Direct investment by government in mortgage-backed securities is a better policy prop for home lending than a guarantee on most such securities, a senior RBA executive said yesterday.Guy Debelle, assistant governor for financial markets at the Reserve Bank of Australia, told an industry conference that the present approach, through which the Australian Office of Financial Management invests in loan pools, is more flexible."I believe the AOFM program has a number of advantages relative to alternative means of support," Debelle told the annual conference of the Australian Securitisation Forum, which was held in Sydney.AOFM investment, he said, "can be easily tailored to help specific types of institutions; it can be phased out easily; the likelihood that the government loses money on its investment is very small; and there is no ongoing contingent liability to the government from providing the support."Of the alternative proposal, for a Canadian-style guarantee, which is favoured by some in the mortgage sector, Debelle said this option "would be difficult to phase out, creating a commitment that could generate a large contingent liability for the government."Debelle noted in his speech that through direct investment the AOFM, in mid-2010, "adjusted the pricing" at which it would invest in mortgage-backed securities - which is to say the government invested at a below-market rate in order to help lower retail interest rates on home loans.He noted that, "prior to May, private investor bids were only just within the range which made deals competitive for issuers. "The AOFM started buying long-dated tranches at a spread of around 110 basis points over swap. Private investors in these deals bought the shorter-dated tranches, often at a spread that was around 100 basis points. As a result, average issuance costs for senior notes declined from around 140 basis points to close to 100 basis points over swap."The AOFM stance helped draw mortgages out of banks and into the secondary market. Alongside increased issuance, the maturity term of the mortgage bonds lengthened, and private investors took up two-thirds of the paper presented to the market.