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Pelma Rajapakse
Shanuka Senarath

Commercial Law Aspects

of Residential Mortgage
Securitisation in Australia
Commercial Law Aspects of Residential Mortgage
Securitisation in Australia
 Pelma Rajapakse • Shanuka Senarath

Commercial Law
Aspects of Residential
Mortgage
Securitisation
in Australia
Pelma Rajapakse Shanuka Senarath
Griffith University University of Colombo
Brisbane, QLD, Australia Colombo, Sri Lanka

ISBN 978-3-030-00604-4    ISBN 978-3-030-00605-1 (eBook)

https://doi.org/10.1007/978-3-030-00605-1

Library of Congress Control Number: 2018968613

© The Editor(s) (if applicable) and The Author(s) 2019

This work is subject to copyright. All rights are solely and exclusively licensed by the
Publisher, whether the whole or part of the material is concerned, specifically the rights of
translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on
microfilms or in any other physical way, and transmission or information storage and retrieval,
electronic adaptation, computer software, or by similar or dissimilar methodology now
known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this
publication does not imply, even in the absence of a specific statement, that such names are
exempt from the relevant protective laws and regulations and therefore free for general use.
The publisher, the authors and the editors are safe to assume that the advice and information
in this book are believed to be true and accurate at the date of publication. Neither the
­publisher nor the authors or the editors give a warranty, express or implied, with respect to
the material contained herein or for any errors or omissions that may have been made. The
publisher remains neutral with regard to jurisdictional claims in published maps and
­institutional affiliations.

Cover illustration: krisanapong detraphiphat / Getty Images

This Palgrave Macmillan imprint is published by the registered company Springer Nature
Switzerland AG.
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
 Foreword

In 1998, as a young academic, I wrote the first article warning of the

macro-economic risks of securitisation transactions. During the late 1990s,
the volume of issuance of asset-backed securities backed by all types of
receivables and cash flows was increasing exponentially, year after year.
There was also very little regulation or oversight of the transactions’ struc-
ture, the credit quality of the underlying receivables, the value of the
underlying collateral, as well as considerable uncertainty in governing law.
Without much oversight, the financial services industry, which was making
a great deal of money from these transactions, extolled the benefits of
securitisation to both issuers and investors. Likening it to alchemy, securi-
tisation enthusiasts failed to consider the possibility that the house of cards
the industry was built on could ever come tumbling down. And tumble it
did. The global financial crisis of 2007 saw the failure of financial institu-
tions, extraordinary defaults by issuers, and loss contagion across the
globe. Securitisation was “singled out for censure” as a significant con-
tributor to the collapse of the financial markets.
Fast-forward ten years: the global economy has recovered and securiti-
sation has had a resurgence to the point that it is currently a ten-trillion-­
dollar industry, begging the question of whether we have learnt anything
from the failures and losses in the securitisation markets during the recent
financial crisis. Which is why Commercial Law Aspects of Residential
Mortgage Securitisation in Australia by Dr Pelma Rajapakse and Dr
Shanuka Senarath is so important and so timely. Residential mortgage-­
backed securities, or RMBSs, are bonds or notes that are backed by resi-
dential mortgages or residential real estate loans. When the market for

v
vi FOREWORD

these securities falters or fails, entire neighbourhoods and even entire cities
can lose billions of dollars in value. This loss of value has a direct impact
on not only institutional market investors but also homeowners
and families.
In their examination of the securitisation of residential mortgage loans
in Australia, Drs Rajapakse and Senarath do a masterful job of elucidating
the complexity of these transactions. In their methodical exploration of
areas of regulatory gaps and careful identification of securitisation’s nega-
tive externalities, they provide an important critical analysis. Commercial
Law Aspects of Residential Mortgage Securitisation in Australia is an
important reading for those who care about well-regulated and well-­
functioning public financial markets and recognise the contagion risks of
market failure in the absence of oversight.

