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    ANZ quietly bought back distressed mortgages from its securitisation trusts amid the COVID-19 crisis, possibly breaching prudential standards and drawing a rebuke from the bank regulator.

    During May and June, ANZ bought back $89 million worth of stressed mortgages from securitisation trusts, which are packaged as mortgage-backed bonds and sold to investors, The Australian reported. The bank made the admission weeks after it was reported that Commonwealth Bank had bought back $80 million in home loans between March and July on the theory that interest was being capitalized on the deferred loans and it would be best to buy them back rather than breach the rules of the trust.

    The securitisation market froze in the wake of the Global Financial Crisis as investors grew nervous about the strength of home loans in their portfolios. While the domestic market has revived in recent years as interest rates have fallen and lending losses have stayed low, it is still below its pre-GFC peak of nearly $200 billion, The Australian reported.

    Packaging home loans into mortgage-backed securities helps banks remove risk from their balance sheets. However, the Australian Prudential Regulation Authority only allows lenders to repurchase mortgages from their securitisations under certain conditions, including that the borrower is in good standing.

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    When it learned that some lenders were buying back COVID-deferred home loans, APRA sent a letter ordering them to stop, saying the buybacks provided “implicit support” to securitisations, which breached regulations.

    “APRA has recently identified that some authorised deposit-taking institutions repurchased residential mortgage loans that were subject to repayment deferral from their securitisations,” the regulator said in the letter.

    APRA said the move represented “implicit support” which was “inconsistent” with prudential standards.

    Both ANZ and CBA halted the buybacks when APRA released the guidance in July, The Australian reported.

    APRA is now holding ANZ to closer scrutiny when it comes to the bank’s securitisation programs.

    “Going forward, in addition to this disclosure, APRA requires ANZ to obtain additional external review of its securitsation programs prior to issuing any further RMBS, using an independent assessor and with a review scope to be agreed with APRA,” ANZ said.

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    Original Article