The Australian mortgage-backed securities market is young but growing almost daily, as Aussie MBS professionals expect their biggest issuance year in history in 2001 in a country that has only 22% of its mortgage market securitized.
While some may consider Australia a backwater in securitized finance, the country is fast becoming one of the linchpins of a broader international MBS market. Analysts at Morgan Stanley Dean Witter expect A$25 billion ($13.8 billion) in MBS issuance this year, up from roughly A$20 billion ($11.1 billion) in 2000. The growth pattern has been steady. From September 1999 to August 2000, roughly $40 billion worth of Australian mortgages were originated on 546,000 individual loans, and analysts expect the market will post an annual rate of $40 billion in new issuance in the next few years.
What has mortgage pros excited is the general top-notch quality of Australian MBS, their easy liquidity and perhaps most of all, their very low rate of prepayment volatility. That's a stark contrast with its counterpart in the U.S., which should soon be hit by waves of mortgage refinancing given the recent Federal Reserve interest rate cuts. A portfolio of low volatility Australian MBS could go a long way toward sweetening an MBS deal, traders said.
The outback and crocodiles may represent Australia in the popular imagination, but a single family home may be the truer symbol. Australia has one of the highest homeownership rates in the world despite not ranking in the top 50 most populous countries. About 70% of Australians own their residence, compared with 67% of Americans, where MBS originated, according to Morgan Stanley analyst Alexander Crawford.
Roughly A$271 billion ($141 billion) of mortgage loans are currently outstanding, both securitized and unsecuritized, and that total is expected to grow by up to 15% each year, with the average mortgage size hovering around $73,000. Analysts said a continued growth rate is essential to build the Australian MBS market, as more volume improves liquidity and firms boost spreads for issuers.
A big sell job will not be needed for most MBS investors, who already consider Australian MBS to be top-of-the-line paper, comparable to investment-grade U.S. MBS and in a much higher league than MBS from less developed countries.
One key appeal of Australian MBS: Their consistent rate of prepayments. Seasoned mortgage prepayments tend to fall in the 23% to 28% range for Australian MBS, in part because so many mortgages are variable-rate loans, reducing the need to refinance. By contrast, the U.S. is dominated by fixed-rate mortgages. Thus when interest rates fall dramatically, up to 50% of the outstanding mortgage base is refinanced. The mood swings in the U.S. market are far more dramatic than in Australia.
Defaults on Australian mortgages are also few, analysts found, with loans often re-underwritten by mortgage insurers before securitization. So far, no AAA-rated Australian MBS has ever been hit with a loss or downgraded. Insurers aren't having to use their pocketbooks either, as claims paid on an annual basis by insurers only add up to 17 basis points since 1965.
Mortgage players said that Australian MBS are quite easy to trade, as the bonds tend to be geographically and structurally homogenous. The deals fall into two basic categories - bank-originated and non-bank-originated - and more than 90% of the mortgage issued to date are floating-rate, adjusting after a roughly one-year fixed rate honeymoon period.