The government's financing arm has defended its $11 billion investment in the nation's home loan market, denying it has bought "sub-prime" assets as part of its purchase of residential mortgage-backed securities.
Since 2008, the Australian Office of Financial Management has been investing in residential mortgage bonds, a key source of funding for credit unions and other rivals to the big banks.
However, a Senate inquiry into banking has been told the agency may have invested in "low-doc" loans that were issued with fraudulent mortgage documentation.
The chief executive of the AOFM, Rob Nicholl, today said he was not aware of any fraudulent mortgages in the portfolio.
He also argued the investments were highly unlikely to put taxpayers' funds at risk, as it had taken a conservative approach to making the investments.
"There are no 'sub-prime' loans amongst the mortgages underpinning the RMBS in which the AOFM has invested," he said in Canberra.
"To date, the AOFM has participated in only one transaction where the share of low-doc loans was greater than 10 per cent of the underlying pool, and in this case it only invested $10 million, of which over half has been repaid without incident," he said.
"Low doc" loans accounted for less than 2 per cent of the loans it had invested in through the program, he said, and the agency had required the lenders to insure themselves against borrowers defaulting.
Even in the most "catastrophic" scenario he said the agency would lose 0.5 per cent of its assets because of the extensive safeguards in place.
The agency is only able to invest in AAA-rated assets, and Mr Nicholl said default rates in its portfolio were lower than the broader home loan market.
The AOFM's $11 billion mortgage bond investment is part of a total pool of mortgages worth $25 billion – of which $400 million are sub-prime loans.