Competition and consumer choice are additional benefits. The Canadian MBS model allows smaller institutions to provide mortgage funding at comparable rates to larger institutions. With the decline of the MBS market in Australia and the flight of deposits to larger institutions, smaller Australian lenders are having trouble accessing funds. Accessing funds at competitive rates is an even greater challenge, which ultimately reduces consumer choice. In contrast, the Canadian MBS market is open to a broad group of lenders that access funding at comparable rates to one another.
Australian borrowers are also expected to benefit from a more transparent market. Under the Canadian model, the rates and spreads of CMBs are the major funding benchmark for all mortgages. This transparency drives competition across the mortgage market.
Moreover, these benefits are available with limited impact on the Federal Government’s budget. The guarantee from the Canadian government is charged on a commercial and zero risk underwriting basis ensuring the public does not subsidise the program. Surplus from the guarantee fee is paid into a guarantee fund held by the CMHC to cover any payments on the guarantee.
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Next steps
The ASF believes these enhancements could be a relatively straightforward overlay onto the existing market structure for prime RMBS. Tranching and structuring of cash flows would deal with the longer term of Australian mortgages and swaps would address floating/fixed rate risk.
To develop a more detailed implementation plan, the ASF hopes to establish a taskforce of interested parties in the coming months. The taskforce will further research and advocate the reform opportunity with view to achieving a consensus position on a new model to enhance the Australian MBS market. In the meantime, the ASF is meeting with key industry players to gather feedback and input into the proposed model. We welcome any feedback from On Line Opinion readers.
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