Commercial Law Aspects of Residential Mortgage Securitisation in Australia

By Pelma Rajapakse and Shanuka Senarath

This book evaluates key commercial law aspects of the relevant law and legislation governing residential mortgage-backed securities (RMBSs) in Australia from a legal perspective. Within the context of a “public benefit test” framework, the book seeks to critically evaluate the impact and effectiveness of current law and regulation governing RMBSs. There is a dearth of both academic and practical literature on the legal and regulatory issues surrounding RMBSs in Australia.  The book aims to make a contribution to the formulation of law and public policy by suggesting a number of reforms to the current law and practice surrounding RMBSs in Australia.  In part, these suggested reforms will be based on the lessons learned from the experiences of overseas jurisdictions such as Canada, the U.K, and the United States. 

• Language: English
• Publisher: Palgrave Macmillan
• Release date: Apr 11, 2019
• ISBN: 9783030006051

Book preview

© The Author(s) 2019

Pelma Rajapakse and Shanuka SenarathCommercial Law Aspects of Residential Mortgage Securitisation in Australiahttps://doi.org/10.1007/978-3-030-00605-1_1

1. Introduction

Pelma Rajapakse¹   and Shanuka Senarath²  

(1)

Griffith University, Brisbane, QLD, Australia

(2)

University of Colombo, Colombo, Sri Lanka

Pelma Rajapakse (Corresponding author)

Email: [e-mail]

Shanuka Senarath

Email: [e-mail]

Keywords

Residential mortgage-backed securities (RMBSs)Asset securitisationBenefits of asset securitisationStructure and mechanism of RMBSsAssignment programmeConduit programme

1.1 Background

Financial product innovation has shown remarkable growth and competition over the past three decades as financial institutions have endeavoured to meet the diverse needs of borrowers and investors.¹ Notable product innovations during this period have included Eurobonds, currency and interest rate swaps, financial futures, options, and mortgage-backed securities.²

This development in financial innovation has been attributed to various legal, economic, and social factors,³ including legal and regulatory rules, taxes, technological improvements, increased efficiencies in collecting and processing information, increased interest rate volatility, higher disposable income, and more sophisticated investors in the market.⁴

Securitisation, which is one of the most significant innovations of the last 20 years,⁵ is the process of converting illiquid but income-producing assets and receivables⁶ that are not necessarily marketable into securities that can be more readily placed and traded in the capital markets. One example of the securitisation process, namely, residential mortgage securitisation, provides the focus for this book.⁷

Residential mortgage-backed securities (RMBSs) first attracted widespread attention in Australia in December 1986, with a A$50 million issue by the New South Wales government agency, First Australian National Mortgage Acceptance Corporation (FANMAC Ltd), which was used to purchase residential mortgages originated by co-operative housing societies.⁸ Since then, the value of the market has grown considerably, reaching a peak of A$12.4 billion in June 1996,⁹ before declining to A$8.1 billion in 1998, and rising to approximately A$10.2 billion in 2003.¹⁰ Under the Commonwealth Government in 2004, the value of Commonwealth bonds issued in the Australian market has been significantly reduced since the late 1990s, as the government has sought to reduce its debt levels.¹¹

Issuance of securities (including RMBSs, Commercial Mortgage Backed Securities (CMBSs), and other Asset Backed Securities (ABSs) reports its highest (since 2000) in 2007, reporting a total value exceeding $50 billion. Following the global turmoil in 2007, issuance of securities showed its lowest value (less than $20 billion) in 2008¹² (Fig. 1.1).

