Abstract
The main focus of this chapter is on the mortgage origination process. As part of the examination, this chapter extends its discussion towards capital adequacy guidelines set by the Australian Prudential Regulation Authority and the consequences of such guidelines on originators (banks and Independent Mortgage Originators), initial borrowers, providers of credit enhancement, investors of residential mortgage-backed security (RMBS), and in general, their effects on asset securitisation in an Australian context. The latter part of the chapter looks into capital adequacy guidelines provided by Basel II. Finally, an international comparison of capital adequacy requirements is made towards the end of the discussion.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
E. I. Sykes and S. Walker, The Law of Securities (5th edition, Sydney: LBC, 1993) 16–18. See also T Frankel, Structured Financing, Financial Assets Pools and Asset-Backed Securities (Boston: Little Brown Co., 1991) 232–235; and D. Everett, ‘Securities Over Receivables’, in M. Gillooly (ed.) Securities Over Personality (Sydney: The Federation Press, 1994) 55.
- 2.
See Chap. 7 for further details.
- 3.
It has been argued, albeit in a US context, that the affiliated or extended meaning of “security” as described, for example, in section. 92(2) of the Corporations Act, is consistent with the notion of a “security” in the general law sense, where a justifiable or real link can be established between the instruments and the subject security property (the res) to which a proprietary interest may be traced. If this interpretation is accepted, a mortgage-backed security (based on mortgages of real property interests) may be one example of a derivative “security”, in the sense that existence of the financial “security” is dependent on and flows from the security transaction and is incapable of an existence apart from the mortgage. Other statutes also define tradable investment instruments, such as bonds, notes, stocks, and shares, as “securities”. For further discussion, see Frankel, above n 1, 230; and cf. Sykes, who considers personal guarantees to fall short of qualifying as a “security” in the absence of the res to which resort could be made: see. Sykes and Walker, above n 1, 11.
- 4.
J.W. Salmond, Jurisprudence (12th edition, London: Sweet & Maxwell, 1966) 246.
- 5.
Sykes and Walker, above n 1, 7–8.
- 6.
For instance, to maintain the property in proper repair, and to pay any rates and taxes.
- 7.
For example, to prevent the deterioration of the property, nuisance and, in some deeds of mortgage, to not part with possession.
- 8.
That is, a right to “buy back” the property—in other words, to pay off a mortgage on the property, so that the equitable interest and legal estate merge. “Clogs” on this right to redeem, such as extinguish it or delay it for an unreasonable time, are now generally covered by the unconscionability provisions of the Trade Practices Act 1974 (Cth) and the consumer credit legislation: see Chap. 5 for further detail.
- 9.
See section 11 of the Property Law Act 1974 (Qld), which is based on the original English Statute of Frauds, and which is replicated in all Australian States.
- 10.
Again, see section 11 of the Property Law Act 1974 (Qld).
- 11.
This effectively extinguishes the borrower’s equity of redemption, so that legal ownership of the security property passes to the mortgagee.
- 12.
In practice in Australia, equitable mortgagees seek to reserve equivalent powers to those of a legal mortgagee.
- 13.
Cf. The subject of priority contests between competing mortgages has arisen in the literature overseas, where the markets are already much more mature than in Australia, although there it is perceived to be a procedural issue, more than one of substantive rights: see, e.g. Frankel, above n 1, 231–232.
- 14.
See, e.g. Land Title Act 1994 (Qld), section 178, which confers priority on registered securities over unregistered, and later registered securities.
- 15.
For example, in Dearle v Hall (1828) 3 Russ 1; 38 ER 475, it was held that an assignee of a debt may lose priority to a later equitable assignee who was first to give notice to the debtor, and who gave valuable consideration without notice of the earlier assignment.
- 16.
That is, although the rule in Dearle v Hall plainly applies to a priority contest between competing (purely) equitable assignment interests, it is doubtful whether it applies to an assignment of a debt secured by a registered mortgage in Australia. For further elaboration, see Sykes and Walker, above n 1, 405, 803. Moreover, section 62 of the Land Title Act 1994 (Qld) would seem to override the rule in Dearle v Hall. The express conferral of legal and equitable interests by this section allows the rule to be distinguished, as the rule may only apply to competing equitable assignments: Sykes and S. Walker, above n 1, 803.
- 17.
It would be open to argument that the later mortgagee would or should know of the practice (certainly, that of the major banks) that all mortgages may be assigned, and that it has therefore borne a risk of which it ought to have been aware. However, such cases are likely to turn on the facts, and in the absence of distinguishing facts, it is submitted that the foregoing analysis is more correct as a general proposition.
- 18.
Other types of priority contests are likely to be resolved along conventional lines, as discussed, for example, in Sykes and Walker, above n 1, 454–464.
- 19.
