Future brighter for non-bank lenders

THE Reserve Bank says the main source of funding for non-bank lenders is heading for recovery after receiving a government leg-up, but it is unlikely to get back to the way it was in the boom years before the financial crisis.Late last decade residential mortgage-backed securities (RMBS) — bundles of home loans sold to investors — arrived on the scene, creating competition to the big banks by providing funds to non-bank lenders.But the global financial crisis crippled the industry because investors were reluctant to buy them as some in the US and Europe contained subprime debt. Guy Debelle, an assistant governor of the RBA, yesterday gave an upbeat view on recent "signs of life" in Australian securitisation markets, and predicted further improvement in the troubled sector.Government purchases of $8 billion in new securities have helped the industry through the worst of the crisis, but Dr Debelle noted this level of support was dwindling.Smaller lenders, such as ME Bank (formerly Members Equity), had recently issued new securities worth $2.3 billion off their own bat, and the Government was taking a smaller position in the deals it did support."In general, I think securitisation will be an important part of the financial landscape in the future," Dr Debelle told the Australian Securitisation Conference in Sydney.The RBA's support for the market has also included relaxing its restrictions and agreeing to hold the securities to help financiers fund themselves.While the RMBS market is making a recovery, it appears unlikely to regain the prominent role reached before crisis struck credit markets in 2007. At their peak, the securities funded 25 per cent of all home loans.Dr Debelle compared their future role to that of "junk" bonds, lowly rated corporate bonds that boomed in the 1980s only to play a smaller though still important role in today's financial system.But others in the industry are less confident. The director of securitisation at lender Resimac, Mary Ploughman, said Government support for the sector had been critical and some investors remained edgy about the assets. "There's still a degree of nervousness, particularly as transactions get larger," she told the conference.Australian RMBS securities have avoided the high default rates seen overseas thanks to tighter lending standards and a milder recession. But Dr Debelle said the industry had suffered "collateral damage" from the subprime crisis in the US and Europe.