Brokers expect to write more non-conforming loans

From The Adviser.

Mortgage brokers believe that tighter prime lending policies and changing customer needs will drive up demand for non-conforming mortgages over the next 12 months, according to new data.

A Pepper Money-commissioned survey of 948 mortgage brokers has revealed that 70 per cent expect to write more non-conforming loans in the coming year, while 66 per cent predict a decline in the number of prime loans written.

Surveyed respondents expect the demand for non-conforming loans to rise as a result of tighter prime lending criteria (22 per cent), changing customer needs (21 per cent) and changing legislation/regulations (13 per cent).

“The survey shows clearly there is a greater awareness and understanding of non-conforming loans among brokers,” Pepper Group’s Australian CEO, Mario Rehayem, said.

“Brokers and consumers no longer see non-conforming loans only for people who’ve experienced a credit event; instead they realise they are a valid alternative for consumers who are self-employed, who generate income outside of normal work scenarios, are seeking investor loans or have a high LVR.”

The CEO believes that brokers are servicing increased demand from Australians for flexible lending alternatives.

Mr Rehayem said: “With the big banks tightening their lending criteria on an almost daily basis, they are excluding a whole segment of credit-worthy ordinary Australians from accessing finance. That’s why more brokers are discovering the benefits of a flexible lender with a consistent approach to credit provision.

“We also know more Australians are working for themselves or on a part-time basis, and brokers are looking to provide their growing self-employed customer base with suitable lending options.”

Moreover, the survey found that the number of brokers who have yet to write a non-conforming loan has also reduced, falling by 6 per cent from 18 per cent in 2016 to 12 per cent in 2018.

“We know brokers who have previously written a non-conforming loan for a customer are more comfortable in recommending them in the future, that’s why we have established ourselves as a leader in broker education and the provision of tools that allow them to confidently recommend a non-conforming loan in the future,” Mr Rehayem concluded.

Pepper Takeover Approved

From Australian Broker.

The shareholders of Pepper Group have overwhelmingly approved the scheme implementation deed for Red Hot Australia Bidco, an entity owned by certain funds, clients or accounts managed or advised by KKR Credit Advisors or its affiliates, for Bidco to acquire all of the Pepper shares.

Approximately 99.96% of voting shareholders voted in favour of the transaction at a special shareholder meeting today.

As a result of the positive vote, Pepper shareholders not electing one of the Election Options in the scheme will receive $3.60 in cash per share and a special dividend of 10 cents a share.

The Scheme also included an equity alternative to the Cash Consideration (Scrip Option) allowing shareholders (other than certain foreign ineligible shareholders) to instead receive one share in Red Hot Australia Holdco, which is the owner of 100% of the shares in Bidco, for each Pepper share they hold.

Pepper Group chairman, Seumas Dawes said “We are pleased with the strong vote in favour of the scheme, which directors believe delivers maximum value for shareholders. In addition, we are delighted that many shareholders chose to remain invested in the Pepper business.”

Commenting on what the transaction means for the Pepper Group Business, group CEO Mike Culhane said, “With the support of KKR, we now have the opportunity to accelerate our long term growth plans around the world. KKR’s investment is a strong endorsement of the outlook for our business. We are confident this partnership will position the company for long-term success.”

The scheme will be formally implemented on 4 December when shareholders will receive the cash consideration for their shares or an allocation of shares in Holdco.

Why non-banks could be the new home for non-resident borrowers

From Mortgage Professional Australia.

Lenders eyeing up wealthy foreigners currently locked out of the banks and developing new processes to combat fraud

Non-resident lending could be set for a return as non-bank lenders become increasingly interested in the sector.

According to La Trobe Financial’s vice president Cory Bannister, “non-resident is a great example of a product that suits non-banks generally.” Speaking at MPA’s Non-Banks Roundtable last week, Bannister said that the low LVRs, low arrears and high net-worth associated with non-resident borrowers made them similar to prime clients.

The banks largely pulled out of non-bank lending in early 2016, citing fears of fraud. However, Bannister believes non-banks can operate safely: “we believe it requires manual assessment and that’s the single characteristic which meant the banks had to step out of that space.”

La Trobe, who have lent to non-residents on and off over the past year, have an international desk with bilingual staff which help ‘weed out’ fraudulent cases.

Growing niche in expat lending

Two other lenders at the panel were already lending to Australian expats: Better Mortgage Management and Homeloans Ltd.

