While Australia may be lagging behind other markets when it comes to product innovation, its less dynamic, more conservative lending practices are helping it weather the current credit market problems.
This was the view of a panel of respected securitisation and banking experts, speaking at the recent American Securitisation Forum 2008, held in early February in Las Vegas.
Comparing Australia to other markets, Ganesh Rajendra,head of securitisation research for Europe and Asia at Deutsche Bank, said not much had changed in terms of banking practices, which was a positive thing in line with what has happened in global markets.
Rajendra said the country’s credit markets were still “very strong” with loan impairments in both prime and low-doc well below UK levels, in a market where the banks still dominate the issuing of RMBS bonds.
“The fact that the banks continued to dominate the Australian issuer base is now a good thing when you look at it with some perspective in terms of what’s happening in the US,” he said.
“A ‘Double A’ or ‘Single A’ rated bank behind a securitisation is certainly a better proposition than a non-bank with a thinly capped business model.”
However, also speaking on the panel, Andrew Twyford, GM for treasury and securitisation at Challenger Mortgage Management, disagreed that it was only the banks that could offer value in this market.
“Not all the non-banks are thinly capitalised,” he said. “The larger non-banks are well capped and [most] are related to listed entities on the ASX.
“Even some of the medium-sized non-banks have been in the market for a number of years and are well-entrenched and well-run organisations.”
Twyford also mentioned that because there were relatively few new entrants in the market, this put Australian non-bank distribution in a very good light. “As a consolidated group, they compete exceptionally well against the banks and they do well against all parts of the world,” he said.
Underwriting
The panel members also spoke highly of Australian lenders’ underwriting standards, emphasising that credit decisions are not passed on to brokers or third parties – as has been the case in the US – but are a centralised function of the lender.
Roger Desmarchelier, chief manager, group securitisation at St.George Bank, pointed out that even though there is an increasing level of use of broker-introduced business amongst Australian banks, all loans must meet the underwriting criteria of the banks, who make the final loan approvals.
“Banks and non-banks have a strong reputation in terms of underwriting in Australia. The model is different to the US, where originators there don’t always have ongoing involvement with the borrower, and, in a lot of cases, the ongoing servicing is outsourced to third parties.”
Another factor in the strength of the Australian securitsation market is its legal framework, with lenders having “full recourse to the borrower”, meaning there are no instances of owners just throwing the house keys back to the lender and taking no further responsibility in any loan shortfall, as is happening in the US.
“We have a lender-friendly security enforcement … with relatively quick foreclosure processes. Because there are no tax benefits in paying off an owner-occupier residential loan in Australia, unlike the US, borrowers are incentivised to pay off their mortgage as fast as possible,” Desmarchelier said.
Twyford said a non-bank lender like Challenger operated using a centralised underwriting model, with all decisions made by this division, while valuations are sourced by an external panel, of which all members are registered valuers and audited by Challenger.
“We lend on the basis that each borrower can make the loan repayments at 2% above the rate … and all banks are the same,” he said, adding that most of the other non-banks also used a centralised process and were “well-structured organisations”.
He said that Challenger had removed products “on the margin of the more risky side”, such as loans with LVRs over 95%, and maintained that Australian underwriting standards remain at the forefront of standards around the world.
Insurance
Also on the panel was Phil White, principal at mortgage insurer PMI Group Australia, which he said underwrote 50% of the securitsation deals.
“We don’t have FICO scores [most widely used credit scoring model in the US], but we do have credit bureaus who have been here for 40 years, and who have used a lot of data to build their models,” he said.
“A bureau score is good measure of likely performance of a loan,” White said, adding that PMI also has its own credit assessment tools, which it runs across all the deals.
“In the US this is done more under delegated authority, but here the deals are underwritten ourselves,” he said.