The Treasurer has announced that the Australian Office of Financial Management (AOFM) will purchase Australian residential mortgage‑backed securities (RMBS) as part of the Government’s commitment to improve liquidity in Australia’s mortgage markets and to re-invigorate the sector.   

Liquidity in the primary Australian RMBS market has been reduced to around $2½ billion per quarter since mid-2007, compared with $18 billion over the previous year. This has weakened the capacity of mortgage lenders reliant on the primary RMBS market as a source of funding to compete.

The AOFM will invest in AAA rated RMBS in two initial tranches of $2 billion each.

To ensure diversity in the new issuance and provide access to the facility to a wide range of lenders, purchases may be subject to a per-issuer cap.

The AOFM will invest only in newly issued, prime, AAA rated RMBS that meet strict criteria in relation to the quality of the underlying mortgages. 

The RMBS purchased by the AOFM will be held until redeemed or sold into secondary markets as and when market conditions normalise.

Joshua Gans comments here and here.

UPDATE 13 October 2008: Amount increased to $8 billion