Abstract
This chapter is devoted to introducing the concept of residential mortgage-backed securities (RMBSs). The discussion begins by introducing the nature of asset securitisation and explaining the contemporary market for RMBS in Australia. This chapter engages in a quick glance at the financial benefits of asset securitisation, especially RMBS, while explaining the basic structures of RMBS programmes. The rest of the chapter explains the mechanism behind an RMBS programme by utilising a real-life RMBS programme, incorporating diagrams as required. The chapter also explains the objectives, scope, structure, and the contribution of this book.
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Notes
- 1.
Financial innovation has been defined as the “development of a new product or process in the financial system for the purpose of improving operational effectiveness and efficiency”: see R.E. Johnston, ‘Technical Progress and Innovation’ (1966) Oxford Economic Papers 158, 160.
- 2.
See generally, I. Cooper, ‘Innovations: New Market Instruments’ (1986) 2 Oxford Review of Economic Policy 1; T.S. Campbell, ‘Innovations in Financial Intermediation’ (1989) Business Horizons 70; E.J. Kane, ‘Interaction of Financial and Regulatory Innovation’ (1988) 78 American Economic Review 328; E.J. Kane, ‘Impact of Regulation on Economic Behavior’ (1981) 36 The Journal of Finance 355; M.H. Miller, ‘Financial Innovation: The Last Twenty Years and the Next’ (1986) 21 Journal of Finance and Quantitative Analysis 459; and H.T. Hu, ‘New Financial Products, the Process of Financial Innovation and the Puzzle of Shareholder Welfare’ (1991) 69 Texas Law Review 1237, 1276.
- 3.
See Sect. 2.4 of Chap. 2 for further discussion of the causes of financial innovation. For example, see also, Senarath, S. and Copp, R., ‘Credit default swaps and the global financial crisis: reframing credit default swaps as quasi-insurance’ (2015) 8 Global Economy and Finance Journal, 135.
- 4.
See also H.L. Baer and C.A. Pavel, ‘Does Regulation Drive Innovation’ (March 1988) Economic Perspectives 3, 6–11 (discussing the role of regulatory taxes—federal deposit insurance, reserve requirements, and capital requirements); S. Becketti, ‘The Role of Stripped Securities in Portfolio Management’ (May 1988) Economic Review 20; T.S. Campbell, (1989) 70–71; J.D. Finnerty, ‘Financial Engineering in Corporate Finance: An Overview’ (1988) 17 (4) Financial Management 14, 16; E.J. Kane, (1988) 332–333, which describes a dialectical relationship between regulation and financial innovation; M.H. Miller, (1986) 460. See also D. Thornton and C. Stone, ‘Financial Innovation: Causes and Consequences’, in K. Dowd and M.K. Lewis (eds.), Current Issues in Financial and Monetary Economics (Basingstoke: Macmillan, 1992) 23; D. Arner, ‘Emerging Market Economies and Government Promotion of Securitization’ (2002) 12 (2) Duke Journal of Comparative and International Law 505. S. Senarath., ‘Securitisation and the global financial crisis: can risk retention prevent another crisis?’, (2017) 18 International Journal of Business and Globalisation, 153; S. Senarath (2016), Not so “Bankruptcy-Remote’: An insight into Sri Lankan Securitization Practices in a Post_GFC Context’ (Paper presented at the MAC-MME conference, Prague, Czech Republic); Senarath, S. ‘The Dodd-Frank Act doesn’t solve the principal-agent problem in asset securitisation’ (2017) blogs.lse.ac.uk (11 November 2018).
- 5.
See R. Pollsen, J. Hu and J. Elengical, ‘A Record Year for Residential MBSs’ (2002) Mortgage Banking 36; J.C. Shenker and A.J. Colletta, ‘Asset Securitization: The Evolution, Current Issues, and New Frontiers’ (1991) 69 Texas Law Review 1369, 1380; L. Alles, ‘Securitisation’s Bright Future: How Investment Science Brings Assets to Life’ (2001) 2 Journal of the Australian Society of Security Analysts 28; P.A.U. Ali, ‘Current Issues in Securitisation’ (book review) (2002) 20 (4) Company and Securities Law Journal 243.
- 6.
The term “receivables” encompasses the receipt of loan repayments, including residential mortgage loans, car loans, credit card receivables, lease receivables, corporate trade receivables, and an ever-growing list of asset types.
