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About this book

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.

Table of Contents

Frontmatter

Chapter 1. Introduction

Abstract
This chapter is devoted to introducing the concept of residential mortgage-backed securities (RMBSs). The discussion begins by introducing the nature of asset securitisation and explaining the contemporary market for RMBS in Australia. This chapter engages in a quick glance at the financial benefits of asset securitisation, especially RMBS, while explaining the basic structures of RMBS programmes. The rest of the chapter explains the mechanism behind an RMBS programme by utilising a real-life RMBS programme, incorporating diagrams as required. The chapter also explains the objectives, scope, structure, and the contribution of this book.
Pelma Rajapakse, Shanuka Senarath

Chapter 2. Towards Formulating a Conceptual Framework

Abstract
After introducing asset securitisation in the first chapter, this chapter moves further to explain asset securitisation and related concepts. This chapter defines asset securitisation and mortgage-backed securities (MBSs) in the first section. The discussion then moves to risks associated with a typical securitisation programme. This chapter engages in a discussion on off-balance sheet financing and financial advantages of asset securitisation while comparing and contrasting the traditional originate-to-hold lending model versus the originate-to-distribute model. White developing a conceptual framework, the “public benefit test”, for the analysis in the rest of the book, this chapter engages in a discussion on rationales behind regulating residential MBS (RMBS) and the need for an optimal regulatory framework for the securities market.
Pelma Rajapakse, Shanuka Senarath

Chapter 3. Structuring and Issuance in Residential Mortgage Securitisation

Abstract
The emphasis on this chapter is manifold. The discussion begins with the means of structuring the mortgage securitisation programme. A number of structuring methods including conduit programmes, pass-through and pay-through structures have been taken into consideration. The discussion then moves onto the mortgage origination process while placing an emphasis on the originator in the capacity of the servicer and substitution of residential mortgages. The rest of the chapter looks into aspects of setting up a special purpose vehicle and the subsequent transfer of lender’s rights, the fund manager, and the credit enhancement pertaining to a securitisation programme. Finally, the discussion engages with the process of issuance of securities in residential mortgage-backed security (RMBS) programmes in Australia.
Pelma Rajapakse, Shanuka Senarath

Chapter 4. Mortgage Origination

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.
Pelma Rajapakse, Shanuka Senarath

Chapter 5. The Legal Process for Transferring Mortgagee’s Rights to the Special Purpose Vehicle

Abstract
Much of the discussion in this chapter deals with the concept of “true sale”. Provided that the “alchemy” of asset securitisation lies with the bankruptcy-remoteness of trust assets, a true sale is supremely important for the healthy life of a securitisation programme. A number of features that may decide a true sale have been discussed in this chapter. Among them, account standards, including Financial Accounting Standards Board Statements, and a number of court cases, from common law jurisdictions including United States, Canada, and United Kingdom, pertaining to true sale have been taken into consideration. The latter part of the discussion is forced on current Australian regulatory provisions, especially Consumer Credit Code, affecting various aspects of the residential mortgage securitisation in Australia.
Pelma Rajapakse, Shanuka Senarath

Chapter 6. Law and Regulation of the Issue of Mortgage-Backed Securities

Abstract
This chapter analyses regulatory provisions pertaining to the issue of mortgage-backed securities in Australia. Provided that the special purpose vehicle (SPV) is a trustee of a trust, in most cases, this chapter begins with analysing regulation of trustees, its rights, obligations, and duties in the light of the trustee powers under the Trust Act. The discussion is further extended towards the nature of the relationship between the trustee and bondholders while discussing investment powers of the trustee and the trustee’s right of indemnity. This chapter extends the discussion towards legislative requirements for assuming the role of trustee, as per the Corporations Act of Australia, including disclosure requirements relevant to residential mortgage-backed securities (RMBSs). The chapter winds up by analysing contractual concerns between the bank and the mortgagor while emphasising the importance of notice to borrowers.
Pelma Rajapakse, Shanuka Senarath

Chapter 7. Insolvency Considerations Pertaining to Trustee-Issuer and Mortgage Originator

Abstract
This chapter is committed on discussing a number of bankruptcy concerns affecting the smooth functioning of a residential mortgage-backed securitisation programme. The initial focus of the chapter is on identifying the consequences of the originator’s bankruptcy on a residential mortgage-backed securitisation scheme in Australia. Then, the chapter moves on to investigate threats posed by the trustee-issuer’s insolvency. This discussion is two-fold. On the one hand, the discussion emphasises the trustee-issuer’s insolvency as the trustee and on the other hand the insolvency of the special purpose vehicle (SPV) in the capacity of the issuer. Finally, the chapter engages in a discussion on a number of means adopted by Australian securitisation programmes with the idea of minimising negatives on a securitisation programme imposed by the bankruptcy of its stakeholders.
Pelma Rajapakse, Shanuka Senarath

Chapter 8. Assessment of Current Regulation and Practice of RMBS Programmes

Abstract
This chapter engages in evaluating existing regulation and industry practices of residential mortgage-backed security (RMBS) in Australia. This evaluation is made in order to identify the extent to which existing regulation may hinder or promote RMBS in Australia. As part of its dialogue, the first section of the chapter engages in summarising the discussion made from Chaps. 1, 2, 3, 4, 5, 6, and 7. The assessment of law begins by assessing the regulatory provisions pertaining to the mortgage origination process in an Australian context. This chapter evaluates regulatory provisions pertaining to the transfer of mortgagee’s rights to the special purpose vehicle (SPV), issuance of RMBS by the SPV, and finally financial and insolvency risks pertaining to RMBS securities in Australia.
Pelma Rajapakse, Shanuka Senarath

Chapter 9. Summary of Conclusions

Abstract
This final chapter of the monograph comprises the summary and main conclusions. As part of the discussion, main findings pertaining to current regulation are summarised in this chapter while emphasising findings related to the growth of residential mortgage-backed securities (RMBSs) and macroeconomic implications on the market. The next section presents a coherent summary of the proposed new regulatory framework. Finally, recommendations identified in previous chapters are presented in the abstract form, while suggesting areas for further research in future are presented at the end of the discussion.
Pelma Rajapakse, Shanuka Senarath

Backmatter

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