The thought of an unprecedented wave of sub-prime mortgages flooding the Australian market is a scary one, perhaps even to the most liberal of lenders.
Purchasing a home, whether it be for owner-occupier purposes or as an investment, and for most, after years of saving for a deposit, is arguably one of the most personal and gratifying acquisitions to be made.
Sub-prime loans are considered to be the riskiest type of mortgage, catering to borrowers who fail to qualify for traditional loans.
Because of this, the borrowers in question are that much more desperate, settling for conditions and lending criteria far removed from their means to repay.
Despite a multitude of financial sins – from poor credit history to bankruptcy to scant evidence of income, lenders continue to adopt and approve these loans, offsetting the risk by simply upping the rate of interest.
It’s at this point sub-prime mortgages truly differentiate themselves from other forms of credit appraisal (and approval).
Questions need to be raised on who the onus lies with in the event the loan defaults: with the lender or with the borrower?
In offering this type of loan, lenders are effectively fostering poor saving habits among consumers, keeping them entrenched in high-risk debt for longer.
After years of the property boom churning out this type of loan to consumers, ramifications stemming directly from sub-prime loans have only recently started to trickle down in the US.
According to the Federal Deposit Insurance Corp, between 2003 and 2005, the popularity of sub-prime loans among all mortgages rose from 9 per cent to 19 per cent.
Today, about 14 per cent of sub-prime mortgage payments are 60 or more days past due, and lenders currently have in excess of $US1.28 trillion worth of sub-prime loans outstanding.
In the US, New Century Financial Corp has recently made headlines following reports that its Wall Street lenders were cutting off its financing, presumably due to over-supplying when the market peaked.
The company has advised customers by posting the following on its website:
“New Century Mortgage Corporation and Home123 Corporation are unable to continue the origination or funding of mortgage loans, and no new loans are being accepted. We are committed to helping borrowers who have been affected by this. We are in the process of contacting customers and brokers to inform them that we’re returning their loan applications, and to assist them in obtaining funding for pending loans.”
Whether Australian mortgage providers are able to learn from the mistakes made in the US remains to be seen, however vigorous scrutiny needs to be applied across the board in ensuring the number of defaults are minimised.
With the RBA last week outlining the escalating levels of personal debt in Australia, the number of people relying on sub-prime loans could eventually surpass those in the conforming sector of the market.
Ironically the news last week from the RBA was that personal debt in Australia was now in excess of $1 trillion – the same milestone the Australian Prudential Regulation Authority noted on Thursday the superannuation industry had now passed.