A trustee and custodian hold the CMBs, and a reserve fund is maintained to cover defaults – but none had yet occurred, Medcraft said. Another aim of the government-backed MBS is to lower the cost of financing to banks and, by extension, the mortgages they sell to home buyers.

In Canada, banks pass on 0.6 per cent in funding costs to consumers, who buy mortgages at a 5.5 per cent interest rate. In Australia, the banks relay 2.1 per cent in funding costs to home buyers, who face a 9.85 per cent mortgage rate.

The credit crunch had frozen the domestic MBS market, Medcraft said. In the second half of calendar 2007, MBS issuance in Australia was $6 billion, compared to $45 billion in the first half of the year. As a result of the rising cost of debt, banks had begun “rationing” their existing credit to minimise their engagement in credit markets, he said.

The ASF is gathering a taskforce to engage the relevant governmental, regulatory and accounting bodies, and to win support from the major banks to implement the securitisation model in Australia.