For example, when the market in Australia has matured to the point where each of a number of originators might, without knowledge of the others’ existence, take unregistered mortgages over the same security property, or group of security properties. Indeed, it is difficult to imagine priority problems arising, under the current Torrens system, unless both security interests were unregistered.
- 20.
Capital adequacy regulation of banks and other financial institutions in Australia, as in many countries, is based on international guidelines issued by the Basel Committee on Banking Supervision. The Basel Committee, which comprises central banks and bank supervisory agencies from other countries, operates under the auspices of the Bank for International Settlements (BIS) and consults widely with supervisory agencies in other countries and with industry on prudential matters.
- 21.
See BIS Home Page: http://www.bis.org
- 22.
Prudential Standard APS 120—Securitisation, objectives.
- 23.
Prudential Standard APS 120. Operational requirements are detailed in Attachment A—Operational requirements for regulatory capital relief.
- 24.
Prudential Standard APS 120—Securitisation, Attachment A.
- 25.
Prudential Standard APS 120—Securitisation, Attachment A. However, if there are two or more originators of the underlying pool in a securitisation, an originating ADI must apply the tests based on the proportion of assets originated by the ADI to the total amount of assets in the pool. Also, it should be noted that ADI must sell non-senior securities issued in the securitisation to third parties. An originating ADI must not repurchase non-senior securities once sold. And the originating ADI may purchase securities issued in a securitisation, provided: (a) the purchase is conducted on an arm’s-length basis and on market terms and conditions; (b) the ADI has no pre-existing obligation to undertake the purchase; and (c) the purchase does not give effect to a call option other than a clean-up call that complies with paragraph 6(c) of this Attachment.
- 26.
Prudential Standard APS 120—Securitisation, paragraph 8.
- 27.
Prudential Standard APS 120—Securitisation, paragraph 14.
- 28.
Prudential Standard APS 120—Securitisation, paragraph 14. This is further extended towards not holding any indirect or beneficial interest in any share capital in the trustee where the SPV is a trust; restrictions on SPV’s name; limitations on directors representing ADI on SPV’s board of directors, restrictions on ADIs’ employees acting as trustees, etc.
- 29.
It is the view of the authors that we should consider court decisions taken in major asset-securitising jurisdictions in terms of the above discussion on claw-back. In 2009, a landmark case has been reported in the US named as Re General Growth Properties. The above decision by the US bankruptcy Court in New York questions the future of securitisation, while demonstrating that the SPV structure will not always shield these entities from becoming intertwined in bankruptcy with a troubled parent company.
- 30.
See G. S. Marc, ‘French Securitisation Law and Practice’ (1998) 1 The Securitisation Conduit, 10, at which Marc notes that, like Australia, Germany at this stage remains at 100%.
- 31.
In the case of the UK, see the Bank of England’s guidelines on Loan Transfers and Securitisations, cited in P.R. Wood, Law and Practice of International Finance (London: Sweet & Maxwell, 1995) 63; and Notice BSD/1992/6, November 1992. This Notice was replaced by more detailed guidelines issued by the UK Financial Services Authority (FSA) in June 1998: see the FSA Web site at http://www.fsa.gov.uk. L. Stuart, and G. Old, ‘The FSA Rules for Securitisation and Loan Transfers—A User’s Guide’ (2000) 15 (9) Journal of International Banking Law 211. In the case of Canada, see the guidelines of the Office of the Superintendent of Financial Institutions in Canada, at http://www.osfi-bsif.gc.ca; F. G. Thompson, ‘An Overview of Current Issues and Trends in the Canadian Securitization Market’ (1994) 37 Private Investments Abroad 81.
- 32.
See the Bank of Japan’s capital adequacy guidelines, cited in E.J. Park, ‘Allowing Japanese Banks to Engage in Securitisation’ (1996) 17 Pennsylvania Law Journal 723, 728; H. Kanda, ‘Securitization in Japan’ (1998) 8 (2) Duke Journal of Comparative and International Law 359; B. Railton, et al., ‘Securitisation Legislation in Japan and Thailand’ (2002) 17 (1) Journal of International Banking Law 12; Y. Shimada, and S. Itoh, ‘Japanese Asset Securitization: A Guide for Practitioners’ (1997) 38 Harvard International Law Journal 171.
- 33.
See the Federal Reserve Board’s capital adequacy guidelines, cited in A. M. Hodgkin, ‘Bank and Thrift Regulatory Considerations’, in R. S. Borod (ed.) Securitization: Asset-Backed and Mortgage-Backed Securities (Boston: Brown, Rudnick, Freed & Gesmer, 1994) 2–9. For an alternative discussion on capital adequacy and related issues, see, in general, 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).
- 34.
Which is an international organisation based in Basel, Switzerland, whose role, since its establishment in 1930, has been to foster international financial cooperation and acts as bank to the central banks of member countries.
