Easy Credit To Cease In Oz?

The latest quarterly research by brandmanagement has started to reveal the size and shape of a two-speed economy which has steadily emerged in the past few years in Australia.

The number of individuals who claim they have been adversely affected by home lending interest price hikes, petrol cost increases and an inflated cost of living has jumped 25% in the past 12 months.

In part, this is interesting because the survey which tracks investor intention every quarter also indicated there is one portion of the Australian mortgage belt that is highly sensitive to another interest rate hike and have indicated that another jump in rates will leave them severely stressed.

Given this, highly geared, larger-borrowing consumers who have been pouring into and propping up the home loan market over the past two years are taking advantage of the increasingly flexible terms offered by banks.

But, easy credit isn’t just a one way street as they discovered in the US this week.

The US banking regulator has announced even tighter restrictions on sub-prime lenders, following reports the US mortgage market is experiencing the record levels of home loan foreclosure.

Sub-prime home loans are made to home-owners with less than sterling credit and have until only recently been tightening the fastest-growing segment of the mortgage market, as lenders reach out to those unable to qualify for conventional mortgages.

Sub-prime loans have helped boost US home-ownership to a record 69 per cent and have been accessed by borrowers in all income ranges, who struggle with poor credit ratings stemming from modest incomes or excessive credit card or other personal debt consumption.

In Massachusetts alone, sub-prime loans, fuelled by home refinancing deals, have grown from 1.6 per cent of mortgages in 2000 to 12.3 per cent in June 2007.

But the industry’s growth has brought problems and not just to the lenders, but to the investment funds which have filled their boots with these riskier but much higher yielding loans.

Sub-prime lenders foreclose on properties much more frequently than conventional lenders and the yield on the loans is designed to compensate for the risk.

The accepted wisdom in the past has been that about 3.5 per cent of sub-prime mortgages and refinancing loans would go into foreclosure (when the asset is sold to compensate the lender), which, while it doesn’t sound like much, is more than three times the 1.1 per cent default rate on a normal US home loan.

In June 2000, however, a study by the University of North Carolina Kenan-Flagler Business School found that 20 per cent of the sub-prime refinancing deals from 1998 through to 2000 resulted in foreclosure.

According to reports from the US, the prevalence of sub-prime loans contributed to a 31 per cent spike in foreclosure filings in the first half of this year in Massachusetts.

It seems that following the housing boom of recent years, sub-prime lenders had shown themselves to be aggressive in their approach to credit impaired or self-employed consumers, justifying their loose approval standards through the strength of the market.

Inevitably, as in any market, the boom is often proceeded by a crash, and while the mortgage market in the US certainly hasn’t ground to a halt, it’s slowed significantly and the ramifications in the sub-prime space are being absorbed by both the lenders and borrowers.

At it’s peak, sub-prime lenders were writing loans featuring a low introductory rate with early repayments, and it’s these borrowers who are now feeling the pinch, either falling behind in repayments, or in many cases, having to relinquish their property altogether.

Many of the biggest lenders to sub-prime borrowers have subsequently been pushed into bankruptcy, with no fewer than 22 lenders filing for bankruptcy over a two-month period in 2007.

One of the bigger sub-prime lenders to fall under the weight of tighter regulations is New Century Financial Group, and while it strictly filed for bankruptcy protection, the group scrapped 3, 200 staff positions and was forced to sell its mortgage-servicing assets to Carrington Capital Management for $139 million.

Like most other international markets, there are fears that what has happened in the US will be replicated in Australia among the low doc lenders.

Debt among Australians has been rising approximately 50 per cent faster than that of income, leading many in the unenviable position of having to seek low-doc loans.

With an apparent surge in the number of people taking out low-doc loans, referred to in the industry as “liar” loans, concerns continue to be raised over the quality of assessments, and the depth in the valuation and more often than not, the approval.

As lenders are having to push that much harder to yield strong volumes in the current property climate, many resort to compromising their valuation, running the risk of the loan defaulting and having their reputation smeared in the process.

Initial research from brandmanagement has revealed there is in essence a two- speed economy taking place in the low-doc loan market.

On one hand, they seem to be the preserve of the self-employed and the property investor who are using the low-doc services to cover for the fact that they have in essence been misreporting their income and also for people who don’t have the credit history to get a conventional loan.