- 7.
Securitisation is necessarily a topic replete with financial and economic jargon. An apology is made in advance to readers with financial economics training if they consider some of the explanations to be either trite or unnecessary. However, the primary target audience for the book is the legal fraternity who, it may be assumed, are largely unfamiliar with this financial and economic nomenclature. For this reason, explanations of financial or economic theory in the book are kept relatively uncomplicated, and unashamedly so.
- 8.
Bankers Trust, ‘Securitisation in Australia’ (May 1999) Asiamoney 17; S. Lumpkin, ‘Trends and Developments in Securitisation’ (October 1999) Financial Market Trends 1; E. Carew, Fast Money 4 (Sydney: Allen & Unwin, 1998) 200; and L.E. Dana, ‘How the New Secondary Mortgage Market Works’ (January 1985) Law Institute Journal 69.
- 9.
Standard and Poor’s, Credit Focus (February 2000) 5–7.
- 10.
See generally, Standard and Poor’s, Australia and New Zealand ABS Performance Watch (Melbourne, February 2004); Standard and Poor’s, ‘Australian Structured Finance Market Starts 2003 on a Positive Note’ (April 2003) Rating Direct 3. See also, Anonymous, ‘CBA Smashes Aussie MBS Records with $2.5 bn Global Hit’ (March 2004) Euroweek 1.
- 11.
See, for example, Commonwealth Budget Papers for 2003/2004, Budget Paper No. 1, Statement 7: Budget Funding”, 1–4; Press Release by the Hon. Peter Costello, Federal Treasurer, 30 October 2002, on ‘Review of the Commonwealth Government Securities Market’ Federal Treasury, Commonwealth Debt Management Review: A Review of the Commonwealth Government Securities Market, Discussion Paper, October 2002; D. Bassanese, ‘Financial Market Wins a Battle But Not the War’ Australian Financial Review, 14 May 2003; Standard and Poor’s, An Investor Guide to Australia’s Housing Market and Residential Mortgage-Backed Securities (Melbourne, 2003) 9; and International Monetary Fund, ‘Fiscal Improvement in Advanced Economies: How Long Will It Last?’ World Economic Outlook (May 2002) 85. Monthly issues of the Reserve Bank Bulletin also show that the issuance of Commonwealth Government securities has fallen to historically low levels: see Reserve Bank Bulletin, various issues, Reserve Bank of Australia, Sydney, Table E.9—‘Commonwealth Government Securities on Issue’, 1986 to the present.
- 12.
Australian Securitisation forum, ‘Market Snapshot’ (2018) https://www.securitisation.com.au/marketsnapshot
- 13.
Chris Dalton, ‘The Australian securitisation market 10 years on from the financial crisis, Australian Centre for Financial studies’ (paper presented at the 22nd Melbourne Money and Finance Conference 10–11 July 2017, Melbourne, Australia).
- 14.
For an overview of these opportunities, see T. Valentine, G. Ford and R. Copp, Financial Markets and Institutions in Australia (Sydney: Pearson Education Australia, 2003) 71–72.
- 15.
Since 1996, most banks have been forced to establish RMBS programmes because of increasing competition in the housing loan market in Australia. While banks remain the major source of housing finance, non-bank lenders currently comprise more than one-fifth of all new lending. The success of the non-bank lenders is due in large part to product innovation, greater borrower accessibility through the introduction of mobile lenders, extensive origination networks, and the ability to securitise their housing loans through RMBS programmes. For more detail, see Standard and Poor’s (2003) 18–19.
- 16.
Both forms of the residential mortgage securitisation process are discussed in detail in Chap. 3.
- 17.
The main originating banks in Australia include Macquarie Bank, Westpac, Commonwealth Bank, Citibank, St George Bank, and Adelaide Bank: see Standard and Poor’s, Structured Finance Australia and New Zealand (Melbourne, 2000) 14. In this context, the originating bank will generally be the “sponsor” (or promoter) of the programme.
- 18.
For the purposes of this book, the term “bondholders” includes not only the holders of bonds but also the holders of notes. Both bonds and notes are negotiable instruments traded in the financial markets. The main differences between bonds and notes relate to their tenure, underlying cash flows, and pricing.
- 19.
