Assessment Of Law And Practice Relating To The Mortgage Origination Process In Securitisation Programs

Abstract

Abstract

Securitisation is the process by which a credit institution – either a bank or an independent mortgage provider (IMP) – sells assets on its loan book – specifically, accounts receivable on its loan book – to another financial intermediary, which then funds its holdings by issuing asset-backed securities to investors. By this process, the original illiquid asset is transformed into a tradeable, more liquid debt security.

The purpose of this article is to examine the relevant aspects of commercial law and practice as they relate to three of the most critical features of mortgage origination within the securitisation process. Firstly, the article will analyse the following legal and regulatory aspects in the origination stage: (1) the concept of the “security” as it relates to the mortgage securitisation process; (2) the legal consequences for various stakeholders of registering a mortgage as security on a loan; and (3) the impact of the Australian Prudential Regulation Authority's (APRA) capital adequacy guidelines on relevant stakeholders in the mortgage origination stage within the RMBS programs.

Secondly, the article focuses on a qualitative assessment of the extent to which the current legislative and regulatory provisions governing the mortgage origination process either impede or facilitate the operation and growth of the RMBS market in Australia. The existing legislative and regulatory provisions governing mortgage origination are assessed using a “public benefit test” framework. This framework is based on the principles of social cost-benefit analysis and is used to identify an optimal RMBS legal and regulatory regime that would provide a resolution to the conflicting interests of participants in the RMBS process. This test is similar to that used to evaluate the introduction of Commonwealth and State legislation pursuant to the Commonwealth-State Competition Principles Agreement 1995 and the Statutory Instruments Act 1992 (Queensland).

The results of the qualitative assessment reveal that the following law and regulation facilitates the achievement of the objectives and criteria for the origination of mortgages within the RMBS programs. These include: (a) rights and obligations of the originator and the borrower under relevant contract law and property legislation, which enhance the cash flow for payment to investors in the RMBS; (b) the Torrens system of land registration facilitates mortgage origination and clear transfer of mortgagee's rights from the originator to the SPV; (c) the law of property permits the right to assign mortgages to a third party in equity, at minimal cost to the assignor and assignee; (d) the Consumer Credit Code's key requirements for disclosure and standardisation of credit contracts contribute to informational efficiency and reduce information costs for lenders, borrowers and investors. The results of the investigation also reveal that the following aspects of the regulatory provisions in relation to mortgage origination act as impediments to the growth of the RMBS market in Australia. These include: the regulatory capital requirements and the risk-weighting criteria in relation to RMBSs which under APRA's system of prudential regulation, effectively discourage ADIs from converting on-balance sheet assets to off-balance sheet assets, and risk-weighting RMBSs at 100 percent rather than (for example) 50 percent in line with international proposals, keeps the amount of capital needed to maintain RMBSs at unnecessarily high levels. Furthermore, if this cost is passed on to investors by way of higher prices and lower yields, this discourages investment in the RMBSs issued, and is likely to increase interest rates and charges for borrowers. Finally, the article concludes with some suggestions for re-form of the risk-weighting of RMBSs and the regulatory capital adequacy guidelines in Australia.

Key Words: Securitisation, Residential Mortgage-Backed Security (RMBS), Mo