Report tips a low-doc loan boom
Peter Weekes, The Age, 30th of September 2005
CLAIMS that the non-conforming mortgage market will almost double to $20.2 billion by 2009 have brought mixed responses from industry experts, with some saying they are based on "some big assumptions".
A report by independent market analyst Datamonitor predicts the sector's growth rate will outpace mainstream home loans by a factor of four, reaching 9 per cent of the overall mortgage market within four years.
The report foresees a rise in interest rates, and says this would slow the traditional home loan market and lead banks to tighten their lending criteria as more households default on their mortgages.
"A slowdown in the mainstream mortgage market may actually drive business to non-conforming lenders, particularly as mainstream lenders tighten their lending criteria," the report says.
Non-conforming loans are designed for those who do not fit mainstream lending criteria because they do not have full-time jobs, have an impaired credit history or want to borrow a particularly large amount.
As the loans are regarded as more risky, borrowers are charged a higher rate of interest, between 7.5 and 10 per cent, as well as hefty up-front fees. Most traditional borrowers pay 6.6 per cent, while the official standard variable rate is 7.3 per cent.
The chief executive of bank monitor InfoChoice, Denis Orrock, said that while the non-conforming market would continue to grow, he doubted it would grow at the 13 per cent compound annual rate predicted by Datamonitor.
The managing director of non-conforming lender Liberty Financial, Sherman Ma, said he agreed with some aspects of the report but added: "It's based on a whole bunch of assumptions for that (growth) to happen."
Liberty Finance is planning to build a commercial loan book of $1 billion within 12 months. In its push to attract potential clients, Liberty is offering terms of up to 30 years, with no annual reviews, and says it is making loans available to a broader range of customers, including new businesses with no proven trading history and those wanting to buy for investment.
Datamonitor's financial services analyst, Alan Shields, said mainstream lenders would start to offer non-conforming products, possibly under a different brand name, to protect their market share.
A spokeswoman for National Australia Bank said its market share was steady at 14.35 per cent in the six months to June but the bank was considering a range of options, including non-conforming loans.
Lisa Montgomery, national manager of consumer advocacy for Resi Mortgage, said more people were likely to take out non-conforming loans as consumers became more aware of the products.
But she disputed the growth predicted in the report, and doubted whether banks would move to substantially tighten lending criteria.
"Most experts are now predicting cuts in interest rates," she said.
KEY POINTS
- Datamonitor suggests rate rise will drive dramatic growth in non-conforming loans.
- Lenders dispute the rate of growth as most expect an interest rate cut.
