8 December 2009
Purchase of Residential Mortgage-Backed Securities – Serial Investment Arrangements
Operational Notice No. 25/2009 of 7 December 2009 outlines the general approach that the AOFM will follow in investing in residential mortgage-backed securities (RMBS) in coming months. It invites the submission of proposals from arrangers on a reverse inquiry basis.
As indicated in that notice, the AOFM is also willing to invest in a series of separate RMBS issues ('pipeline funding') to lenders who have been largely or wholly reliant on securitisation markets to fund mortgage lending. Such serial investment arrangements can provide lenders with greater funding certainty and so a greater capacity to compete in mortgage lending.
This notice provides details of serial investment arrangements and invites the submission of proposals.
Eligibility to lodge proposals
Proposals may be lodged by arrangers/lead managers that are members of the AOFM Investment Facility dealing panel (current panel members are listed in the Appendix) on behalf of issuers/originators that have previously securitised residential mortgages in Australia and intend to remain active in funding new mortgages through securitisation.
Proposals may also be lodged by issuers that have previously issued RMBS that have been purchased by the AOFM. This allows proposals to be submitted by issuers that expect that they may wish to use different arrangers/lead managers within a series of RMBS issues.
Serial investment arrangements
In a serial investment arrangement the AOFM will undertake in principle to invest in several RMBS issuances by or on behalf of a single issuer over a 6 to 12 month period. In each issue the AOFM will invest up to 50% of the total AAA securities proposed to be offered, to a maximum AOFM investment of $250 million, and up to 75% of a specific security (i.e. tranche).
The terms of each serial investment arrangement will be agreed with successful applicants.
The extent and terms of the AOFM's participation in each issue will be determined at the time of the issue. Where the AOFM does not take up the full amount initially allocated, the shortfall may, at the AOFM's discretion, be allocated to a subsequent issue under the serial investment arrangement.
Issuers that have a proposal for a serial investment arrangement accepted by the AOFM will not be eligible to apply for investment in RMBS under the reverse enquiry approach until the serial investment arrangement has ended.
All proposals for serial investment arrangements will be considered in one round, with 15 January 2010 as the closing date for lodging proposals.
Proposals will be evaluated in terms of the contribution they will make to maintaining competition in housing lending and using the following criteria:
- The extent to which the funds raised from proposed issues under the arrangement will be used to originate new residential mortgages.
- The extent to which the mortgage originators associated with the proposed arrangement have been largely or wholly reliant on RMBS to finance their lending for residential housing in the past.
- The capacity of issuers and originators to finance mortgages in the interim period prior to the issue of RMBS under the proposed arrangement. Proposals should indicate what undertakings relevant parties connected with the issuer are prepared to make in this regard (for example, in relation to continued future access to warehouse facilities).
- The expected participation of other investors in the issues proposed under the arrangement.
- The experience, capabilities and quality of the mortgage originator and servicer.
Issuers will be required to undertake to advise the AOFM in a timely manner of any material changes to their mortgage origination or business strategy, or other material changes that may affect their business or sponsored RMBS transactions, including but not limited to a change of control or a material deterioration in financial condition.
Issuance Under a Serial Investment Arrangement
Investment assessment criteria
Subsequent to the awarding of a serial investment arrangement, the extent of the AOFM's participation in each issue under the arrangement will be evaluated in terms of the contribution it will make to maintaining competition in housing lending and using the following criteria:
- The extent to which the issuer/originators have undertaken new mortgage lending for housing under the arrangements, including the interim financing (warehouse) capacity available and utilised.
- The expected participation of other investors in the issue.
- The proposed pricing of the securities, having regard to the market conditions then prevailing, the capacity of the mortgages in the pool to service the securities, and objective of supporting competition in lending for housing.
- The timing of the proposed issue and the extent to which the proposal will avoid congestion with other issues.
- The overall quality of the mortgage pool and securities on offer.
- The experience and capability of the arranger/lead manager in relation to RMBS issues. The transactions arrangers/lead managers are required to be members of the AOFM Investment Facility dealing panel at the time of the issue.
Minimum eligibility requirements
All issuance under a serial arrangement must meet the following minimum eligibility requirements:
- The securities offered must be:
- Expected to obtain an AAA (or equivalent) credit rating. This rating will need to be confirmed by at least two of the major credit rating agencies before settlement of the issue.
