The federal government will invest an initial $4 billion to boost competition in the mortgage market, which has been stifled by the global credit crunch.
Through the government's asset manager - the Australian Office of Financial Management (AOFM) - banks and non-bank lenders will be able to tender their mortgage-backed securities, rather than waiting for financial markets return to normal.
"We need to have a competitive mortgage market so that people out there who are under financial pressure can get a fair go," Treasurer Wayne Swan said in announcing the move.
"This is an important measure to introduce competition into the mortgage market over time.
"Boosting competition is something the government has been emphatic about."
The so-called Australian residential mortgage-backed securities (RMBS) market - where banks can repackage existing mortgages in return for new funding - has practically dried up because of the extraordinary developments in financial markets in the past year, caused by the collapse of the US subprime market.
Retail banks now account for 90 per cent of all home loans, as non-bank lenders have had difficulties obtaining funding in global markets to provide mortgages due to the credit crunch.
Mr Swan said quarterly RMBS issuance has fallen to around just $2.5 billion since mid-2007, compared with $18 billion in the previous year.
"To reinvigorate the Australian RMBS market and support competition in mortgage lending, I will direct the AOFM to invest AAA-rated RMBS in two initial tranches of $2 billion each," he said.
Mr Swan said the government's move was very different to what the US government was trying to do with its $US700 billion ($A839.5 billion) bailout plan for the US banking system, which is proposing to buy up existing bad debts and lesser quality mortgage bonds.
TD Securities senior strategist Joshua Williamson doubted the government would be willing to put taxpayers' funds at risk if the Australian banking system was in as much risk as the US system.
"It is not surprising that this initiative has come about after the RBA's positive Financial Stability Review," he said.
"The initiative appears designed to shore up mid-tier banks and non-bank lenders, and politically at least shore up the government against criticism that competition in the mortgage sector is diminishing as non-bank lenders find it harder to obtain funds in wholesale markets."
The Reserve Bank of Australia gave the Australian banking system a clean bill of health in Thursday's review, saying banks are profitable and well capitalised despite the ongoing global financial market meltdown.
Mr Swan said the RMBS move was a temporary initiative that responded to highly unusual conditions in international capital markets and their impact on Australia's mortgage lending market.
"I expect that the RMBS purchased by the AOFM will be held until redeemed or sold into the secondary markets as and when market conditions normalise," Mr Swan said.
He said the action followed legislation passed by the government in June which expanded the range of high-quality assets in which the AOFM can invest.
The money for the AOFM to invest in mortgage securities will partly come from a larger than expected budget surplus for 2007-08.
Mr Swan announced the final budget outcome for 2007-08 was $19.7 billion, $2.9 billion larger than forecast in the May budget.
He said this was the result of lower than anticipated government spending rather than higher tax revenue.
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