Expats often struggle to find finance at the banks because they earn income abroad and in foreign currencies. BMM’s managing director Murray Cowan told the panel that “I think the expat sector may have been unfairly characterised as the same as non-residents and that might have created a bit of an opportunity for us there.”

Aaron Milburn, director of sales and distribution at Pepper Money, said that although Pepper doesn’t currently lend to non-residents “I wouldn’t discount it for the future.” He noted that Pepper’s international spread helped provide the infrastructure to do so.

Can non-banks handle non-residents?

Non-banks at the panel were concerned however that a return to non-resident lending could lead to a surge in business.

In fact, it could cause volumes to triple ‘overnight’, suggested Homeloans and RESIMAC general manager of third party distribution Daniel Carde. The panel broadly agreed that such a surge would be difficult to deal with. “No business is set up for triple volumes,” argued Liberty’s national sales manager John Mohnacheff “we can probably handle 5-10% variability”.

A note of caution was sounded by FirstMac founder Kim Cannon. “The RBA wants to stop [non-residents buying property]; they don’t want to cure it,” he told the panel. He warned that surge in non-residents getting financed by non-banks would be “treading on dangerous ground” with regulators.

Non-banks call for more limited APRA scrutiny

From Australian Broker.

Four leading non-bank lenders have criticised the extensive nature of powers proposed to the Australian Prudential Regulatory Authority (APRA) to be implemented over the non-ADI lending sector.

In a joint submission to the Treasury, Pepper Group, Liberty Financial, Firstmac and RESIMAC addressed these potential new APRA powers.

While the lenders appreciated the need for financial stability and sound lending practices, they pointed out that non-ADI lenders and ADIs are significantly different.

“While non-ADI lenders provide a range of essential functions and products to all Australians, they do not provide as broad a range of products, nor do they accept deposits, nor are they responsible for key pieces of banking infrastructure. Non-ADI lenders promote healthy competition within the finance sector, and service areas and customers that ADIs lenders cannot or are unable to service.”

The regulation of non-banks should thus be limited to “exceptional circumstances” if activity from a non-ADI lender is deemed to threaten the stability of the financial system.

The Treasury’s recent exposure draft on these proposed powers creates “unnecessary regulatory intervention” and “regulatory uncertainty” within the sector, they said.

“It casts an extremely wide net, both in terms of the proposed entities to be regulated and the level of regulatory oversight. We recommend that the legislation be modified to facilitate a more targeted regulatory approach to avoid causing unintended instability in the capital markets, the non-ADI lending sector and the Australian economy more generally.”

The submission, which was prepared by legal firm King & Wood Mallesons, proposes a number of specifics with regards to any future regulatory powers granted to APRA:

  • The definition of non-ADI lenders should be restricted only to those engaging in lending finance or in activities which directly result in the origination of loans
  • When assessing the impact of non-ADI lending practices on financial stability, the activities of non-ADI lenders related to ADIs should be excluded
  • Specific details of when APRA can create a ‘rule’ to further regulate a non-ADI lender should be contained either within the legislation or the guidance notes accompanying that rule
  • APRA will assess competitive issues within the relevant markets prior to exercising its rule-making power
  • This rule-making power will be limited to target macro-prudential concerns rather than regulating overall business aspects of the non-bank lender
  • APRA must consult with any affected non-ADI lender prior to creating a rule relating to that firm
  • A transitional period will be held before a rule comes into effect to ensure that the lender can meet its commitments to borrowers prior to any restrictions
  • Proposed rules that apply to the non-ADI lending sector will be no worse than any specific rule applying to the ADI sector
  • Directions to refrain from lending activities should only be made in the event of repeated and severe non-compliance by the lender

“Given the nature of a non-ADI lender and its industry, the rule making and enforcement power needs to be more specific, and different from the prudential standard and oversight approach taken with ADIs,” the joint submission said.

The statement continued, saying that vague regulation would negatively affect the confidence of the investors funding non-bank lenders, reducing the sustainability of the lender’s business model and thus restricting competition.

“In the absence of certainty as to when, how and why APRA may regulate, investors may question the non-ADI business model which may reduce the availability of capital markets funding and increase funding costs and limit the availability of warehouse funding, which in turn may have the unintended adverse effect on the level of loans and pricing in the retail lending market.”