Sub-prime crisis

Has the sub-prime crisis killed riskier loan types?

House of cards about to fall With international financial markets in disarray many are unsure as to what effect this is having on the Australian mortgage industry at a grass roots level. In other words everyone is asking what loans are still available?

In October 2008 Aussie John announced the death of the low doc loan despite all four major banks still offering low doc loans. So what is really going on?

Low doc loans

A low doc loan is designed for self employed borrowers that cannot prove their income. Instead of providing tax returns they sign an income declaration and the bank uses this to assess their borrowing capacity. So what has become of the low doc loan in recent times?

Major banks: All four major banks still offer low doc loans. There have been some minor changes with ANZ withdrawing their lo doc 80 laon & CBA reducing their discount on low doc loans over 60% of the property value. Westpac & CBA are now requesting that all borrowers provide an ABN as proof that they are indeed self employed. Overall low doc loans are very much still available.
Non-bank lenders: Although low doc policy has become more stringent and ABN requirements are being enforced, low doc loans are still readily available. The old Rams (RHG) and Macquarie have increased the rates on their old low doc loan customers by as much as 1%, forcing many to refinance to other lenders.
Non conforming lenders: The few non conforming lenders still around such as Liberty Financial and Resimac are all still offering low doc loans albeit at a higher rate.

No doc loans

A no doc loan is where the borrower signs a declaration that they can afford the loan but does not have to declare any income and in some cases does not need to declare any assets or liabilities. No doc loans are not in as great shape as their low doc cousins:

Major banks: None of the major banks ever offered a no doc loan even before the credit crisis. So again nothing has changed.
Non-bank lenders: Policy has tightened for no doc loans with some lenders requiring an ABN for at least one year and other lenders such as Citibank increasing the rates for their current no doc customers. No doc loans are still available for up to 70% of the property value.
Non conforming lenders: Liberty Financial's no doc asset lend is still available although funding for this product is in doubt. Private no doc lenders are usually funded by private investors so as always they vary significantly. Many are actively advertising that they have plenty of money available to lend. Private lenders tend to be opportunistic and have increased their rates in response to lower competition.

No deposit loans

100% home loans for first home buyers and investors have become very popular since 2003. St George was the first major lender to specialise in no deposit finance and after testing the water relaxed their lending policy and began writing huge numbers of no deposit loans. So how are they faring now?

Major banks: Most of the major banks have not reduced the maximum LVR (Loan to Value Ratio) for their home loans. Banks such as Westpac and CBA still offer 100% loans whereas ANZ will no longer lend more than 90% of the property value (90% LVR). What has changed is that the Lenders Mortgage Insurance (LMI) premiums have increased slightly. St George still has the lions share of the market and has not changed their policy or pricing for no deposit loans.
Non-bank lenders: Policy has tightened and some lenders have reduced the maximum loan amount to 90% or 95% of the property value. Lenders such as Citibank and Rams still actively pursue the no deposit market.
Non conforming lenders: No non conforming lenders offered no deposit loans before the credit crunch. You must have a clear credit history to access no deposit finance.

Credit impaired / non conforming loans

The lenders that specialise in lending to people with defaults, bankruptcy history and missed home loan repayments are known as non conforming lenders. They tend to be non bank institutions such as Liberty Financial, Bluestone, GE Money and Mobius. So who is still left in the game?

Major banks / Non-bank lenders: All of the major banks have become more conservative when lending to someone with a bad credit history. ANZ in particular will not consider any exceptions to policy. The only way you can get approval is if you have a very good reason for the credit problem and evidence to back up your story.
GE Money: GE appeared to be the most stable of the non conforming lenders as they have a AAA rating and a strong ability to raise new money compared to other lenders. Despite this GE has announced that they are withdrawing from the Australian mortgage market.
Bluestone Mortgages: Bluestone has ceased offering new loans and can only service existing customers due to funding constraints.
GMAC RFC: GMAC has wound down their Australian operations and sold off their distribution platform Capital First. No new loans are being funded.
Mobius: Mobius ran into trouble when its parent company Allco Finance Group suffered losses due to the credit crunch. Mobius has ceased originating new loans.
Liberty Financial: Liberty is still operating however is having great difficulty funding its loans. Their rates have increased significantly and they have issued notices to brokers that settlements will be staggered to allow them time to raise more funds.
RESIMAC: Resimac continues to offer loans however it is not known what financial position they are in.
Challenger / Interstar: Interstar has priced themselves out of the market but continues to offer new loans. It is unknown what financial position they are in.

