Purchase of RMBS – Request for Proposals – Second Selection Round

18 December 2008

This notice details arrangements for the next round of investments in residential mortgage-backed securities (RMBS) by the AOFM and invites the submission of proposals from arrangers of RMBS issues to be priced in the new calendar year.

BACKGROUND

On 26 September 2008 the Treasurer announced that the AOFM would purchase RMBS to support competition in Australia’s mortgage markets. Up to $8 billion is available for investment, with at least $4 billion to be allocated to issuer/originators that are non-authorised deposit taking institutions.

To date, the AOFM has invested a total of $1.996 billion across four mandates, for issues on behalf of Members Equity Bank Pty Ltd, FirstMac Ltd, Challenger Mortgage Management Pty Ltd and RESIMAC Ltd. Of the amount invested to date, $1.496 billion has been in securities of issuers that are not authorised deposit taking institutions.

THE NEXT ROUND

The AOFM will continue to allocate mandates to lead managers to arrange the issue of RMBS with the AOFM as a ‘cornerstone investor’. These mandates will again be allocated over time to avoid congestion.

  • The AOFM will conduct a series of selection rounds to allocate mandates.
  • Mandates will be awarded to arrangers for specific transactions on behalf of issuers. Arrangers must be members of the AOFM Investment Facility dealing panel.
  • The RMBS securities will need to meet minimum standards specified by the AOFM.
  • Proposals will be assessed using criteria related to the contribution they will make to maintaining competition in housing lending.
  • The granting of mandates will be staggered to avoid congestion in capital markets and with the ratings agencies.
  • Mandates will be open for specified periods to provide time for issues to be marketed and launched.
  • The pricing of an issue will be determined by the parties to the issue at the time the deal is closed.

Attached to this notice is a Request for Proposals (RFP) for the second selection round.

  • The second selection round is for RMBS issues that are expected to be priced and placed with investors from February 2009. Arrangers should indicate when they will be in a position to price the proposed transactions.
  • The amount invested by the AOFM in any one issue will take account of the characteristics of the issue and the size of the contribution by other investors, with a minimum investment by the AOFM of $100 million and a maximum of $500 million.
  • The AOFM expects to issue at least four mandates under this second round RFP.

Note that there have been some adjustments to the minimum standards and selection criteria in the light of experience and discussions with market participants.

  • In particular, the previous requirement for the weighted average Loan to Value Ratio of the mortgage pool to be not more that 70 per cent has been removed, the requirement for insurability has been clarified and the requirement for an audit of the pool has been specified in more detail.
  • An additional selection criterion has been included relating to the overall quality of the mortgage pool and the securities on offer.
  • These changes are intended to allow greater flexibility in the composition of pools, while providing assurance of overall quality.

A further request for proposals is expected to be issued after progress has been made in the second round, possibly in April or May.  This may include further adjustments to the arrangements in the light of experience and to promote the objectives of the initiative.


ATTACHMENT

REQUEST FOR PROPOSALS (RFP) – PURCHASE OF RMBS BY AOFM

BACKGROUND

Over the past 15 years, the market for residential mortgage-backed securities (RMBS) has provided an important source of funding for new and smaller mortgage lenders to compete with the major banks. However, developments in international capital markets since mid-2007 have had an impact on the Australian RMBS market, reducing liquidity in the RMBS market and constraining the ability of lenders to access funding from this source.

The Australian Government has decided to invest temporarily in Australian RMBS to support competition from a diverse range of lenders during the present market dislocation. To this end the AOFM has been directed to invest up to $8 billion in Australian RMBS, with at least $4 billion being allocated to issuers/originators that are non-authorised deposit taking institutions.

This document outlines arrangements for the lodgement of proposals for the second selection round for the allocation of mandates to arrange the issue of RMBS with the AOFM as a ‘cornerstone investor’.

  • This selection round is for RMBS issues that are expected to be priced and placed with investors from February 2009.
  • The amount invested by the AOFM in any one issue will take account of the characteristics of the issue and the size of the contribution by other investors, with a minimum investment by the AOFM of $100 million and a maximum of $500 million.

ELIGIBILITY TO LODGE PROPOSAL

Proposals may be lodged only 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.  A proposed issue may be on behalf of more than one originator.

Proposals for this round may be lodged by arrangers on behalf of both ADI and non ADI issuers/originators.

