Investors in Australian mortgage-backed securities may have to take into account a range of variables they had previously ignored, following research by Macquarie Bank.

The findings may be timely, given that international investors are expected to buy more Australian MBS this year than ever before, and to account for a far higher proportion of the overall Australian MBS investor base than previously.

Macquarie, the country's biggest independent investment bank and the dominant domestic arranger of MBS transactions, has published research suggesting that redraw facilities attached to home loans have a significant impact on the conditional prepayment ratio.

The study, which covered 65,000 loans, was the first of its kind by the bank for three years. Like previous research efforts, it focused on PUMA, the flagship securitization vehicle of subsidiary, Macquarie Securitization.

For the first time, however, the research covered a large number of mature loans (outstanding for 30 months or more) and excluded older loans which, under the early forms of program documentation, would have been removed from the securitized pool once redrawn by a borrower.

According to the study, the CPR for loans incorporating a redraw facility ran between 26 and 27%, irrespective of the loan-to-valuation ratio of the loan. The CPR for loans without redraw facilities, however, varied significantly according to LVR.

Non-redraw loans with an LVR of between zero and 45% had a CPR of more than 31%, while those with an LVR of between 85 and 100% had a CPR of slightly more than 29%.

Macquarie postulated that the availability of redraws affected the prepayment behavior of borrowers.

"Just as a low LVR borrower may be expected to prepay their loan faster, they are also more likely to redraw the additional equity they have built up."

The study also identified loan purpose (i.e., whether used for owner-occupied funding or investment) and geographic location to be significant factors influencing CPR.

The findings may be timely, given that international investors are expected to buy more Australian MBS this year than ever before, and to account for a far higher proportion of the overall Australian MBS investor base than previously.

Aurora prices

The domestic mortgage-backed securities market in Australia has diversified another step further away from the residential sector with the pricing of A$150 million of commercial MBS issued by Commonwealth Property Investment Trust.

The CPIT 2006 Auroro Bonds, soft bullet securities with a scheduled maturity of March 30, 2006, and final maturity of September 30, 2007, were rated Aaa by Moody's Investors Service and priced at 41 basis points over the three-month bank bill swap rate. The underlying asset was a new Sydney office and retail complex, Aurora Place, in which ABN AMRO is a major tenant with signage rights. The investment bank lead managed the transaction.

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