The Reserve Bank has stepped up its purchases of mortgage backed securities in a significant shift in strategy, buying $1.1 billion of these securities in varying quantities and with varying maturities over the past two days.

It seems the central bank is trying to kick start the home loan market, especially the part of the market financed by bundling up good quality mortgages into what are called Residential Mortgage Backed Securities (RMBS) and selling them off to investors here and around the world.

That part of the financial market has been shut all year because of the credit crunch and a reluctance of buyers to do deals: now the RBA appears to be taking quite deliberate action to tell the market that it’s OK to do deals and to resume securitising housing loans. 

The RBA spent some $320 million on Friday and bought securities worth a further $780 million this morning. All are what are called repurchase agreements, where the seller undertakes to buy back the securities at a predetermined date. In the case of these securities that is in almost a year’s time: around March-April 2009.

The bank purchased $600 million in one tranche this morning which was the largest purchase so far since it expanded the range of securities it would deal in last September.

That $600 million deal was for 353 days at 7.85%, another $80 million for 346 days at 7.78% and further $100 million for 22 days at 7.45%. That 353 day duration would see the selling institution have to buy them back on 9 April, 2009. The previous largest deal was a $500 million purchase on February 14.

Dealers say the bank is injecting money directly into a difficult part of the money market at the moment. No bank or non bank lender has been able to securitise a home loan this year (that is, package the loans up and sell them on to investors to raise money to re-lend). Even though home lending is falling as the interest rate hikes bite, the major banks have been able to hold their own because they have had a huge inflow of cash into term deposits from retail and business customers.

Some smaller banks have struggled, especially those with small depositor bases or who have financed themselves heavily off the securitisation markets and the short term money markets. St George Bank and Adelaide Bank (now absorbed by Bendigo Bank) have been heavy users of the securitisation and short term money markets to finance much of their balance sheet, especially housing.

The RBA has now bought a total of $2.35 billion of Australian mortgage-backed bonds in repo arrangements since last September. The past two days have seen more activity than at any time. Apart from the 22 day repo for $100 million done today, the other $1 billion in repos on Friday and today have been for the longest duration of all and suggest they might have gone to one or two participants in the market.

Dealers say the RBA appears to be deliberately trying to securitise some loans directly by buying them in for longer than normal terms. The banks selling to the mortgages would be able to securitise those when the market re-opens and then buy them back from the Bank.

It’s what the Bank of England will start doing tonight when it and the Government reveals a $US100 billion facility of similar scope. The Federal Reserve has also done a similar thing in the US.