Macquarie takes $70m hit

Macquarie, which entered the Italian market just three years ago as part of a plan to widen mortgage sales through Europe, has warned it will take a $70 million loss on the sale.

Focus has now switched to Macquarie's remaining offshore holdings of mortgages, including a $US1 billion ($A1.4billion) portfolio in the US that is being wound down.

Macquarie has so far resisted making write-downs on the loans as its default rates remain low and it has no subprime exposure.

In March, Macquarie said it would sharply scale down its mortgage business, including stopping new loans in Australia, blaming a freeze in securitisation markets for cutting a major source of funding.

The Australia mortgage portfolio was $23.7 billion at March 31, 2008, with most of the Australian book securitised or warehoused.

While Macquarie is no longer writing new loans in the US, its Canadian operation with the equivalent of $3.6 billion under management continues to generate mortgages, mostly thanks to government support of the securitisation market under the Canadian Mortgage Bond program.

Other mortgage wholesalers, including Challenger Financial Group, have deliberately slowed down the volume of new mortgages as a freeze in securitisation markets has sliced profits on new loans.

Third-quarter figures released by Challenger show that its residential loans portfolio was reduced by 4.1% over the three months to the end of September. This is a 17% on an annualised basis.

Challenger generates almost a third of its earnings through providing wholesale mortgage origination financing to companies such as Bluestone, and aggregation services to mortgage brokers.

Elsewhere, Allco Finance Group-owned Mobius has stopped lending, and its $1.2billion portfolio is up for sale.

Macquarie's mortgage portfolio accounts for less than 1% of Macquarie Group's profit.

Arrears on Australian mortgages continue to creep higher as the economy slows. In July, arrears on residential mortgages underlying Australian prime residential mortgage-backed securities increased fractionally to 1.51%, as measured by the S&P SPIN Index, which gives an indication of the health of the broader mortgage market.

This is its highest level since 1996, when Standard & Poor's began tracking securitised mortgages.