Non-bank lenders in Australia are growing their loan books and issuing more securitised products as banks scale back their presence in the mortgage market following temporary supervisory lending benchmarks introduced in 2017.
Some of the private finance industry’s leading names are investing in non-bank lenders. When New York-headquartered KKR offered A$675 million ($459 million; €414 million) for Pepper Group, the Australian non-bank lender, in August 2017, the deal was expected to bring the private equity giant exposure to Australia’s trillion dollar-sized mortgage market.
Soon after, in December 2017, the non-bank lender was acquired by an affiliated entity of KKR Credit Advisors via a scheme of arrangement, according to a statement from Pepper Group’s legal advisor, Jones Day.
Among the three portfolio companies, Bluestone has entered the prime loan scene this month, according to the firm’s statement on 6 November.
“We have been operating in the near prime space for a number of years and over this time we’ve seen an increase in clear credit borrowers thanks to the tightening lending criteria of the banks,” said Campbell Smyth, chief executive of Bluestone.
Lending rates are from 3.09 to 8.49 percent, before fees and adjustments for fixed-rate discounts, across four product lines, including prime mortgage loans.
Available home loan amounts offered by Bluestone range from A$100,000 to A$2.5 million for 15 to 30 years with a loan-to-valuation ratio (LVR) of 60 to 85 percent.
Bluestone has a loan book worth more than A$9 billion.
Industry observers point out that the non-bank lenders also issue “non-conforming RMBS (residential mortgage-backed securities)” after loan originations.
A report from S&P Global Ratings, An Overview Of Australia’s Housing Market And Residential Mortgage-Backed Securities, published on 14 November, shows there are more than A$1.82 trillion-worth of home loans outstanding in Australia, of which about 7.5 percent are securitised.
Data compiled by Moody’s, another rating firm, on the RMBS market in Australia at the end of Q2 2019 showed that the cumulative loss rate per vintage year of prime RMBS in Australia, before adjustments per lenders’ mortgage insurance (LMI) coverage, has been at zero percent since 2016.
During 2018 alone, Moody’s saw A$9.72 billion-worth of rated non-conforming RMBS issuance. The current balance of RMBS at the end of Q2 was A$14 billion, based on the amount of Moody’s-rated transactions in this category.
The delinquency rate from non-conforming RMBS, including five active non-bank lenders – Sapphire, Pepper, La Trobe, Resimc and Liberty Financial – from June 2015 to June 2019 was in the range of 2.54 to 3.8 percent, according to Moody’s.
According to Alena Chen, a Sydney-based vice-president and senior analyst at Moody’s, her team restarted rating on non-conforming residential mortgage-backed security (RMBS) deals in 2014. “Since 2016, there has been quite a pick-up in non-conforming issuance, and this stays the same in 2019 issuance as well,” she said.
Chen noted that in the past, non-conforming lending more narrowly referred to lending to borrowers with a prior credit history or lending that mortgage insurers would not insure – the loans that banks traditionally did not underwrite.
“However, non-conforming lending is much broader now. A big portion of the loans underwritten by non-bank lenders, or non-conforming lenders, over the last two to three years were loans that banks would have underwritten,” she said.
On 1 January 2019, the Australian Prudential Regulation Authority removed its supervisory lending benchmarks on interest-only loans in residential mortgage lending and loans to finance residential property investments made by deposit-taking institutions. This measure was put in place, temporarily, to reinforce sound lending practices.
As PDI reported in February 2018, citing the APRA statement, the annual growth rate of investor lending, which included lending activities from all authorised deposit-taking institutions in Australia, has remained below 10 percent since October 2015.
“The current book of non-conforming lenders or non-bank lenders are more diversified and better performing,” Chen noted, adding that, “we are obligated to do regular due diligence meetings with all lenders and sponsors of Moody’s rated transactions and have not seen any material changes in underwriting criteria for the RMBS portfolio as a whole, including non-conforming issuers.”