Reverse mortgages the future for Australian securitization

ABN AMRO makes its second foray into reverse mortgages in a month, suggesting these equity release loans will become the next to be securitized.

ABN AMRO's private equity business in Australia has purchased a 39.2% stake in non-conforming lending specialist, Bluestone Group. The deal comes just a week after ABN AMRO's wholesale bank launched its own reverse mortgage product called Home Equity Access to be sold through financial advisors.

The deals are intended to fuel ABN AMRO's residential mortgage-backed securitization business which is under pressure as a slowing housing market in Australia brings with it a decline in traditional mortgage lending. The loans offered by Bluestone and Home Equity Access are extended to borrowers that do not meet the lending criteria of traditional institutions.

Tuesday's Bluestone deal sees ABN AMRO Capital purchase the 39.2% stake from a shareholder syndicate that includes RMB Ventures and interests held by Bluestone's chief executive, Alistair Jeffery. The purchase is the fourth seed asset for the bank's A$300 million buyout fund called Capital Australia Fund No 2.

Jeffery set up the loan company in December 2000 and has since advanced more than A$2 billion to about 9,000 borrowers. The company also established a New Zealand division in 2002 where outstanding mortgages total NZ$215 million.

Bluestone's two main products are non-conforming mortgages and equity release or reverse mortgages. The latter are offered to home owners over the age of 60 who can borrow an amount of cash against the agreed value of their home. The loans carry no repayments and the interest is compounded and, in most cases, repaid when the property is sold.

There are 10 providers of reverse mortgages in Australia but only three of them are with the major banks - St George, Commonwealth and Macquarie. The market for reverse mortgages is growing at 50% per year because of the number of retirees who have most of their assets tied up in property. ABN AMRO estimates that home equity in the over-60s will rise to A$700 billion within 10 years.

With institutional investors already familiar with the securitization of low-doc or no-doc loans in Australia, ABN AMRO obviously sees a ready market for more such deals. The Dutch bank has a track record of setting up mortgage pipelines for its securitization team. It was once a 25% owner in mortgage originator Wizard Home Loans, for which ABN AMRO provided many conduit and securitization facilities.

Speaking about the bank's reverse mortgage strategy, ABN AMRO's head of global markets, Colin McKeith, says the move links the bank's wholesale expertise with local growth hubs. "We have equity stakes in businesses geared towards retail investment, including retail advisory networks, ABN AMRO Morgans in Australia and ABN AMRO Craigs in New Zealand and Sydney-based professional futures broking business, BrokerOne."

"Bluestone's strength in loan origination coupled with our ability to support all aspects of the mortgage market auger well for a profitable partnership."