RMBS Investment Program

Investor Update, September 2010

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Important Notice

The views expressed in this presentation are commentary only, and should not be considered as advice. You should not act in reliance upon the views expressed in this presentation, but should seek independent advice in relation to these issues. The Commonwealth of Australia and the authors disclaim responsibility for loss or damage suffered by any person relying directly, or indirectly, on this presentation, including in relation to negligence or any other default.

Operational Notices on the AOFM website (www.aofm.gov.au) are the authoritative statements of the AOFM’s requirements and procedures for RMBS transactions and this presentation should not be taken as modifying these Notices in any way.

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The AOFM• The Australian Office of Financial Management

(AOFM) is a specialist Australian Government agency responsible for:• management of Australian Government debt• the Government's cash balances• investing in financial assets

• The AOFM is:• Part of the Treasury portfolio• Accountable to the Treasurer and through him to

the Australian Government, the Parliament and the public

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The RMBS Investment Program

• Program Chronology• Program Objectives• AOFM Strategy• Program Requirements

• Assessment Criteria• Minimum Eligibility Criteria

• Investment Process• AOFM Investments (to date)• Pricing• Outlook

Program Timeline

* ADI = Approved Deposit-taking Institutions (prudentially regulated financial institutions)

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Policy Implementation (AOFM)Sep-Oct 2008 • Government announces a range of

measures to support Australia’s financial system

3 Oct 2008 • AOFM directed to invest up to A$4 billion in RMBS

13 Oct 2008 • AOFM “request for proposal” / tender approach commences

16 Oct 2008 • AOFM directed to invest a further up to A$4 billion in RMBS issued by non-ADI* lenders21 Nov 2008 • Settlement of first AOFM RMBS investment

Sep-Oct 2009 • Market consultation in relation to further support for RMBS issuance

30 Nov 2009 • AOFM directed to invest up to a further A$8 billion in RMBS (Phase 2)

7 Dec 2009 • AOFM “reverse enquiry” approach commences

8 Dec 2009 • AOFM “serial arrangement” RFP

Program Objectives• AOFM to invest up to A$16 billion in RMBS to support:

• competition in residential mortgage lending from a diverse range of lenders

• support small business lending (Phase 2)

• The AOFM does NOT:• Invest in secondary RMBS or ABCP• Invest in other classes of ABS• Aim to clear out mortgage warehouses• Support primary issues other than through direct

investments

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AOFM Strategy• The primary objective is to support competition in

mortgage lending and lending to small business

• Program is temporary

• Aim to meet the program objectives without “leaving a legacy in the market”

• Allow market to function as “normal” as possible

• Closely monitor market conditions

• Support structures that engage other investors

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Program Requirements• RMBS issuance is currently supported through two

channels• Serial Arrangement• Reverse Enquiry

• Issuers eligible to lodge proposal• Have issued RMBS in Australia before• Intend to remain active funding new mortgages

through securitisation• Lodged by an eligible arranger

• Proposal Assessment Criteria

• Minimum Eligibility Criteria

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Serial Arrangement• AOFM offered to invest in a series of RMBS issues

• Mandates totalling up to A$3.4 billion allocated to:• AMP Bank• Firstmac• Liberty Financial• ME Bank• Resimac

• Issues must price by 15 December 2010

• AOFM can purchase up to 50% of eligible AAA securities offered, up to 75% of a tranche

• Lenders can “opt out” and use reverse enquiry channel

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Reverse Enquiry

• Proposals can be submitted to AOFM when ready to go to market

• As not a tender process can have two way dialogue with issuers / arrangers on deal structures

• Program does not have an end date

• No restriction on AOFM participation volumes or % of a tranche; determined by AOFM for each proposal

• Not available to issuers with serial arrangement (though they can “opt in”)

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Assessment Criteria• The extent to which the funds raised will be used for

new residential lending, or loans to small business, rather than clearing warehouses / balance sheets

• Historical reliance on RMBS

• The expected participation of other investors

• Timing of the issue to avoid congestion

• The experience and capability of the arranger

• The capabilities and quality of the asset servicer

• The overall quality of the mortgage pool and securities on offer

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Minimum Eligibility Criteria• Both channels have the same minimum eligibility

criteria which include:

