Table of Contents

Non-conforming Mortgage Lending in Australia 2004 - An examination of a small but growing section of the Australia mortgage market. Non-conforming mortgage lending includes that to the self-employed, individuals with a bad credit history, temporary residents and those aged 55 and over.

Product Code: bffs0335

Publication Date: 23-Nov-2004

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Overview

Introduction

The non-conforming mortgage market in Australia remains small. However, Datamonitor's opinion is that the market has considerable growth potential if mainstream lenders recognize the opportunities in the market and existing players continue to grow their market presence. How can opportunities in the non-conforming market be exploited? How large is the market and by how much can the market grow?

Scope

· Covers non-conforming mortgage lending in Australia with comparison to the non-conforming mortgage market in the UK

· Includes an estimate of the size of the non-conforming mortgage market and a forecast of lending commitments to 2008

· Based on in-depth interviews with executives working within the non-conforming mortgage market

Highlights

The roots of non-conforming lending in Australia can be found among solicitors, accountants and property companies. These players were the first to lend to individuals in the non-conforming population doing so in a largely unregulated manner and in modest volumes.

It is estimated that around eight per cent of the 13 million credit eligible Australians have a default listing against their name. Assuming this estimate is correct around one million Australians have a default listed in their credit file.

Non-conforming lenders interviewed for this briefing stated that between six and 25 per cent of loan applications are rejected by mainstream lenders and between 25 and 35 per cent of these applications are then underwritten by lenders in the non-conforming market.

Reasons to Purchase

· Quantify the non-conforming population and lending commitments to individuals in the non-conforming population

· Examine the potential for competitive entry into the non-conforming market by players in the mainstream market and parties from overseas

