Aug 242007

John Symons, CEO of Aussie Home Loans, stated earlier this week that in the shadow of the US sub-prime mortgage meltdown, some re-pricing of risk in the Australian, if not the world financial marketplace would result.

“Relaxed lending criteria had allowed a lot of people – particularly the young – to borrow as never before, and some will be caught out as interest rates rise”, Mr Symond said. “Rising interest rates and debt levels would force lenders to re-examine how they assessed potential borrowers”

I strongly suspect that re-pricing is underway. Non-conforming lenders, Bluestone Mortgages, and to a lesser extent, Pepper Home Loans appear to have have restructured their tiers of risk exposure to better reflect the type of products they are offering. In other words, while no announcements, apart from Pepper’s recent off-the-cuff that some new lending will attract an average exposure increase of 0.15%, have issued formally, some internal re-pricing is underway within the Australian marketplace.
This is evidenced quite dramatically by the following advice issued by Australia’s largest privately owned mortgage originator, FirstMac Mortgage Management Ltd.

Through conservative treasury management FirstMac is in a very strong financial position to absorb market volatility and associated liquidity constraints. FirstMac funds its mortgage asset portfolio with long term liabilities. As a result we do not anticipate any funding cost increases to existing borrowers, outside of normal RBA official cash rate movements.
Market funding costs for new borrowings has however increased and we expect all bank and non-bank lenders to review their products.
In light of this, FirstMac announces the following product adjustments for new business, effective from Monday 27 August 2007.
NoDoc (X and ZIP loans)
The NoDoc interest rate will increase from 7.89% to 8.89%

A quick & dirty review of competition within the NoDoc marketplace indicates quite clearly that FirstMac have just priced themselves out of that market. By anything from 0.50% to more than a full percentage point. There can only be two valid reasons for this re-pricing:

  1. that FirstMac want to limit current exposures and severely restrict future potential exposures; or
  2. that a return to the original risk perspective of the NoDoc/LoDoc loan product is underway.

Whether the latter view carries through the rest of the Australian mortgage marketplace remains to be seen, but for the immediate future, it seems that the largest, privately-owned mortgage originator and manager doesn’t see enough return for risk in the current NoDoc/LoDoc competition.
A return to the original priced-for-risk regime pertaining to the NoDoc and to a lesser degree, the LoDoc loan products can only be a good thing. Such a move which will undoubtedly receive the tacit support of the RBA board, and lessen the likely adverse impact of the current Parliamentary Inquiry into so-called predatory practices among lenders and mortgage introducers in this country.

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