price surge is set to continue until the rest of the Australian economy recovers to pre-COVID levels. With the widespread prevalence of this fact, we see home lending levels driven to record highs. In March alone there were over 64,300 mortgages issued for both owner-occupiers and investors, averaging more than 2,000 a day. The increase in lending is further highlighted when compared to May last year, during the height of the pandemic, with NSW seeing a 72 percent increase, Victoria 60 percent and Western Australia seeing an increase of 664 percent compared to the number of first-home buyer loans in May last year.


However, despite high levels of activity in the residential mortgage sector, the rest of the Australian economy and furthermore the global economy continues to experience a rocky road to economic recovery. Consequently, the combination of low benchmark interest rates, coupled with comparatively weak economic activity in other sectors, have lead many investors to be actively search for higher yields. Many investors ended up turning to Residential Mortgage Backed Securities(RMBS) as a means of securing higher yield by leveraging the booming residential market without directly participating in the housing market. In the Australian market RMBS were initially introduced as an alternative to bank deposits as a source of funding for residential mortgages. Consequently, it enabled smaller authorized deposit-taking institutions or institutions with limited access to deposit funding to compete in the market. However, its popularity plummeted alongside the confidence in it's asset class following the GFC, despite low levels of mortgage default in Australia.


RMBS' newfound popularity is evident over the last couple weeks, with a slew of non-bank institution increasing their RMBS issuance size, such as Firstmac's initial $1 billion increased to $2 billion, Resimac planning an additional $1 billion offering, following its $1.5 billion offering in March, which was the company’s biggest since the financial crisis and La Trobe Financial has priced a $1.25-billion residential mortgage-backed securities (RMBS) issuance. Closer inspection of investor reception to these offering, further emphasize the popularity of the RMBS in the current economic climate. James Austin, chief financial officer for Firstmac, said six of the 29 backers of the deal were investing in non-bank Australian RMBS for the first time, a sign of the intense pressure on fixed-income investors. La Trobe Financial's issuance revealed that 65 percent of transactions were with institutional investors and 71 percent was placed with international investors.


However RMBS is not the only option for high yield securities in the current economic climate, as their exists alternatives with slightly different characteristics, potentially being more suitable for certain investors. At it's base level, RMBS is a form of Pooled Mortgage Schemes, which benefits from spreading risk over a pool of loans and is suitable for passive investors. However, downsides to this are investors not possessing direct control over where the funds are being invested, alongside higher management fees as the funds manager has to compare and juggle a large variety of loans. The other main form of mortgage scheme is contributory mortgage fund which is often called direct mortgage fund because its pools investment capital until it is able to take mortgage security of a single asset. As it is only targeted towards a single asset, investors possess far greater control over their investment choice, enabling more active investors to assess individual mortgage investments against their own risk profile, thereby determining suitability with their own financial goals and situation. Traditionally only utilized for large commercial projects, contributory mortgage schemes are becoming more popular for funding small residential projects, especially since the main drawbacks for lack of diversification are reduced as an individual property's downside risk are low during a booming house market. At KBRZ we strive to provide products that best suit the needs of our clients, contact us today to find out more about financial products that may be more suitable for you than RMBS.

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