Looking to capitalize on the booming reverse mortgage market in Australia, Commonwealth Bank of Australia was hired by a non-bank to manage the sale of bonds backed by reverse mortgages. According to the Bloomberg article, the bonds will be sold in Australian and New Zealand dollars within six months, said Matthew Lever, senior manager of securitization and capital solutions at Commonwealth Bank. Lever didn’t name the lender as the information isn’t yet public. This will be the third sale of reverse mortgage securities in Australia.
The sale could kick-start Australian lenders to securitize reverse-mortgages, which grew 80 percent in volume last year to A$1.5 billion, according to Towbridge Delloitte. Like in the US, the market for such mortgages is expected to grow as the population ages. “There is a generational need for this product,” Lever said in a phone interview from Sydney. Many ageing Australians have “very little” in retirement savings, so they can use reverse mortgages to raise cash from the homes that they own.
The securities differ from other mortgage-backed bonds because there is no risk borrowers won’t meet repayments and cause the bond to default. “It’s all about mortality risk,” said Lever. Investors have to weigh up if the value of the loan is likely to exceed the value of the house before the owner dies or moves out, he said. Reverse mortgages are securitized to provide the lender with a constant source of funding while waiting for repayment when the borrower dies or moves out.
The first reverse-mortgage bonds were sold in Australia by Bluestone Group Ltd. in June 2006. The company received orders for double the amount of bonds offered in its second sale on June 26 this year, Chief Executive Officer Alistair Jeffrey said at a credit conference July 26. That second sale included A$124 million of bonds yielding 33 basis points more than the benchmark swap rate. “Investors found the asset class interesting in terms of diversification,” Jeffrey said on a panel at the conference.
Commonwealth’s Lever said reverse-mortgage bonds are a “diversity play away from credit risk for a more passive property exposure; there is space in the market for that kind of bond.” To read a copy of the full article, click the link below.