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Minimum Eligibility RequirementsSecurities • “AAA” rated by at least two agencies

• A$ denominated

Mortgages (at cut off date)

• Prime• A$ denominated• Maximum loan size A$750,000• Maximum LTV 95%• Maximum term to maturity 30 yrs• Maximum interest only period 10 years• Days in arrears <30 days

Low doc loans are eligible

• Prime• Additional loan level requirements where low doc are >10% of pool

• Not a PAYG/salaried borrower, maximum consolidated borrower exposure of A$1 million, maximum LTV of 80%, mortgage insured

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Minimum Eligibility RequirementsPool • Closed pool

• Maximum 50% interest only loans

Mortgage insurance

• Don’t need to be mortgage insured but must be “Mortgage Insurable”

Audit • Sample audit of compliance with minimum requirements• Tie back of sample of loans in the pool to source loan documentation

Reporting • Monthly

Minimum Eligibility Criteria cont.

Investment Process

• AOFM does not underwrite the pricing of issues. We may have discussions around price with issuers to assist them in refining the capital structure

• When we agree to support a transaction:• We disclose support of a transaction on our

website• We indicate to issuer/arranger the maximum

amount we may invest and any limits, including the maximum percentage or amount of a tranche we may invest (this is not disclosed to market)

• During book build we may bid for an allocation of RMBS alongside other investors in the transaction

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Investment Process

• We require that for any investments by the AOFM:• Tranche pricing and volume is disclosed at pricing• AOFM website updated after settlement

• Deals to date supported by AOFM:• 35 issues• 16 lenders• Total RMBS issuance supported A$23.1 billion• AOFM investments of A$11.0 billion (48% of

supported issuance)

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Pricing Rationale

• The volume and price bid by the AOFM for a particular security will take into account:• the extent to which the issue will contribute to the

Program's objectives• credit and structural characteristics of the security• expected WAL• pricing relative to other AOFM RMBS investments• current market conditions• other investor demand for the security

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Pricing – AAA senior RMBS

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0

50

100

150

200

250

300

350

400

450

500

Aug 06 Jan 07 Jun 07 Nov 07 Apr 08 Sep 08 Feb 09 Jul 09 Dec 09 May 10

BpsPrimary RMBS Primary RMBS (AOFM sponsored) Secondary RMBS

Source: RBA, RBS

Pricing Rationale cont.

• Primary market stalled in March-April 2010

• AOFM sought to restart market in May 2010• Anchoring long tranches to facilitate creation of short tranches• Tighter pricing – driving competition in the mortgage space

• AOFM seeks to limit interest to 1 or 2 tranches• But will put a clearing bid into a short tranche

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AOFM Investments

Source: AOFM

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Firs

tmac

2-2

008

SM

HL

2-20

08

CM

S 2

008-

2

RE

SIM

AC

200

8-1

TOR

RE

NS

200

9-1

Har

vey

Trus

t 200

9-1

Pro

gres

s 20

09-1

RE

DS

200

9-1

Libe

rty 2

009-

1

CM

S 2

009-

1

SM

HL

2009

-1

RE

SIM

AC

200

9-1

Firs

tMac

1-2

009

Wid

e B

ay 2

009-

1

Ligh

t Tru

st 2

AP

OLL

O 2

009-

1

GB

S N

o 4

Libe

rty 2

009-

2

RE

SIM

AC

200

9-2

Firs

tMac

2-2

009

Pro

gres

s 20

10-1

RE

DS

201

0-1

Har

vey

Trus

t 201

0-1

SM

HL

2010

-1

Torre

ns 2

010-

1

Illaw

arra

201

0-1

Res

imac

201

0-1

(Low

doc

)

AP

OLL

O 2

010-

1

SM

HL

2010

-2E

TOR

RE

NS

201

0-2

Con

Que

st 2

010-

2

Libe

rty 2

010-

1

RE

DS

201

0-2

PU

MA

P-1

6

Firs

tMac

1-2

010

A$ millionAOFM Investment Private (incl. retained)