../images/418275_1_En_1_Chapter/418275_1_En_1_Fig1_HTML.png

Fig. 1.1

Securitised issuance. (Source: Australian Securitisation Forum 2018)

However, the Australian securitisation market seems to be still rebuilding itself in the aftermath of the financial crisis. A notable feature of the post-crisis market is that CMBS, ABS, and other ABS did not follow the contraction suffered by RMBS, compared to the pre-crisis market figures.¹³ Although the current government is committed to maintaining a Commonwealth bond market for risk management and other purposes, it is unlikely to increase government borrowing levels substantially in the foreseeable future, from either the domestic or international financial markets. This begs the question of whether, in order to maintain present living standards and national wealth, any future funding shortfall resulting from less Commonwealth borrowing would, other things being equal, need to be met by bond issues from the private sector. Since the corporate bond market in Australia lacks the depth of that in the United States or Europe, one logical funding alternative is additional issues of mortgage-backed securities by the private sector. Securitisations that are based on residential mortgages, as distinct from non-residential (e.g. company) mortgages and charges, could provide a considerable source of funds in this regard.

Thus, to the extent that it is economically efficient, growth in the RMBS market in Australia is likely to continue to be important in the foreseeable future. In addition, the RMBS market provides additional opportunities for:

Banks and other financial intermediaries, in terms of:

Funding

Off-balance sheet financing

Making non-liquid assets marketable

Additional fee revenue and interest income

Asset/liability management and liquidity management

Rapidly changing their level of exposure to housing loans

Investors (such as fund managers), in terms of:

Further avenues for investment in new, innovative financial products

An ability to diversify into housing mortgages, which would otherwise be unavailable to them

Additional interest income¹⁴

There are two common forms of residential mortgage securitisation programmes in Australia. The first is a bank or assignment programme, so-called because it typically involves a bank¹⁵ that assigns its mortgagee rights—for a price—to another entity. In a typical bank or assignment programme (illustrated in Fig. 1.2),¹⁶ a housing loan provider, generally referred to as the originating bank,¹⁷ pools selected housing loans and—for a price—transfers its rights under the relevant loan agreements to a special purpose vehicle (SPV), which then—again, for a price—issues notes or bonds to institutional investors. In Australia, the SPV is invariably structured as a trust.

../images/418275_1_En_1_Chapter/418275_1_En_1_Fig2_HTML.png

Fig. 1.2

Structure of typical assignment or bank programme. (∗Depending on the context, the issuer of the securities is also termed the special purpose vehicle (SPV), the Special Purpose Entity (SPE), or simply, the trustee; ♠ The bonds or notes are issued in a unit trust structure. The bonds themselves comprise principal and interest components. Usually, there are a number of classes of bondholders, whose rights vary with the class of bonds held. For example, Class A bondholders may have priority rights to interest or principal distributions over Class B bondholders; ♦ Unit holders in the trust are generally subsidiaries of the sponsoring bank and may be capital unit holders or income unit holders. Capital unit holders are those who hold capital units and are entitled, generally on winding up of the trust, to any residual trust capital or corpus. Income unit holders are those who hold income units and are entitled to net trust income, if any exists, generally up to a maximum token amount (e.g. $1000) which is specified in the trust deed; ♣ The Security Trustee holds a floating charge over trust assets on behalf of the bondholders. The trust assets include the right to principal and interest repayments (ultimately, from borrowers on the initial housing loans), the right to exercise power of sale under those mortgages, and any rights to mortgage insurance payouts)

In most bank or assignment programmes, the bank that originally issues the housing loans is the originator of the mortgages securing those housing loans—that is, the lending and mortgage originator roles are both embodied in the one organisation, which transfers its rights under the loan agreements to the SPV. However, in some other bank or assignment programmes, the lending bank is a separate entity from the mortgage originator, and it is the mortgage originator that transfers its rights as mortgagee to the SPV.

Relevant housing loan agreements are pooled according to specified criteria that perform a somewhat similar role to standard contract specifications in futures contracts. This is done to enhance the ultimate marketability of the lender’s contractual mortgagee rights by making them as homogeneous as possible—for example, in terms of loan amount, outstanding tenure, type of security property (e.g. houses versus owner-occupied units), and interest-compounding period. The SPV, which may or may not be related to the bank or mortgage originator, pays an arm’s-length price for the transferred rights, which is equal to their present value.