Maine
LoisLaw Foundation Professor of Law R. Lupica
University of Maine School of Law
Portland, ME, USA
Fulbright Senior Scholar 2019
University of Melbourne
Melbourne, VIC, Australia
 Preface

In a residential mortgage-backed security (RMBS) programme, a bank or

other financial institution sells its rights in a pool of home loans to a special
purpose vehicle (SPV), which pays for the asset pool by issuing fixed or
floating rate bonds in the financial markets to institutional investors. The
SPV finances the interest and principal payments under these bonds from
the pooled home loan repayments. The SPV is a “special purpose” vehicle
in the sense that it is established especially, and solely, for the purpose of
acquiring the asset pool and issuing bonds against it.
In practice in Australia, the SPV itself is invariably structured as a trust,
which holds the asset pool on behalf of the bondholders. Frequently, but
not always in Australia, the income and security features of the asset pool
are effectively split, so that the SPV retains the rights to the income from
the asset pool but grants a charge or charges over the property in the asset
pool in favour of a separate “security trustee”, who holds these on behalf
of the bondholders. In selling the asset pool to the SPV, the bank or finan-
cial institution removes those assets—subject to prudential regulator’s
approval—from its balance sheet for prudential regulation purposes. This
has the effect of substantially reducing the bank’s or institution’s operat-
ing costs. For regulatory and tax purposes, it is important that the SPV is
seen to be entirely independent of the originating bank or institution; that
the sale to the SPV is seen as a “clean sale”; and the SPV is “insolvency-­
remote”, in the sense that the asset pool cannot be put at risk by the insol-
vency of the SPV or the originating institution.

vii
viii PREFACE

There is a dearth of both academic and practical literature on the legal

and regulatory issues surrounding mortgage-backed securitisation
­programmes in Australia, as compared with overseas jurisdictions, such as
the United States and the United Kingdom. Moreover, the descriptions of
RMBS programmes overseas do not always accord with the way in which
RMBS programmes are structured in Australia in practice. This book seeks
to redress that imbalance.
To date, no comprehensive textbook or scholarly research book on
mortgage securitisation law has been published in Australia. This book
will make an excellent source of reference for both undergraduate and
post-graduate students of business and finance law, academics, and legal
practitioners in these areas. It is designed to provide the reader a compre-
hensive reference source on RMBS programmes, which can also be used
by post-graduate students, academics, and professionals as a basis for fur-
ther research on this topic.
Writing a monograph is a long venture if it was not for the encourage-
ment, guidance, and support of many people. I am very much grateful to
Dr Shanuka Senarath, who is a co-author for this book. Shanuka’s per-
sonal willingness and commitment in editing the chapters have supported
me for successful completion of this book project.
This book provides the most updated information on the law and the
current practice of residential mortgage securitisation in Australia. I greatly
acknowledge the guidance and support of my research supervisors, Dr
Richard Copp, Dr Eduardo Roca of the Department of Accounting,
Finance and Economics, Griffith University and Professor Justin Malbon
of the School of Law, Monash University, Victoria.
I am grateful to Professor Lois R Lupica of the University of Maine
School of Law, Portland, Maine, USA, for writing an explicit foreword
for this book. Special thanks are due to Professor Fabrizio Carmignani,
Head of the Department; Dr Jennifer Dickfos and Professor Brett
Freudenberg, the Discipline Heads of the Department of Accounting
Finance and Economics and Professor Don Anton, Director of the Law
Futures Centre for their encouragement and support during the writing
stages of this monograph. I gratefully acknowledge the resources and
financial support provided by the Department of Accounting, Finance
and Economics, and the Law Futures Centre of the Griffith Law School,
at Griffith University.
 PREFACE ix

The views and opinions expressed in the book belong solely to the
authors, and any errors of omission that remain are the authors’ responsi-
bility. The law and practice are stated as at 31 October 2018.

Brisbane, QLD, Australia Pelma Rajapakse

Colombo, Sri Lanka Shanuka Senarath
 Contents

1 Introduction  1
1.1 Background  1
1.2 Objectives of the Book 10
1.3 Scope of the Book 11
1.4 Contributions Made by the Book 12
1.5 Structure of the Book 13
Bibliography 14

2 Towards Formulating a Conceptual Framework 19

2.1 Introduction 19
2.2 Securitisation Explained 20
2.3 Mortgage-Backed Securities (MBSs) 22
2.3.1 Risks Associated with a Securitisation Programme 24
2.3.2 Ringfencing 26
2.3.3 On-Balance Sheet Financing Versus Off-Balance
Sheet Financing 26
2.3.4 Lack of Progression in the Australian RMBS
Market 27
2.4 Incentives for Stakeholders 28
2.5 Regulation of Securitisation Market 32
2.5.1 Rationales Behind Regulation 32
2.5.2 The “Public Benefit Test” 34
2.5.3 Optimal Regulatory Framework for Securities Market 35
2.6 Summary 36
Bibliography 37

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