Conservative lending policies and consumer protections differentiate Australian non-conforming to US sub-prime markets

The Australian non-conforming industry's conservative lending policies and sensible consumer protections were strong and viable safeguards from current pressures being felt in international finance markets, Group CEO of leading Australian non-conforming lender, Bluestone Group, Mr Alistair Jeffery, told a US conference overnight. Addressing delegates to the IMN Sub-prime Conference in Las Vegas, Mr Jeffery said turmoil in the US sub-prime market underlined the need for fundamental principals in sound and proper lending, with the roots of the current US problems resting on a presumption of future house price appreciation and lack of lender conscionability in certain segments of the industry. "Australia is fortunate that conservative lending policies and consumer protections differentiates our non-conforming industry from US sub-prime markets, " he said. "Our lenders generally understand that just because a borrower’s property value is increasing does not mean they can suddenly afford a substantially larger loan. "They also understood that the use of teaser rates to improve apparent serviceability is flawed, and effectively increases both borrower and lenders reliance on future house price appreciation, " Mr Jeffery said. He said fundamental principals of good lending include knowing your customer well enough to determine if they can afford their loan, ensuring that they are protected from payment shocks which could materially lift their monthly payments, ensuring that lender and borrower interests are aligned by requiring a reasonable deposit, and not allowing risk factors to compound.
"Many risks faced by lenders could be masked in times of strong property appreciation, where consumers are able to refinance out of trouble." "Australia experienced very strong house price appreciation in 2003 – 05, but while this drove record loan volumes during that period the core risk measures of loan to value ratio and borrower serviceability across the industry did not deteriorate markedly."
Mr Jeffery said Australia had been well served by the Uniform Consumer Credit Code, and welcomed the recommendations earlier this week of the Federal Parliament Lending Practices Inquiry which called for uniform regulation of brokers and better reporting on enforcement rates within the market.
"The UCCC is a straight forward framework designed to ensure that consumers interests are protected when they borrow, a set of practices and policies introduced in the late 90s, which must be adhered to by all lenders in providing loans to home owners. "One powerful provision has been the requirement that a lender acts conscionably and not lend unless they have made reasonable enquiry into a borrower’s ability to pay. "Penalties for breaching this provision can be severe and include the possibility of having the loan set aside (made non-repayable), so lenders have been diligent about ensuring they comply with the UCCC. "This has limited certain practices that proliferated in the US such as no-doc lending, where little or no enquiry is made into the ability of a borrower to service their loan, " he said.
Mr Jeffery called on the Federal and State governments to use the UCCC as the framework to further strengthen lending practices and remove the current exemption for investment loans, which has been used by some lenders in an attempt to avoid the conscionability provisions. He also urged that the scope of the UCCC to be broadened to include the mortgage insurers, a move that would ensure that insurer’s interests and those of the lenders who they support are aligned and no moral gap emerges between the two industries.
Mr Jeffery said while the US sub-prime market had acted as a catalyst, the current dislocation in the global credit markets was now substantially broader and few sectors relying on open and liquid credit markets would be immune to the on-going stress. "What started as a credit event is now a mature liquidity disruption and investors, rating agents, issuers and even central banks are re-assessing their risk models to evaluate liquidity based risk, "he said.
“Markets have been reminded about the constantly changing nature of risk and traditional credit models are now being rapidly updated to reflect the new order. "When the debt markets re-open fully, bond margins will have widened to reflect appropriately higher credit spreads and pricing will include a new component of liquidity risk. "Issuers who operate transparently and create straightforward debt instruments with simple and sensible structural features are likely to be rewarded with lower liquidity spreads but conversely, exotic or opaque structures are likely to be penalised heavily, "Mr Jeffery said.
He said in the current financial turmoil, lenders have to reconsider term risk, an exposure created when the duration of assets of a bank or lender do not match the duration of their liabilities.
“Many lenders are currently being reminded about term risk and the merits of matched funding, which is the aligning of asset and liability duration and profile. Lenders who have chased higher returns by borrowing short and lending long (mortgages are generally considered a long term asset) are currently being punished”, Mr Jeffery said.
He said over 80% of Bluestone’s mortgages were match funded via securitisation, providing a secure, non-recourse, duration matched funding source for the business.
For further information, please contact: Alistair Jeffery Group CEO, Bluestone Group Tel 02 8115 5010fff123000@yahoo.cn Tony Pescott Chief Operating Officer, Bluestone GroupTel 02 8115 5020