The rights transferred to the SPV (sometimes through a mortgage originator) include the lender’s right to receive principal and interest repayments from the borrower, the lender’s right to exercise its power of sale under the terms of the residential mortgage, and the lender’s right to any mortgage insurance payout in the event of default by the borrower.

The SPV issues notes or bonds, usually in face values of $500,000, to institutional investors who, in return for investing in the issue, receive semi-annual interest until the expiry date of the facility, at which time the face value is returned to them. The price paid by investors reflects the present value of the periodic interest coupons and the face value. In Australia, the notes or bonds are invariably issued by way of a trust, in which the issuer is the trustee for the bondholders.¹⁸ The borrowers’ principal and interest repayments act as an income buffer to help insulate the investor from the risk of default on the notes or bonds it has issued.

The notes or bonds issued are mortgage backed in the sense that if the issuer defaults on its obligation to pay interest (or ultimately the face value of the note) to the investor, a security trustee—in whom the legal rights under the pooled mortgages are vested—can exercise a power of sale over the secured residential properties and recover the monies owed. To the extent that the proceeds from the sale of the residential properties are insufficient to meet the outstanding debts to bondholders, the bondholders will rank as unsecured creditors in the event of a winding up of the trust.

The overall securitisation is profit driven, in the sense that at each stage of the process, income is generated for the relevant service provider. For example, the lender or mortgage originator earns revenue when it assigns (sells) its rights under the relevant loan agreements to the SPV. This represents a cost to the SPV, which is more than offset by the all up price at which it sells bonds or notes to the investors. Other stakeholders in the process also earn revenue from the services they provide. For example, the mortgage insurer earns premium income for providing insurance to the SPV in the event of loan default, and the fund manager earns fees for managing the SPV’s investment portfolio.

In order to ensure that the mortgage loan receivables are sufficient to repay the bondholders on time, and to also make the bonds issued more attractive to institutional investors, various forms of credit enhancement methods are used. For example, a third-party lender may give a guarantee to the SPV, or the originator may agree to make a subordinated loan to the SPV. An alternative form of credit funding support may be provided by the issue of junior or subordinated (Class B) bonds by the trustee, payment of interest and principal in which they rank behind the senior (Class A) bonds issued by the SPV.

The SPV will generally have the issue of securities underwritten. Often the lead manager—typically, an investment bank—will underwrite the issue, relying on its network of institutional investors to purchase any unsubscribed securities. As an additional means of attracting investors, the RMBSs are risk and quality rated by ratings agencies such as Standard and Poor’s or Moody’s Investors.

The second common form of residential mortgage securitisation programme, and indeed the most prevalent in the financial market at the time of writing, is the so-called conduit programme. These programmes are typically established by the smaller regional banks, building societies, credit unions, and independent mortgage providers (IMPs)¹⁹ that, individually, lack the asset size to sponsor an assignment programme in their own right (i.e. without the guarantee of a larger bank or credit institution). As a result, these institutions warehouse (or pool) their mortgages until they reach an aggregate value sufficient to back an RMBS issue, made either by the institution itself, or in combination with other smaller institutions. In order to make the bonds that the SPV issues more attractive to institutional investors, the smaller originators typically need to upgrade the quality of their bonds by obtaining the support of a larger bank as guarantor. This guarantee may be variously described as a guarantee proper, or as a commitment on the part of the major bank to act as back-up servicer, standby credit facility provider, standby specialist servicer, liquidity facility provider, or Guaranteed Investment Certificate (GIC)²⁰ provider. This requirement is in addition to the usual mortgage insurance associated with bank or assignment programmes.

Inevitably, there can be many variations on the securitisation structures described here. However, for expository purposes, the structures illustrated in Fig. 1.2 and described earlier provide useful reference points for the legal analysis in other chapters of the book.