An IMP is a third-party mortgage provider—that is, an institution that “originates” (or brings into existence) mortgages, usually as elements of mortgage loans—which is generally unaffiliated with the major banks. For example, IMPs in Australia include Aussie Home Loans Ltd, Australian Mortgage Securities Ltd, Interstar Securities Pty Ltd, RAMS Home Loans Pty Ltd, Macquarie Securitisation Ltd, and Resimac Ltd. The IMP or mortgage originator typically charges an origination fee, which is generally charged to the borrower to cover the costs of initiating the loan.
- 20.
A Guaranteed Investment Certificate is a certificate evidencing that a specified amount has been deposited at a trust company for a set time, usually five years, at a specified interest rate. Usually the certificate cannot be redeemed prior to maturity.
- 21.
But not in a social science sense, which typically involves surveys and interview etc.
- 22.
Pursuant to the Statutory Instruments Act 1992 (Qld), which is mirrored in every other State, and the Competition Principles Agreement dated 11 April 1995, between the Commonwealth and State and Territory governments, any legislation that is likely to impose appreciable costs on the community, or a section of it, is subjected to a Regulatory Impact Statement to determine whether the legislation is likely to be for the benefit of the public. The legislative review process is undertaken within the “public benefit test” framework, as required under the National Competition Principles Agreement: See National Competition Council, National Competition Principles Agreement, 11 February 1995 http://www.ncc.gov.au/publication.asp?publicationID=99&activityID=39
The “public benefit test” process involves (a) the identification of the restrictions on competition in the market, (b) an analysis of the effects of legislative restrictions, (c) an analysis of the costs and benefits, and (d) and the provision of appropriate recommendations. The approach adopted in such Regulatory Impact Statement is similar to that used in Chap. 8 of the book in the evaluation of the existing legislation and regulation governing RMBSs.
- 23.
For more details regarding the “public benefit test”, see Queensland Treasury, Public Benefit Test Guidelines: Approach to Undertaking Public Benefit Test Assessments for Legislation Reviews under National Competition Policy, Brisbane, October 1999, http://www.treasury.qld.gov.au/office/knowledge/docs/ncp/public-benefit-test-guidelines.pdf pages 10–26, and Appendices 1–10 attached to the Public Benefit Test Guidelines. All other State governments have published similar guidelines based on cost-benefit analysis.
Bibliography
Books and Book Chapters
Carew, E., Fast Money, Sydney: Allen and Unwin, 1998.
Thornton, D. and Stone, C., ‘Financial Innovation: Causes and Consequences’, in K. Dowd and M. K. Lewis (eds.), Current Issues in Financial and Monetary Economics, Basingstoke: Macmillan, 1992.
Valentine, T., Ford, G. and Copp, R., Financial Markets and Institutions in Australia, Sydney: Pearson Education Australia, 2003.
Journal Articles
Ali, P. A. U., ‘Current Issues in Securitisation’ (book review) (2002) 20 (4) Company and Securities Law Journal 243.
Alles, L., ‘Securitisation’s Bright Future: How Investment Science Brings Assets to Life’ (2001) 2 Journal of the Australian Society of Security Analysts 28.
Arner, D., ‘Emerging Market Economies and Government Promotion of Securitization’ (2002) 12 (2) Duke Journal of Comparative and International Law 505.
Baer, H. L. and Pavel, C. A., ‘Does Regulation Drive Innovation’ (March 1988) Economic Perspectives 3.
Becketti, S. ‘The Role of Stripped Securities in Portfolio Management’ (May 1988) Economic Review 20.
Campbell, T. S., ‘Innovations in Financial Intermediation’ (1989) Business Horizons 70.
Cooper, I., ‘Innovations: New Market Instruments’ (1986) 2 Oxford Review of Economic Policy 1.
Dana, L. E., ‘How the New Secondary Mortgage Market Works’ (January 1985) Law Institute Journal 69.
Finnerty, J. D., ‘Financial Engineering in Corporate Finance: An Overview’ (1988) 17 (4) Financial Management 14.
Hu, H. T., ‘New Financial Products, the Process of Financial Innovation and the Puzzle of Shareholder Welfare’ (1991) 69 Texas Law Review 1236.
Johnston, R. E., ‘Technical Progress and Innovation’ (1966) Oxford Economic Papers 158.
