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Australia's growing subprime mortgage market. 43% of new loans are interest only.; Australian lenders dole out $3 billion worth of non-conforming home loans in 18 months
Topic Started: 27 Aug 2014, 09:26 AM (2,930 Views)
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Australia 'at the front' of growing subprime mortgage market

Pat McGrath
Tue 26 Aug 2014

They triggered an economic meltdown in the United States and sparked the global financial crisis, but subprime mortgages are staging a revival in Australia.

Ratings agency Moody's says Australian lenders have doled out $3 billion worth of the non-conforming home loans over the last 18 months.

Prime mortgages are those that typically go to people with good credit scores, secure jobs and existing, well-serviced loans.

Moody's analyst Robert Baldi says non-conforming, or subprime, borrowers tend to have patchier personal financial histories.

"We're looking at things like prior bankruptcies or prior defaults in their credit history past," he explained.

"If the borrower is a non-resident, for example, or it's a jumbo loan, these would all fall outside of the lenders' mortgage insurance criteria and would classify the loan as non-conforming."

Essentially, subprime loans are those going to borrowers with a much higher risk of default that a typical loan.

Australia 'out at the front' of subprime market

While subprime remains something of dirty word in the economies hardest hit by the GFC, Australian lenders are increasingly willing to step up and fund subprime loans by selling what are known as residential mortgage backed securities (RMBS).

"Australia is out there at the front of the market, I would say, so we are the ones that have continued with issuance in this space," Mr Baldi said.

"Since the beginning of 2013, we've seen 10 new transactions in the RMBS market from non-conforming issuers and that's totalled about $3 billion, so that's quite a pick up in volume considering the market did shut down post the crisis in 2008."

While $3 billion sounds like a large amount of money, Mr Baldi says it is a relatively small share of the home loan market, and of RMBS issuance.

"[In] the year to date we saw roughly about $15 billion of RMBS transactions. Of that, about $1 billion was non-conforming, so we'd say about 7 per cent of issuance this year has been from the non-conforming market," he added.

Moody's says most of these loans are being written by non-bank lenders.

However, Mr Baldi is confident that there is enough regulation in place to avoid a subprime crash similar to that in the US in 2008.

"One of those is the National Consumer Credit Protection Act, and this basically requires lenders to take reasonable steps to verify a borrower's financial position and their ability to repay the loan," he said.

"Essentially this gets around the fact that in the US you saw those loans being written to borrowers pre-2008 with little to no income verification. In Australia that just can't happen."

The United States is still managing the fallout from its subprime crisis.

Last week, finance powerhouse Bank of America Merrill Lynch agreed to an almost $US17 billion settlement for its role in the crisis.

Australia's biggest danger in prime mortgages

Despite that history, banking analyst Martin North sees Australia's non-conforming market as much safer.

"Most of the investors now, the people who are buying these mortgage-backed securities, are now Australian investors rather than overseas investors," he said.

"So there is a bit of a feedback loop going on, and that does mean that some of the other players who might be buying those securitised loans now are essentially home-based rather than offshore-based."

Mr North says the subprime segment of Australia's market is so small that it is unlikely to destabilise the financial system, even if a lot of the loans go bad.

However, he says Australia's banks, households and the economy in general is too heavily reliant on real estate.

"This is a very small proportion of a much bigger question about leverage into property," he warned.

"We have a massively leveraged financial services system into property more broadly.

"If we have the sorts of defaults we're talking about in the non-conforming sector, then you would also be having, I think, similar defaults more broadly across the market, and it's those broader defaults across the market that would be of much more concern rather than the non-conforming element, which I think is quite small and quite isolated."

Read more: http://www.abc.net.au/news/2014-08-26/australian-subprime-mortgage-market-growing/5697880
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peter fraser
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Moody's says most of these loans are being written by non-bank lenders.


But funded by three of the big four.

That said Australia didn't have a sub-prime crisis because the sub-prime lenders generally stuck to sound lending principles, often better lending policies than the banks. The major three sub-prime lenders around pre-GFC are still lending today, and that's why banks are prepared to fund them.
Any expressed market opinion is my own and is not to be taken as financial advice
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peter fraser
27 Aug 2014, 09:46 AM


But funded by three of the big four.

That said Australia didn't have a sub-prime crisis because the sub-prime lenders generally stuck to sound lending principles, often better lending policies than the banks. The major three sub-prime lenders around pre-GFC are still lending today, and that's why banks are prepared to fund them.
See you could not address anything else in the article.

Your lies reguarding subprime mortgages in Australia are getting boring Peter.

The fact is, you have played a major role in this, and I have clearly explained what goes on before and saying how you could acknowledge what I have said is true, but instead of acthanksknowledge the facts, you dont even deny them, just walk away from the thread and pretend it does not exist. Spells it out loud and clear.

Our subprime mortgage market invovled the EXACT same subprime lending as the US, from which we had copied and mirrored their mindless debt ponzi spriuking lending practices.

