Sub-prime crisis

Australian government to fund non-bank lenders

Taxpayer funds will be used to buy $8 billion worth of AAA rated Mortgage Backed Securities from non-bank lenders in an attempt to maintain competition in the home loan market.

The Treasurer Mr Swan announced that the Federal Government would move into the home loan market to help non-bank lenders to compete with the major banks.

The need to have a competitive home loan market after the end of the sub-prime crisis outweighs the cost of the investment. Unlike in foreign countries such as the USA, Australian mortgage backed securities have negligible default rates and high rate of returns so the taxpayer is expected to make money from this transaction.

The goal of the investment is to restore confidence in the mortgage market and re-invigorate investment in the financial sector. The original $4 billion that the government announced is no-where near enough to cover the requirements of non-bank lenders however if confidence is restored by the move then non-banks should be able to securitise new loans and fund further lending activities. After feedback from the finance industry the government increased the amount to $8 billion.

Non-bank lenders such as Aussie Home Loans and Resi Mortgage Corporation strongly endorsed the move made by the treasurer. Lisa Montgomery of Resi Mortgage Corporation has noted that the industry eagerly awaits the details of the plan.