2008 H2: 76% 2009 H1: 78% 2009 H2: 47% 2010 H1: 22% 2010 H2: 33%

0%

20%

40%

60%

80%

100%

Firs

tmac

2-2

008

SM

HL

2-20

08

CM

S 2

008-

2

RE

SIM

AC

200

8-1

TOR

RE

NS

200

9-1

Har

vey

Trus

t 200

9-1

Pro

gres

s 20

09-1

RE

DS

200

9-1

Libe

rty 2

009-

1

CM

S 2

009-

1

SM

HL

2009

-1

RE

SIM

AC

200

9-1

Firs

tMac

1-2

009

Wid

e B

ay 2

009-

1

Ligh

t Tru

st 2

AP

OLL

O 2

009-

1

GB

S N

o 4

Libe

rty 2

009-

2

RE

SIM

AC

200

9-2

Firs

tMac

2-2

009

Pro

gres

s 20

10-1

RE

DS

201

0-1

Har

vey

Trus

t 201

0-1

SM

HL

2010

-1

Torre

ns 2

010-

1

Illaw

arra

201

0-1

Res

imac

201

0-1

(Low

doc

)

AP

OLL

O 2

010-

1

SM

HL

2010

-2E

TOR

RE

NS

201

0-2

Con

Que

st 2

010-

2

Libe

rty 2

010-

1

RE

DS

201

0-2

PU

MA

P-1

6

Firs

tMac

1-2

010

AOFM participation rate Last 6 deal rolling average Last 6 deal rolling average (adjusted for non-supported issuance)

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AOFM Investments - Participation Rate*

Source: AOFM* Includes retained tranches

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AOFM Investments – WAL (senior AAA)

0

1

2

3

4

5

6

7Fi

rstm

ac 2

-200

8S

MH

L 2-

2008

CM

S 2

008-

2R

ES

IMAC

200

8-1

TOR

RE

NS

2009

-1H

arve

y Tr

ust 2

009-

1Pr

ogre

ss 2

009-

1

RE

DS

200

9-1

Libe

rty 2

009-

1C

MS

200

9-1

SM

HL

2009

-1R

ES

IMAC

200

9-1

Firs

tMac

1-2

009

Wid

e B

ay 2

009-

1Li

ght T

rust

2AP

OLL

O 2

009-

1G

BS

No

4

Libe

rty 2

009-

2R

ES

IMAC

200

9-2

Firs

tMac

2-2

009

Prog

ress

201

0-1

RE

DS

201

0-1

Har

vey

Trus

t 201

0-1

SM

HL

2010

-1To

rren

s 20

10-1

Illaw

arra

201

0-1

Res

imac

201

0-1

(Low

doc

)

APO

LLO

201

0-1

SM

HL

2010

-2E

TOR

RE

NS

2010

-2C

onQ

uest

201

0-2

Libe

rty 2

010-

1R

ED

S 2

010-

2P

UM

A P

-16

Firs

tMac

1-2

010

Years

WAL (AOFM) WAL (Other)

Source: AOFM

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Pricing – AAA RMBS

0

20

40

60

80

100

120

140

160

180

200

220

240

0 1 2 3 4 5 6 7 8WAL

Bps

ADI Non-ADI Non-AOFM

Mezz AAA"AB" tranches

Adjusted pricingmethodology

Source: AOFM

Sale of AOFM investments• AOFM is authorised to adjust its holdings of RMBS

• In March 2010, the AOFM sold a small portion of its holdings (A$73.79 million) for portfolio management purposes

• After conditions in the primary market have improved, AOFM has discretion to sell or hold to maturity. Sales should be undertaken without causing market volatility

• The AOFM has no current plans to undertake further sales of its portfolio

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Outlook• AOFM has up to A$5.02 billion remaining of the $16 billion

program to be invested (with some allocated to serial arrangements)

• AOFM is supportive of further decreases in the cost of RMBS issuance across the capital structure

• Decrease in headline RMBS spreads• Capital structures to meet private investor demand with

complementary investment from AOFM• Support for cross border / foreign currency issues (but

only via A$ tranches)• Other innovations will be explored as they arise

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Further InformationWebsite www.aofm.gov.au/content/rmbs.asp