What is happening in the Non - Conforming mortgage market?

By:freedomloan

In America there are many homeloans products like here in Australia. They have the traditional Prime products (like the products offered by the major lending institutions i.e . CBA, ANZ, and NAB etc) and they also have loan providers that cater for people that fit outside the traditional lending square i.e. customers with previous credit defaults, a history of poor loan repayments or non traditional income methods. The latter is the Sub-prime mortgage market.



The subprime mortgage market in Australia is called the non-conforming market and is made up of a handful of specialty lenders that cater for the non-traditional borrower as in the US.



The funders in these subprime marketplaces raise their funding from the same place i.e. capital markets………..they do this through a process of securitisation where the mortgage backed securities are packaged up and sold to investors for an agreed rate of return.



In the USA there has been a great deal of demand for Subprime mortgages due to the fact that these home loans in the main require less documentary evidence (income evidence etc) to support an application that a prime loan would demand…..in return for less documentary evidence the lender will charge a premium interest rate for the funds.



To cater for the great demand and intercompetition amongst lenders credit underwriting standards have been fairly slack and some of the products offered have been extremely risky………the riskier the loans the greater the perceived rate of return for the lenders and the investors. Some of these lenders have been offering 125% of the cost of a property to borrowers that have not demonstrated any evidence or capacity to repay the loan as well as previous credit issues………they have also been offering products to borrowers called ARM (automatic reset mortgages). These products start at an interest rate that is better than the standard rates in the first year and then increase over the next few years to around double the rate . In a large majority of cases the borrower is unable to afford the repayments in the second year onwards and eventually the property is repossessed.



In the US at the moment there are record foreclosures of properties around the country that have these Sub prime products with ARM. Billions of dollars have been wiped of the value of the bonds issued by the Lenders that have been purchased by investors. One of the biggest losers has been Merrill Lynch (large investment group) with current written off losses of $7.9 Billion.



The irresponsibility of the lending practices in the US has led to a lack of appetite in the capital markets for the bonds issued by our Non-conforming lenders here in Australia. This has led to rate increases and contingency plans being put in place by funders to safeguard their short term operations while normal capital market conditions are returned.



The important thing to remember for consumers here in Australia is that there are very prudent credit procedures in place here to guard against the same issues arising. Lenders are regulated by the Uniform Consumer Credit Code (UCCC) this places strict responsibility on lenders to assess their customers with diligence and conscionability.

Over time I believe that investors in the capital markets will begin to recover confidence in the infrastructure of the Australian Non-conforming marketplace and return to support all non-conforming lenders.

Source: http://www.articlealley.com/article_251738_19.html