Question: What does the U.S. have that Australia doesn't have? For starters, the Land Down Under doesn't have any government-sponsored enterprises (GSEs). However, that might change.
In April, the Australian Securitization Forum (an industry trade group) and Rismark (a real estate investment group) floated simultaneous recommendations for an Australian GSE based on the Fannie Mae model. It was decided to call the agency AussieMac, in tribute to the folksy nicknames given to the U.S. GSEs.
For two months, nothing much happened with that idea. But on June 18, the Housing Affordability Committee of Australia's Senate issued a report that the Treasury look into the possibility of creating AussieMac. According to the Wall Street Journal, the report envisioned AussieMac being able to buy mortgage-backed securities (MBSs) and repackage them as low-cost mortgage bonds.
Driving the push for AussieMac is the state of Australia's housing market. Bloomberg News reports that Australian housing affordability hit a three-decade low due to a spike in housing prices and soaring interest rates. AussieMac, according to its supporters, would pump liquidity into the local market.
In concept, AussieMac is a fine idea. But as with many fine ideas, there are problems in the details.
For starters, having a GSE does not automatically lead to a copacetic market. The current U.S. market is no one's idea of a weekend at the beach – and that's with having Fannie, Freddie and Ginnie. Of course, the GSEs are doing everything they can to help alleviate the situation. But the point remains that a GSE is not necessarily an antitode to a severe crisis.
Also, the Australian government currently has a triple-A rating – not bad, considering the local economy is a bit of a mess. As proposed, AussieMac would vigorously leverage that excellent rating. But if things go wrong, that rating will be tarred and it could be a long time before it is restored. Considering the state of the Australian economy and the global credit markets, this is a very risky gamble.
Furthermore, the Australian MBS market is having problems that are a little too similar to the U.S. example. The Sydney Morning Herald reports that arrears on subprime loans in residential MBS offerings, as measured by Standard & Poor's SPIN index, rose 14.66% in March, up from 12.29% in December. Late payments on prime loans are also on the rise. Clearly, some MBS issues need to be addressed before any new activities commence.
Finally, AussieMac appears to be of primary benefit for the country's smaller lenders, who are seeking additional funds to boost the quantity of their lending. But in view of the country's mortgage woes, perhaps more attention should be given to the quality of origination rather than quantity.
As of this writing, it is not certain where the Australian government is going to proceed with AussieMac. If Canberra is anything like Washington, it will probably take an extraordinary amount of time for any significant change to be enacted. Nonetheless, let's hope the Australian government proceeds slowly on this issue – there are many questions that require answers and many worst-case scenarios that need to be plotted out before the government gets inserts itself into the middle of the MBS market.
– Phil Hall, editor, Secondary Marketing Executive.
(Please address all comments regarding this opinion column to hallp@sme-online.com.)
