A joint paper released this week has called for more Federal Government aid to help prevent the big banks regaining dominance of the home lending sector as the credit crunch forces small originators and lenders out of business (RAMS and Macquarie Bank) or to cut back (Bluestone and others).
It calls for a new funding agency to be created by the Federal Government:
Under our proposal, the Commonwealth would guarantee the credit worthiness of an Australian government agency, which we loosely call ‘AussieMac,’ thereby lending it Australia’s AAA credit rating. This would allow AussieMac to issue substantial volumes of very low cost bonds into the domestic and international capital markets.
The funds raised through issuing these bonds could be used to acquire high-quality AAA-rated Australian home loans off the balance-sheets and warehouse facilities of lenders (including the majors). AussieMac would, therefore, serve to guarantee liquidity in the Australia home loan market in the event that other private sources of capital were to supply insufficient funding, such as is currently the case.
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The funding advantages afforded to AussieMac should ensure that it is a profitable going concern that does not require any meaningful public subsidies. This is certainly the case with the CMHC in Canada and Freddie Mac and Fannie Mae in the US, which do not draw on any government funding whatsoever to support their securitisation activities.
Sounds eminently sensible, but it’s interesting to look at who’s making the call. The paper was written by Joshua Gans, a professor of economics at the Melbourne Business School, and Christopher Joye, Managing Director of Rismark International, a funds management business which is obviously feeling the pinch from the credit crunch and the shut down of the securitisation markets.
According to its website:
Rismark International (“Rismark”) is a global funds management business that has expertise in the execution of sophisticated real estate investment, research, securitisation and active portfolio management strategies. As a by-product of its quantitative research activities, Rismark also produces advanced property price indices and automated property valuation models (AVMs), amongst other things.
… In March 2007 Rismark launched via Adelaide Bank the first “shared equity mortgage” to ever be made available by a private lender in Australia’s history.
With policy proposals like this, the Cui Bono test should always be: who benefits? In this case, it would be small banks and lenders, including Rismark clients, many of whom have had their business models destroyed or badly damaged by the abrupt halt of the cheap money era — risk has been rediscovered and it will be priced into deals even after the crunch eases.
The AussieMac idea, while having merit, is really just a way of asking for Government aid for a group of businesses whose time has come and gone. Why should the Federal Government provide the cheap money that used to come from the credit markets?
And the proposal would effectively provide a taxpayer subsidy to the lenders whose mortgages AussieMac was backing. Where is the fairness for renters and homeowners who have already paid off their mortgages?
Gans and Joye should read yesterday’s speech from Dr Anthony Richards, head of the RBA’s economic analysis department, on housing affordability.
On the demand side, it is now widely accepted that policies that simply give people more money to spend on housing are likely to be capitalised into higher housing prices. On the supply side, efforts to improve housing affordability should be focussed on policies regarding land use and on improving efficiency in the supply of land and housing.