They invovled giving loans of 100%, they involved giving loans of 105%, exactly the same as the US.

They involved giving loans to people with little or no savings hirstory, they involved giving loans to people with little or no real job history, or loans to people who had either of these.

They invovled giving loans to people with no job, people who had a deposit and a registered abn could obtain a loan without having any proof of assets or income whatsover. The are all facts, there are many more too , peter fraser has been invovled in every single one of these type scenarios, they were rampant. Peter could tell you everything I have said here is true, if he denied it, he would be lying and last time I made a so.iliar type post, he just went AWOL on the thread rather than admit the truth or acknowledge the facts.

Like I said Peter, its getting real boring mate........
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Here Are Two Charts Suggesting More Risk Is Being Taken In The Australian Housing Market

Greg McKenna

APRA has just released its latest quarterly update of property exposure data for Australian Deposit Taking Institutions – its the all encompassing term for banks, building societies and credit unions.

RP Data’s Cameron Kusher has had a look at the data which reveals there appears to be a growing level of risk being taken by both lenders and borrowers in the Australian housing market.

Kushers says that “Based on the value of all outstanding mortgages by households to Australian ADIs, there $811.7 billion outstanding to owner occupiers (66.2%) at the end of June 2014 and $413.5 billion to investors (33.8%)”.

But it is the level of interest only loans (those where no principle is repaid) which stands out as an area of concern with the data showing that 35.7% of outstanding loans are now interest only. This is the “highest on record” according to Kusher who says the percentage outstanding this year has increases from 34.3% the year before.

Posted Image

The difference over the year of 1.4% isn’t a lot in percentage terms but is equivalent to an increase of $17.15 billion in interest only loans. Arguably these loans are more risky because no principle repayment is being made by the borrower who is more likely using the tax shelter of negative gearing to defray interest costs or betting that the rise in house prices will help cover the repayments in the future.

Kusher also highlighted that when looking at “new loans written over the June quarter, 62.1% of lending was to owner occupiers and a record high 37.9% was to investors. Compared to the June 2013 quarter, owner occupier lending is up 2.0% and investment lending is 14.4% higher”.

Posted Image

If the level of investor activity when combined with interest only loans isn’t alarming enough Kusher also highlights that “although only 3.7% of loans were approved outside of serviceability over the June quarter, this was the highest proportion on record. This would seem to suggest that there has been some relaxation of lending standards over the quarter which is likely to be a factor that APRA finds worrying”.

When added together these statistics from APRA, coming on the day that second round submissions are due to the Financial System Inquiry, highlight that Australian banks and borrowers are taking on more risk.

Murray appears right to be focused on stability as much as competition.

Read more: http://www.businessinsider.com.au/here-are-two-charts-suggesting-more-risk-is-being-taken-in-the-australian-housing-market-2014-8
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Interest Only Loans Up To 43.2% In June – APRA

By Martin North | August 26, 2014 | Economics and Banking

APRA just released their quarterly data on housing exposures of the Authorised Deposit-taking Institutions in Australia for the June 2014 quarter. As at 30 June 2014, the total of residential term loans to households held by all ADIs was $1.23 trillion. This is an increase of $29.7 billion (2.5 per cent) on 31 March 2014 and an increase of $97.2 billion (8.6 per cent) on 30 June 2013. Owner-occupied loans accounted for 66.2 per cent of residential term loans to households. Owner-occupied loans were $811.7 billion, an increase of $16.5 billion (2.1 per cent) on 31 March 2014 and $56.5 billion (7.5 per cent) on 30 June 2013.

ADIs with greater than $1 billion of residential term loans held 98.4 per cent of all residential term loans as at 30 June 2014. These ADIs reported 5.1 million loans totalling $1.21 trillion and an average loan size was approximately $237,000, compared to $230,000 as at 30 June 2013.

There are a number of interesting observations within the data, but the one which stands out is the continued growth in interest only loans. Looking at the new loans written, we see that 43.2% were interest only loans. This is the highest ever, and reflects the growth in investment loans where tax offsets are maximized by keeping the balance as high as possible.

Posted Image

We also see a growth in the number of loans which are approved outside normal criteria. It lifted to more than 3.5% of all loans written in the quarter. At a time when regulators are stressing the importance of good lending practice, this is a surprise, but reflects the fact that larger loans are required by some to chase inflated house prices.

Posted Image

The proportion of new loans originated via brokers was 43%, based on the value of loans written. This is the highest for 5 years.

Low documentation loans continue to make up only a small proportion of all loans written.

Turning to the portfolio data, (the stock of all loans held by ADI’s) we see the continued growth in interest only loans, to 35% of all loans, the continued fall in low document loans.

The average loan balances across the portfolio for loans with offsets, and interest-only mortgages continues to rise, with the average balance for the latter now at $299,000.

Investment loans across all ADI’s now make up 33.8% of all lending in the portfolio.

We see that the number of lending entities fell again to 162, highlighting continued concerns about the competitive tension in the industry.