1.2 Objectives of the Book

Within the context of a public benefit approach, this book aims to evaluate, from a legal perspective, key commercial law aspects of the relevant legislation and regulation governing RMBSs in Australia, in order to:

1.

Identify, in a qualitative manner,²¹ those features of the existing law and regulation which:

(a)

Facilitate the development of the market for RMBSs in Australia

(b)

Hinder the development of the market for RMBSs in Australia

2.

Suggest some key areas in which the current law and regulation relating to RMBSs in Australia could be reformed

The features of the existing law and regulation that facilitate and hinder the market will be evaluated using a public benefit test framework. This framework is similar to that used for the introduction of Commonwealth and State legislation pursuant to the Statutory Instruments Act 1992 (Qld) and the Commonwealth-State/Territory Competition Principles Agreement 1995.²² This Agreement requires that legislation effecting competition be reformed, unless it can be shown that the benefits of the restrictions to the public as a whole outweigh the costs—this is referred to as the public benefit test.²³ Overall, the test involves an assessment of the economic, financial, and social benefits and costs associated with the current legislation and regulatory reform options. Chapter 8 of the book provides an analysis of the current law and regulation governing RMBSs based on the public benefit test approach adopted in accordance with the Competition Principles Agreement. Thus, in this book, the public benefit test framework is used as a guide to the legal analysis of regulatory factors that facilitate and hinder the RMBS market, rather than as a detailed economic evaluation or demonstration of the test.

The book finds that the current legislation and regulation governing RMBSs seems to be appropriate as it stands, in terms of the criteria expressed in the public benefit test, used for evaluating legislation at Commonwealth and State levels. There are nevertheless significant potential moral hazard problems and risks inherent in the legislation. First, there is a risk that borrowers might find their homes sold out through no fault of their own, because of the actions and omissions of financial intermediaries of which they are unaware. As a result, the legislation or regulation should be amended to impose a requirement on banks to fully inform their borrowers about the risks and consequences of having assignment clauses in their home loan contracts and mortgages. Second, there is a need to reform the regulation in the foreseeable future to cater to unsophisticated investors in RMBS. Third, the risk-weighting of RMBS for capital adequacy purposes should be changed to a weighting less than the current 100%.

1.3 Scope of the Book

A number of caveats are apposite regarding the scope of this book. First, the scope of the book is limited to a legal analysis of the main commercial law and regulatory issues that typically arise in the securitisation of residential mortgages in Australia. The book does not address whether the suggested reforms to the commercial law and practice governing RMBS issues would be economically efficient; whether the aggregate value of the benefits to the community of those suggested reforms would exceed their costs to the community in economic terms; or specific economic problems, such as the potential moral hazard problem inherent in bank or assignment programmes, which are identified in Chaps. 2 and 8.

Second, the book is limited to an analysis of the relevant commercial law and regulation governing RMBSs. Thus, the book does not address the income tax, capital gains tax, or GST issues surrounding RMBS programmes.

Third, as stated previously, the book focuses only on the commercial law and regulation governing RMBSs. It does not address in any detail the stamp duty and land tax considerations surrounding RMBS programmes or issues surrounding other transactions-based taxes such as Financial Institutions Duty and Bank Account Debits Tax. Nor are the rights and obligations of stakeholders under the recently enacted privacy legislation; insurance law aspects of RMBS issues; the law on the underlying negotiable instruments in RMBS issues; or the rights and liabilities of the key stakeholders in tort considered in detail in the following chapters.

1.4 Contributions Made by the Book

The book makes a number of contributions to the scholarly literature and to practice.

First, within the context of a public benefit test framework, the book seeks to critically evaluate, from a legal point of view, the impact and effectiveness of current law and regulation governing RMBSs in Australia. In so doing, it aims to provide guidance for the Federal government and its agencies such as the Australian Securities and Investments Commission, the Ministerial Council of Consumer Affairs, the Australian Prudential Regulation Authority (APRA), and the Reserve Bank of Australia.