- Australian dollar denominated.
- Settled in Austraclear.
- The following minimum requirements apply in relation to all loans in the mortgage pool (as at pool cut-off date):
- 100 per cent prime Australian mortgages.
- Australian dollar denominated.
- Mortgage insurable.
- Closed pool, no substitution or prefunding permitted.
- Maximum loan size of $750,000.
- Maximum remaining loan term to maturity of 30 years.
- Maximum loan to value ratio of 95 per cent.
- Interest only loans may not exceed 50 per cent of the initial principal value of the loan pool.
- Maximum interest only period of 10 years.
- Days in arrears for an individual loan payment may not exceed 30 days.
- Low documentation loans, that is a loan underwritten using alternative income verification procedures, may be included in mortgage pools. In pools where low documentation loans exceed 10 per cent of the initial principal value of the loan pool, all low documentation loans must meet the following additional requirements:
- Borrower is not a pay as you go (PAYG) salaried borrower and has provided an ABN.
- Maximum consolidated exposure to any one borrower in the loan pool of $1,000,000.
- Maximum loan to value ratio of 80 per cent.
- Mortgage insured.
- Mortgage insurability is best demonstrated through full insurance of the mortgage pool, but the AOFM will accept pools that are not fully insured where it is satisfied that alternative arrangements will provide an equivalent level of comfort about the quality of the mortgage pool. This may be provided by a combination of:
- Certification by a body independent of the arranger and issuer that the mortgages in the pool meet the published underwriting requirements of at least one major mortgage insurer;
- All the senior notes in which the AOFM would invest being assigned an AAA rating by at least one rating agency using an 'expected-loss' based methodology; and
- Equity contributions that enhance the credit of the senior notes.
- An independent audit of the mortgage pool must be obtained prior to the settlement of the transaction. Settlement will be conditional upon the successful completion of this audit, comprising both:
- Confirmation of the conformance of the pool with the above minimum requirements (a 'pool audit'); and
- Confirmation that a representative sample of mortgages in the pool can be traced back to loan documentation (a 'tie-back audit').
- The issue must provide for monthly reporting on the composition of the mortgage pool and regular reviews of the rating of the issue by the credit rating agencies.
Information to be Provided
Proposals for a serial investment arrangement must provide sufficient information, in the sole opinion of the AOFM, to enable the AOFM to determine if the conditions for participation are satisfied and to enable the AOFM to evaluate proposals against the selection criteria. It would be helpful for proposals to be presented in a manner that directly addresses the selection criteria.
The information provided should include:
- The undertakings the issuer is prepared to make regarding new mortgage lending and observance of the requirements in relation to each issue under the proposed serial investment arrangement.
- Information outlining mortgage origination activity. This should include origination strategy, historical mortgage origination volumes on a monthly basis for the prior three years, forecast origination volumes on a monthly basis for the next year, and an estimate of the impact of a serial investment arrangement on the origination strategy and forecast origination volumes.
- Information outlining interim finance / warehouse capacity. This should include facility limits and utilisation for all warehouse facilities on a monthly basis for the prior three years, forecast limits and utilisation for the next year, facility renewal or expiry dates, terms or conditions that may limit the ability of the issuer to originate new mortgages, or the timing of RMBS issuance, pursuant to a serial arrangement.
- Expected timing for RMBS issues under a serial investment arrangement.
- Information indicating previous securitisation activity of the issuer(s) including summary details of RMBS issues undertaken over the last five years. This information should demonstrate the extent of the issuer's reliance on RMBS for their lending for residential housing.
Lodging a Proposal
Proposals should be lodged by email to email@example.com no later than 5.00 pm Australian Eastern Daylight Time, 15 January 2010.The primary AOFM contact for enquires concerning the RMBS investment program:
RMBS Portfolio Manager
Telephone: (61 2) 6263 1134
Facsimile: (61 2) 6263 1222
AOFM INVESTMENT FACILITY DEALING PANEL
(Panel Members as at 7 December 2009)
Australia and New Zealand Banking Group
Bank of Scotland
Bank of Tokyo-Mitsubishi UFJ
Commonwealth Bank of Australia
JP Morgan Chase
National Australia Bank
Royal Bank of Canada
Royal Bank of Scotland
St. George Bank
Sumitomo Mitsui Banking Corporation
Westpac Banking Corporation