Effectively the non conforming market is in big trouble. Take care to avoid getting defaults listed on your credit file or missing payments on your loan otherwise you may end up having to take whatever rate you can get.

Investment loans

Investment loans and business loans tend to be one of the first loan types to be withdrawn or limited during financial meltdowns. So is it still possible to borrow to invest in property?

Major banks: All of the major banks have not reduced their LVR (Loan to Value Ratio) for investment loans except for ANZ who no longer offers loan over 90% of the property value. All of the major lenders still actively pursue investors and offer competitive interest rates.
Non-bank lenders: Policy has tightened and some lenders have reduced the maximum loan amount to 90% or 95% of the property value for investment loans.
Non conforming lenders: Some non conforming lenders have reduced the maximum LVR for investment loans to 90% or 80% of the property value. Aside from that investment loan finance has remains unchanged.

Fixed rate loans

Fixed rate loans are more difficult for banks to fund compared to variable loans as the bank has to lock in wholesale market funding. The price of fixed rate funding fluctuates more than variable rate funding in normal economic conditions so there is likely to be even more fluctuations now.

Major banks: The major banks have significantly different fixed rates as some try to profit from the market uncertainty while others try to gain extra market share by offering discounts. CBA has recently increased their 10 year and 15 year rates as more people take advantage of low rates and lock in for the longer term.
Non-bank lenders: The majority of non-bank lenders have seen significant increases to their fixed interest rates which has forced them out of the market. Some lenders are now only offering fixed rates on a "price on application" basis.
Non conforming lenders: The majority of non conforming lenders do not offer fixed rate loans. The ones that do have seen large increases in their fixed interest rates.

Non resident lending

Foreign citizens investing in Australia have come under recent government scrutiny with the introduction of anti money laundering and counter terrorism legislation. Are the banks still interested in lending to people from overseas or here on working visas?

Major banks: All of the major banks have kept the same policy for non residents buying property in Australia.
Non-bank lenders: Policy has remained the same for non bank lenders however there have been few exceptions to normal lending policy. In other words if you don't fit the box then your loan is declined.
Non conforming lenders: Few non conforming lenders offer loans to the non resident market. The good news is that Australian lenders do not assess your overseas credit history so you might as well just apply for a loan with a bank.

Which lenders have been affected by the credit crisis?

Plenty of lenders have been unable to stand the heat and have left the kitchen. Luckily for us the Australian government has learnt lessons from the problems we had in the mid 90's and introduced legislation to prevent the failure of our major banks. With any luck our banks will be ok and non bank lenders will again be able to compete with the major lenders. Not every lender has survived the storm, these are the lenders that haven't:

Macquarie: Macquarie bank ceased all new loan applications for wholesale and retail residential loans. This has left lenders such as Aussie and Mortgage House who were funded by Macquarie to find new funding partners such as CBA or Westpac.
Rams (RHG): The old Rams ran out of money and could not extend their wholesale funding lines. Because of this the company got carved up and the brand was sold to Westpac. The existing customers rates were increased and the company name was changed to RHG Limited.
Mobius: Owned by Allco, Mobius has run out of money and has stopped funding new loans.
Bluestone Mortgages: Bluestone isn't dead, we hope they return when the credit crisis is over. However they have run out of cheap funding and have ceased offering new loans.
GMAC RFC: Global giant GMAC was forced to shut down their Australian operations due to an inability to source funding despite writing record numbers of loans.
Liberty Financial: Liberty isn't out of the game entirely, however their ability to source funds is limited and they are at risk of having to withdraw from offering new loans.
GE Money: GE has withdrawn from the Australian mortgage market. This is unfortunately a huge blow to the non-conforming industry as they were one of the few main player left in the market.

What is likely to happen in the future?

That is anybodies guess! Nobody knows what will happen as the market is very volatile at the moment. Maybe low doc loans and no deposit home loans will be withdrawn from the market however at this time they are still available.