Read more: http://www.digitalfinanceanalytics.com/blog/interest-only-loans-up-to-43-2-in-june-apra/
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peter fraser
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27 Aug 2014, 10:23 AM
See you could not address anything else in the article.

Your lies reguarding subprime mortgages in Australia are getting boring Peter.

The fact is, you have played a major role in this, and I have clearly explained what goes on before and saying how you could acknowledge what I have said is true, but instead of acthanksknowledge the facts, you dont even deny them, just walk away from the thread and pretend it does not exist. Spells it out loud and clear.

Our subprime mortgage market invovled the EXACT same subprime lending as the US, from which we had copied and mirrored their mindless debt ponzi spriuking lending practices.

They invovled giving loans of 100%, they involved giving loans of 105%, exactly the same as the US.

They involved giving loans to people with little or no savings hirstory, they involved giving loans to people with little or no real job history, or loans to people who had either of these.

They invovled giving loans to people with no job, people who had a deposit and a registered abn could obtain a loan without having any proof of assets or income whatsover. The are all facts, there are many more too , peter fraser has been invovled in every single one of these type scenarios, they were rampant. Peter could tell you everything I have said here is true, if he denied it, he would be lying and last time I made a so.iliar type post, he just went AWOL on the thread rather than admit the truth or acknowledge the facts.

Like I said Peter, its getting real boring mate........
Actually you are incorrect. The sub-prime lenders take on borrowers who have had past bankruptcies and credit defaults, but they mitigate that by taking more security, analysing in more depth, and lending at higher interest rates to cover the extra work and risk.

I don't recall them ever lending 100% or 105% loans, those were done by some banks and some non-bank prime lenders and those loans were mortgage insured.

The bank low doc loans were also mostly mortgage insured - APRA insisted that any low doc loan above 60% was insured.

You need to get your details right Ted. You can't take names for pigeon holed lending categories from the USA and expect them to fit our loans, the markets have quite different products and regulations.

That's why you are constantly wrong.
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SittingOnDeFence
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Are most interest only mortgages variable or fixed?

With the stories a month or two ago about people being led to believe they were fine as long as they had mortgage insurance (was on the ABC one night) it's worrying how many people get into trouble
Edited by SittingOnDeFence, 27 Aug 2014, 10:58 AM.
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Veritas
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peter fraser
27 Aug 2014, 10:52 AM
Actually you are incorrect. The sub-prime lenders take on borrowers who have had past bankruptcies and credit defaults, but they mitigate that by taking more security, analysing in more depth, and lending at higher interest rates to cover the extra work and risk.

I don't recall them ever lending 100% or 105% loans, those were done by some banks and some non-bank prime lenders and those loans were mortgage insured.

The bank low doc loans were also mostly mortgage insured - APRA insisted that any low doc loan above 60% was insured.

You need to get your details right Ted. You can't take names for pigeon holed lending categories from the USA and expect them to fit our loans, the markets have quite different products and regulations.

That's why you are constantly wrong.
But what is your take on IO mortgages?
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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peter fraser
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Veritas
27 Aug 2014, 01:12 PM
But what is your take on IO mortgages?
I think that Martin North was correct with his analysis, he said -
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Looking at the new loans written, we see that 43.2% were interest only loans. This is the highest ever, and reflects the growth in investment loans where tax offsets are maximized by keeping the balance as high as possible.


I would advise all of my investors to take their loans as interest only for their IP's unless they were boomers, but really there are very few boomers in the market with large loans. They are mostly at the end of their accumulation phase although some may be rejigging their portfolios.

Investors are often drawing equity out of their PPOR and I would advise them to take that loan out as I/O as well and pump every dollar that they have into their PPOR offset account or into the PPOR loan itself.

For a non-investor buying a PPOR I would always try to set that up as a P&I loan although some nervous PPOR buyers ask for the initial year or two as I/O so that they can bed the loan down and get ahead in repayments to get a buffer established.

If we could drill down into the data and there was a high proportion of PPOR buyers with I/O loans I would be concerned, but I doubt if that's the case based on my own experience and discussions with banks that I deal with. BTW most I/O loans have a max term of 5 years and after that they revert to P&I unless they were set up as a LOC - not many of them these days.

An investor can get an I/O term reset quite easily subject to good loan conduct, but if the loan was for a PPOR buyer often the banks insist on it reverting to P&I. The banks position will depend largely on the age of the borrower and the loan conduct. If the borrower is still young and the loan has been well conducted the bank will usually accommodate a further term of I/O.

Does that make sense to you? Lots of jargon.
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peter fraser
27 Aug 2014, 09:46 AM


But funded by three of the big four.

That said Australia didn't have a sub-prime crisis because the sub-prime lenders generally stuck to sound lending principles, often better lending policies than the banks. The major three sub-prime lenders around pre-GFC are still lending today, and that's why banks are prepared to fund them.
Do I recall you saying Australia doesn't have sub prime.?
Surely you only restarted that in the last week or so.

Am I wrong?
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