Kane, E. J., ‘Impact of Regulation on Economic Behavior’ (1981) 36 The Journal of Finance 355.
Kane, E. J., ‘Interaction of Financial and Regulatory Innovation’ (1988) 78 American Economic Review 328.
Lumpkin, S., ‘Trends and Developments in Securitisation’ (October 1999) Financial Market Trends 1.
Miller, M. H., ‘Financial Innovation: The Last Twenty Years and the Next’ (1986) 21 Journal of Finance and Quantitative Analysis 459.
Pollsen, R., Hu, J. and Elengical, J., ‘A Record Year for Residential MBS’ (April 2002) Mortgage Banking (Washington) 36.
Senarath, S., ‘Securitisation and the global financial crisis: can risk retention prevent another crisis?’ (2017) 18 International Journal of Business and Globalisation 153.
Senarath, S., and Copp, R., ‘Credit default swaps and the global financial crisis: reframing credit default swaps as quasi-insurance’ (2015) 8 Global Economy and Finance Journal 135.
Shenker, J. C. and Colletta, A.J., ‘Asset Securitization: Evolution’ Current Issues and New Frontiers’ (1991) 69 Texas Law Review 1369.
Working Papers, Magazines, Newspapers and Reports
Anonymous, ‘CBA Smashes Aussie MBS Records with $2.5 bn Global Hit’ (March 2004) Euroweek 1.
Bankers Trust, ‘Securitisation in Australia’ (May 1999) Asiamoney 17.
Bassanese, D., ‘Financial Market Wins a Battle But Not the War’ Australian Financial Review, 14 May 2003.
Commonwealth Treasury of Australia, Commonwealth Budget Papers for 2003/04, Budget Paper No. 1, Statement 7: Budget Funding, Canberra.
Costello, P., ‘Review of the Commonwealth Government Securities Market’, Commonwealth Debt Management Review: A Review of the Commonwealth Government Securities Market, Discussion Paper, October 2002.
Dalton, C., ‘The Australian securitisation market 10 years on from the financial crisis’, Australian Centre for Financial studies (paper presented at the 22nd Melbourne Money and Finance Conference 10–11 July 2017, Melbourne, Australia).
International Monetary Fund, ‘Fiscal Improvement in Advanced Economies: How Long Will It Last?’ World Economic Outlook (May 2002) 85.
National Competition Council, National Competition Principles Agreement, 11 February 1995, http://www.ncc.gov.au/publication.asp?publicationID=99&activityID=39 (20 January 2002).
Queensland Treasury, Public Benefit Test Guidelines: Approach to Undertaking Public Benefit Test Assessments for Legislation Reviews under National Competition Policy, Brisbane, October 1999, http://www.treasury.qld.gov.au/office/knowledge/docs/ncp/public-benefit-test-guidelines.pdf (20 August 2003).
Reserve Bank of Australia, Reserve Bank Bulletin, Sydney (various issues).
Senarath, S. ‘The Dodd-Frank Act doesn’t solve the principal-agent problem in asset securitisation’ (2017) blogs.lse.ac.uk (11 November 2018) http://blogs.lse.ac.uk/businessreview/2017/04/21/the-dodd-frank-act-doesnt-solve-the-principal-agent-problem-in-asset-securitisation/
Senarath, S., Not so “Bankruptcy-Remote’: An insight into Sri Lankan Securitization Practices in a Post_GFC Context’ (Paper presented at the MAC-MME conference 2016, Prague, Czech Republic).
Standard and Poor’s, ‘Australian Structured Finance Market Starts 2003 on a Positive Note’ (April 2003) Rating Direct 3.
Standard and Poor’s, An Investor Guide to Australia’s Housing Market and Residential Mortgage-Backed Securities (Melbourne, 2003) 9.
Standard and Poor’s, Credit Focus, Melbourne, February 2000.
Standard and Poor’s, Structured Finance Australia and New Zealand, Melbourne, 2000.
Standard and Poor’s, Australia and New Zealand ABS Performance Watch, Melbourne, February 2004.
Web Sites
Australian Securitisation Forum, ‘Market snapshot’ (2018) https://www.securitisation.com.au/marketsnapshot
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Rajapakse, P., Senarath, S. (2019). Introduction. In: Commercial Law Aspects of Residential Mortgage Securitisation in Australia. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-00605-1_1
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