· Benchmark non-conforming mortgage lenders

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CHAPTER 1 INTRODUCTION	6
Scope	6
Who is the target reader?	7
How to use this briefing	7
Related reports	8
CHAPTER 2 MARKET CONTEXT	9
The growth of the Australian mortgage market	9
Lending commitments for housing amounted to AUS$197.6 billion in 2003	9
House prices have increased dramatically	10
Housing credit aggregates per adult have now surpassed AUS$35,000	12
The level of indebtedness will have a bearing on the non-conforming mortgage market in the next few years	13
Lending commitments for refinancing amounted to AUS$30.8 billion in 2003	13
Lending commitments for refinancing now amount to almost 30 per cent of total owner-occupied lending commitments	14
Low interest rates have been the catalyst for housing market growth	15
Mortgage arrears are at a historic low	16
A lower cash rate target has been reflected in lower borrowing costs	16
Evidence that the property market is slowing	17
Property price increases have slowed in 2004	17
There has not yet been a significant slowdown in mortgage lending	19
Non-conforming lending explained	19
The nature of non-conforming lending	20
Non-conforming loans generally carry an interest rate premium and have a shorter life	20
Various loan types fall into the non-conforming category	21
Mainstream lenders are increasingly engaging in low-documentation lending	22
APRA's ruling may drive low-documentation lending back to non-conforming players	23
There is no rigid definition of what constitutes a non-conforming lender	24
The history of non-conforming mortgage lending in Australia	24
The roots of non-conforming lending can be found among solicitors, accountants and property companies	24
These players have now largely been forced out of the market	25
The growth of the mortgage broker market has been vital in boosting the fortunes of the non-conforming market	26
The rise of the specialist non-conforming lender has brought mainstream standards to the non-conforming market	27
The non-conforming population	27
Self-employed individuals in Australia numbered almost 1.3 million at the end of 2003	27
Own-account workers account for a larger percentage of the total self-employed workforce	31
Contract and casual employment have become more important	32
In the 2003/2004 financial year there were more than 20,000 Part VI and XI bankruptcies in Australia	33
Debt agreements have rapidly increased in prevalence since their introduction in 1996	34
Part X Administrations now number around 200 per year	36
Defaults listed on an individual's credit file will also be considered by a credit provider	37
There were 138,446 temporary residents in Australia in June 2004	38
Older borrowers represent an additional market segment for non-conforming lenders	40
Quantifying the non-conforming population	40
The non-conforming population included 2.0 million individuals in 2003	41
Credit impaired individuals accounted for 40 per cent of the non-conforming population in 2003	43
For more information on the methodology used to size the non-conforming population....	44
Sizing the non-conforming mortgage market	44
Lending commitments in the non-conforming mortgage market amounted to AUS$8.4 billion in 2003	45
CHAPTER 3 COMPETITIVE DYNAMICS	47
Specialist non-conforming mortgage lenders	47
Bluestone Mortgages	47
Bluestone reports record profits and loan volumes	47
Bluestone's product range includes a full range of non-conforming products	47
Bluestone's distribution strategy is third party focused	48
Bluestone tries to extend the life of non-conforming mortgage loans	48
Liberty Financial	49
Macquarie ties up with Liberty	49
Liberty reaches for the stars	50
Liberty completes Australia's largest non-conforming securitization	50
Pepper Home Loans	51
Accommodating varying levels of credit impairment through product design	51
Spicing things up in the small business sector	52
Pepper joins an elite club of non-conforming lenders	52
Pepper buys Baycorp Advantage Lending Solutions	53
GE	53
The history of GE in Australia	53
Positioning GE is the non-conforming market is hard	54
GE offers a Jump Start	54
GE takes sixth spot in the Australian mortgage market	54
GE can now take non-conforming products to a wider audience	55
There may be more acquisitions to come	55
Other non-conforming players	56
HLP Mortgage Company	56
The Mortgage Alternative	56
CHAPTER 4 FUTURE DECODED	58
Forecasting lending commitments in the non-conforming mortgage market	58
The growth of the non-conforming mortgage market will outstrip that recorded in the mortgage market as a whole	59
The future of non-conforming lending in Australia	61
Further competitive entry into the non-conforming market	61
Mainstream lenders will show greater interest in the non-conforming lending	61
The UK highlights the likely development of the Australian market	62
GE could have its eye on any of the specialist non-conforming lenders	63
Going beyond mortgages	63
Secured loans have potential as more individuals look to consolidate debts	64
Secured loans are attractive to non-conforming borrowers	64
Credit cards for non-conforming individuals have good potential in the Australian market	65
Card issuers considering the launch of a non-conforming credit card must not do so lightly	65
New non-conforming products will bring new funding challenges	66
CHAPTER 5 APPENDIX	67
Definitions	67
AAGR	67
CAGR	67
Cash rate target	67
Contributing family workers	67
Employees	67
Employers	68
Lending commitments	68
Low-documentation mortgage loans	68
Non-conforming	68
Own-account worker	68
Research methodology	68
Datamonitor's methodology used to size the non-conforming population	68
Datamonitor's approach to sizing the non-conforming population in Australia differs from that adopted in the UK	69
Datamonitor assumes a black and white approach to loan assessment	69
Step one: quantify the number of permanent employees in the non-conforming population	69
Step two: quantify the number of self-employed individuals in the non-conforming population	71
Step three: quantify the number of contract or caasual employees in the non-conforming population	74
Datamonitor's methodology used to size the non-conforming mortgage market	78
Step one - quantify the number of non-conforming households	78
Step two - Calculate the number of non-conforming households with a mortgage outstanding	79
Step three - Calculate the number of dwellings being purchased with a mortgage by non-conforming households as a percentage of the total number of dwellings being purchased with a mortgage	79
Step four - Calculate lending commitments to non-conforming borrowers	79
Future readings	79
Relevant links	80
Datamonitor's custom research capabilities	80
SPP writing team	82
How to contact experts in your industry	83
List of Tables
Table 1: Housing credit aggregates per adult, 1999-2003	13
Table 2: Median house prices according to the Australia Bureau of Statistics and the Real Estate Institute of Australia	18
Table 3: The number of self-employed individuals in the Australian workforce, 1990-2003	30
Table 4: The number of own-account workers in the Australian workforce, 1990-2003	32
Table 5: Number of temporary residents in Australia, 1997-2004	39
Table 6: The non-conforming population in Australia, 1999-2003	42
Table 7: Number of credit impaired Australians, 1999-2003	44
Table 8: Lending commitments in the non-conforming mortgage market, 1999-2003	46
Table 9: Liberty Financial's securitizations completed to date	51
Table 10: Macroeconomic projections underpinning Datamonitor's forecast of the Australian non-conforming mortgage market	58
Table 11: Lending commitments in the non-conforming mortgage market, 2004-2008f	61
Table 12: Mainstream lenders, investment banks and financial conglomerates with a stake in the UK non-conforming mortgage market	63
Table 13: Quantifying the number of self-employed individuals in the non-conforming population	74
Table 14: Quantifying the number of individuals working on a contract or casual basis in the non-conforming population	78
List of Figures
Figure 1: Lending commitments have increased in the investment and owner-occupied housing markets but most rapidly in the investment housing market	10
Figure 2: At the end of 2003 the Australian house price index for an established house reached 245 index points	11
Figure 3: Housing credit aggregates per adult now surpass AUS$35,000	12
Figure 4: Refinancing has increased in popularity as many Australians have switched to a better mortgage deal or consolidated their debts into their home loan	14
Figure 5: Though increased twice towards the end of 2003, when compared to historic rates the Reserve Bank's cash rate target relatively remains low	15
Figure 6: A lower cash rate target has been reflected in mortgage rates	17
Figure 7: The low-documentation market sits between the regular and non-conforming mortgage markets and has been entered increasingly in recent years by mainstream lenders	23
Figure 8: Self-employed individuals accounted for more than 13 per cent of the Australian workforce in 2003, a lower percentage than in previous years	29
Figure 9: Own-account workers have accounted for an increasingly large percentage of the self-employed workforce in recent years	31
Figure 10: Part VI and XI bankruptcies peaked in 2001. Since then they have fallen to around 21,000 per year	34
Figure 11: Debt agreements have become a popular alternative to bankruptcy since their introduction in 1996. In 2003 more than 4,500 debt agreements were reached	36
Figure 12: The number of Part X Administrations recorded per year has fallen over the last ten years, a fall that has been contributed to by the introduction of debt agreements	37
Figure 13: There were almost 140,000 temporary residents in Australia in June 2004	39
Figure 14: There were 2.0 million non-conforming individuals in Australia in 2003 accounting for 10.4 per cent of the country's population	42
Figure 15: 40 per cent of the non-conforming population were credit impaired due to bad credit history in 2003	43
Figure 16: Lending commitments in the non-conforming mortgage market amounted to AUS$8.4 billion in 2003	46
Figure 17: Lending commitments in the non-conforming mortgage market will amount to AUS$20.4 billion by 2008, accounting for 8.7 per cent of total lending commitments	60
Figure 18: Datamonitor's core consulting capabilities	82

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