Second, the book seeks to make a contribution to the formulation of law and public policy, by suggesting a number of reforms to the current law and practice surrounding RMBSs in Australia, as well as more effective ways of regulating the RMBS market in Australia. In part, these suggested reforms are based on the lessons learned from the experiences of overseas jurisdictions.

Third, there is a dearth of both academic and practical literature on the legal and regulatory issues surrounding RMBSs in Australia, as compared with overseas jurisdictions such as the United States and the United Kingdom. Moreover, the descriptions of RMBS programmes overseas do not always accord with the way in which RMBS programmes are structured in Australia in practice. This book seeks to redress that imbalance.

Fourth, to the extent that a scholarly legal literature about RMBS programmes exists in Australia, there are significant gaps in its coverage of key issues. For example, the current legal literature in Australia does not address in any significant detail issues such as the true sale of mortgagee rights to the SPV; the impact of the Corporations Act on RMBS issues and stakeholders; the impact of the recent Basel II proposals on the treatment of RMBSs for capital adequacy purposes; or the consequences for stakeholders of the mortgage originator or SPV becoming insolvent. The book seeks to fill these gaps in the existing literature.

1.5 Structure of the Book

Chapter 2 attempts to place RMBSs in a theoretical context by explaining the process of securitisation in general and of RMBS programmes in particular. The incentives for participants are outlined within a contractarian framework; and some of the key features that might characterise a theoretically optimal regulatory regime for RMBSs are suggested.

Chapter 3 outlines the mechanics, structure, and process of a typical residential mortgage securitisation in practice. In this chapter, a number of key issues that arise throughout the RMBS process are identified, which are further discussed in subsequent chapters.

Chapters 4, 5, 6, and 7 examine key legal and regulatory aspects of residential mortgage securitisation in Australia. Chapter 4 focuses on the origination process, and includes a consideration of the consequences for the originator of registering (as distinct from not registering) the residential mortgages used as security for the issue; the impact of Australia’s capital adequacy guidelines on participants; and the New Capital Adequacy Framework and proposals for different regulation of asset securitisations recently propounded by the Bank for International Settlements (BIS).

Chapter 5 focuses on the transfer of the lender’s (originator’s) rights to the SPV. It includes a consideration of whether a transfer is a true sale of mortgagee rights; potential problems arising from the assignment of the lender’s rights; issues involved in structuring an SPV; and the impact of the Consumer Credit Code on stakeholders when the lender’s mortgagee rights are transferred.

Chapter 6 focuses in detail on the process of issuing RMBSs in Australia, and includes a consideration of the impact of the Corporations Act, as well as relevant aspects of trust law and contract law.

Chapter 7 outlines the consequences for stakeholders, if the mortgage originator (which would include the originating bank, in bank or assignment programmes) or subsequent assignee of its rights, becomes insolvent. From an economic point of view, the risk of such insolvency will (or should) already have been incorporated into the interest rates charged on the various stages of the RMBS programme. However, in this context, the law usually focuses not on these considerations, but on the consequences of mortgagee insolvency for borrowers and other stakeholders. Thus, this chapter considers the legal impacts of insolvency, both of an originator and of an SPV, including the position of secured creditors (e.g. the investors in the RMBSs themselves); whether particular transactions will be treated by the law as void or voidable because of insolvency; and the requirements of the rating agencies in relation to structuring an insolvency-remote issuer.

Chapter 8 provides an assessment of the current law and regulation relating to RMBS issues in Australia, focusing on those aspects of the law that respectively facilitate and impede the development of the RMBS market in Australia.

Finally, Chap. 9 presents the main conclusions and recommendations of the book, and suggests a number of areas in which further research is likely to prove fruitful.

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.Crossref

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.Crossref

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

Footnotes

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