- 35.
The so-called G10 (or “Group of Ten”) central banks comprise those of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States.
- 36.
These are subject to the formal approval of the Governors of the G10 central banks.
- 37.
Referred as the Basel Capital Accord.
- 38.
BIS, Basel Accord II New Framework (1988) Annex 2, paragraph 21.
- 39.
BIS, Basel Accord II Consultative Paper 3 (abbreviated by the Basel Committee to “CP3”) (April 2003).
- 40.
Ibid, Annex 9, paragraph 14.
- 41.
Ibid, paragraphs 526–529.
- 42.
Standard and Poor’s, Structured Finance Australia and New Zealand (Melbourne, 1999) 17.
- 43.
Common sense suggests that this is likely where a smaller or regional ADI is utilising a larger, well-known sponsor to upgrade the quality of its RMBSs.
- 44.
As noted earlier, a financial risk assessment of RMBS programmes is plainly beyond the scope of this book. Nevertheless, this represents a fruitful area for future research.
Bibliography
Books and Book Chapters
Frankel, T., Securitization: Structured Financing, Financial Asset Pools, and Asset-Backed Securities, Boston: Little Brown & Co, 1991, v I and v II.
Gillooly, M. (ed.), Securities over Personality, Sydney: The Federation Press, 1994.
Salmond, J. W., Jurisprudence, 12th edition, London: Sweet & Maxwell, 1966.
Sykes, E. I. and Walker, S., The Law of Securities, 5th edition, Sydney: Law Book Company, 1993.
Wood, P. R., Title Finance, Derivatives, Set-Off, and Netting, London: Sweet & Maxwell, 1995.
Journal Articles
Hodgkin, A. M., ‘Bank and Thrift Regulatory Considerations’, in R. S. Borod (ed.), Securitization: Asset-Backed and Mortgage-Backed Securities, Boston: Brown, Rudnick, Freed & Gesmer, 1994.
Kanda, H., ‘Securitization in Japan’ (1998) (8) (2) Duke Journal of Comparative and International Law 359.
Marc, G. S., ‘French Securitisation Law and Practice’ (1998) 1 The Securitisation Conduit 10.
Park, E. J., ‘Allowing Japanese Banks to Engage in Securitization: Potential Benefits, Regulatory Obstacles, and Theories for Reform’ (1996) 17 University of Pennsylvania Journal of International Economic Law 723.
Railton, B., Kinami, N. and Lawden, J., ‘Securitisation Legislation in Japan and Thailand’ (2002) 17 (1) Journal of International Banking Law 12.
Senarath, S., ‘Securitisation and the global financial crisis: can risk retention prevent another crisis?’ (2017) 18 International Journal of Business and Globalisation 153.
Shimada, Y. and Itoh, S., ‘Japanese Asset Securitization: A Guide for Practitioners’ (1997) 38 Harvard International Law Journal 171.
Stuart, L. and Old, G., ‘The FSA Rules for Securitisation and Loan Transfers – A User’s Guide’ (2000) 15 (9) Journal of International Banking Law 211.
Thompson, F. G., ‘An Overview of Current Issues and Trends in the Canadian Securitization Market’ (1994) 37 Private Investments Abroad 81.
Working Papers, Magazines, Newspapers and Reports
Standard and Poor’s, ‘Credit Ratings on Mortgage-Backed Securities’, Structured Finance Australia and New Zealand, Melbourne, 1998.
Australian Prudential Regulation Authority, Prudential Standard APS 112 – Capital Adequacy: Standardised Approach to Credit Risk, July 2019, https://www.apra.gov.au (11 November 2019).
Australian Prudential Regulation Authority, Prudential Standard APS 111 – Capital Adequacy: Capital Adequacy: Measurement of Capital, January 2018, https://www.apra.gov.au (11 November 2019).
BIS, Basel Accord II New Framework (1988) Annex 2, http://www.bis.org (15 October 2004).
BIS, Basel Accord II Consultative Paper 3 (April 2003), http://www.bis.org (15 October 2004).
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).
Web Sites
BIS Home Page, http://www.bis.org
APRA Home Page, http://www.apra.gov.au
Financial Services Authority Home Page, http://www.fsa.gov.uk
Government of Canada The Office of the Superintendent of Financial Institutions home page, http://www.osfi-bsif.gc.ca
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
Copyright information
© 2019 The Author(s)
About this chapter
Cite this chapter
Rajapakse, P., Senarath, S. (2019). Mortgage Origination. In: Commercial Law Aspects of Residential Mortgage Securitisation in Australia. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-00605-1_4
Download citation
DOI: https://doi.org/10.1007/978-3-030-00605-1_4
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-030-00604-4
Online ISBN: 978-3-030-00605-1
eBook Packages: Economics and FinanceEconomics and Finance (R0)