INDICATIVE TIMING

The closing date for lodging proposals is 30 January 2009 (see below). The AOFM will assess the proposals and may discuss them with arrangers.  Proposals should indicate the preferred timing for pricing and placement. The AOFM will seek to price the first transactions under this RFP by late February 2009.

SELECTION CRITERIA

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 the proposed issue will be used to originate new residential mortgages in the near term, rather than simply clearing warehouse facilities or reducing balance sheets. Proposals should indicate what, if any, undertakings relevant parties connected with the issue are prepared to make in this regard (for example, in relation to continued future access to warehouse facilities).

  • The extent to which the mortgage originators associated with the proposed issue have relied on RMBS to finance their lending for residential housing in the past.
  • The expected participation of other investors in the proposed issue.
  • The experience and capability of the arranger/lead manager in relation to RMBS issues.
  • The extent to which the proposal will avoid congestion with other proposals. Arrangers should indicate the groups of investors likely to participate and any special factors which may facilitate consideration of the proposal by ratings agencies.
  • The capabilities and quality of the asset servicer.
  • The overall quality of the mortgage pool and securities on offer.

MINIMUM REQUIREMENTS

All proposals must be consistent with the requirements detailed below.

  • The securities offered should be expected to obtain an AAA credit rating. This rating will need to be confirmed by at least two of the major credit rating agencies before settlement of the issue.
  • Austraclear lodgement and settlement of the securities.
  • The following minimum requirements apply in relation to the mortgage pool:
    • 100 per cent prime Australian mortgages.
    • Australian dollar denominated loans that are mortgage insurable.
    • Closed pool, no substitution or prefunding permitted.
    • Low documentation loans may not exceed 10 per cent of the initial principal value of the mortgage pool.
    • 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.
  • 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.
  • The issuer must commit to obtain an independent audit of the mortgage pool 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, including the proportions of prime full documentation and low documentation mortgages, and regular reviews of the rating of the issue by the credit rating agencies.

INFORMATION TO BE PROVIDED

Proposals 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 parties connected with the proposed issue are prepared to make in relation to use of the funds raised from the issue.
  • Information indicating current mortgage origination activity.
  • Information indicating previous securitisation activity of the issuer(s) including summary details of RMBS issues undertaken over the last five years.Expectations in relation to participation by other investors in the proposed issue.
  • Expected timing for placement and pricing of the proposed issue.
  • Summary information in relation to the expected mortgage pool to be securitised including but not limited to geographical distribution plus details of the current location of the mortgages (for example, on-balance sheet, warehouse facility).
  • An indicative term sheet for the proposed issue which should include details of:
    • Issuer;
    • Trustee;
    • Manager;
    • Servicer;
    • Back up servicer;
    • Arranger(s);
    • Interest payment details;
    • Proposed levels of credit enhancement and credit support arrangements.
  • An undertaking to report monthly on collateral and cash flows to ratings agencies, the trustee, wire services and arranging banks.
  • An undertaking to obtain an independent audit of the mortgage pool and the name of the firm that will conduct the audit.

LODGING A PROPOSAL

Proposals should be lodged by email to rmbs@aofm.gov.au, no later than 5.00 pm Australian Eastern Daylight Time, 30 January 2009.

AOFM CONTACTS

The AOFM contacts for enquires concerning this RFP are:

Michael Bath(until 16 January)
Director, Financial Risk
Telephone: (61 2) 6263 1136
Facsimile: (61 2) 6263 1222
Email: michael.bath@aofm.gov.au

Gerald Dodgson (from 19 January)
Head of Treasury Services
Telephone: (61 2) 6263 1141
Facsimile: (61 2) 6263 1222
Email: gerald.dodgson@aofm.gov.au


APPENDIX

AOFM INVESTMENT FACILITY DEALING PANEL
(Panel Members as at 18 December 2008)

  • ABN AMRO
  • Australia and New Zealand Banking Group
  • Bank of Scotland
  • Bank of Tokyo-Mitsubishi UFJ
  • BNP Paribas
  • Barclays Bank
  • Citigroup
  • Commonwealth Bank of Australia
  • Credit Suisse
  • Deutsche Bank
  • HSBC
  • ING Bank
  • JP Morgan Chase
  • Macquarie Bank
  • National Australia Bank
  • Royal Bank of Canada
  • Royal Bank of Scotland
  • Societe Generale
  • St. George Bank
  • Sumitomo Mitsui Banking Corporation
  • Suncorp-Metway
  • Toronto-Dominion Bank
  • UBS
  • Westpac Banking Corporation

Last updated: 21 March 2014