Mortgage bonds are selling like hotcakes

Brisbane-based lender Firstmac has gone from strength to strength and has just issued the largest non-bank Australian mortgage bond in a $2 billion deal as Australia’s mortgage bond market hits its boiling point. 

James Austin, chief financial officer for Firstmac, said six of the 29 backers of the deal were investing in non-bank Australian RMBS for the first time, a sign of the intense pressure on fixed-income investors.

Resimac, another non-bank lender, last month priced a $1 billion offering, following a $1.5 billion issue in March, which was the company’s biggest since the financial crisis.

Word reaches us that investors are hungry for deals and that led to a run of residential mortgage-backed securities (RMBS). These are generally considered as safe and reliable income-producing securities for investment. 

We have some ‘splaining to do for those who may not know. A mortgage bond is a bond backed by real estate holdings. When a person buys a home and finances the purchase by keeping it as a mortgage, the lender rarely retains ownership of the mortgage. Instead, it sells the mortgage to another entity, such as an investment bank or government-sponsored enterprise (GSE). This way, the lender gets money instantly that they originally would get over the term of a loan. The entity packages the mortgage with a pool of other loans to minimise risk of any individual default and issues bonds with the mortgages as backing. When homeowners pay their mortgages, the payments flow through to the investors who bought into this pool. 

Resimac beefed up on their deal knowing that there’s a strong demand from investors in Australia as well as overseas, which has pushed the yield on the bonds relative to government debt to levels not seen since pre-GFC. 

With interest rates at rock-bottom levels, investors are scrambling for yield and pressing issuers for deals. There has been a lack of deals from big banks which usually rely on the Reserve Bank’s Term Funding Facility to support lending (it allows them to borrow at a 0.1% cash rate for 3 years). This in turn increases demand for non-bank issuance.

So far, non-bank lenders have issued about $10 billion of mortgage bond sales, quickly snapped up by fixed-income investors. 

Tailwinds

“When the housing market is strong, demand for supply of these securities increases as more people borrow and there are more mortgages that will be securitised,” said Mr Sorrell – head of credit for Nikko Asset Management Australia.

House prices are forecast to rise for another year, despite  near-stagnant wage growth. Nationwide housing values rose 1.8% in April. Sydney house prices climbed 10.7% and are now 7.4% above their previous peak in April 2020. The number grew between 2.2% in Melbourne and 15.3% in Darwin. 

Soaring house prices mean less well-off households and first home buyers are finding it difficult to get on the housing band wagon. There’s very little new affordable housing available at the moment, which has sparked an intense interest in apartments. Values are