Those quick and easy vanilla home loans are fast becoming a thing of the past. In an ever-changing market, near-prime mortgages are becoming a critical offering in a broker’s product suite. James Mitchell investigates.
Let’s look at the mortgage market for a minute.
The banks have been slammed by the Hayne royal commission. As a result, they’ve tightened up considerably on housing credit. Brokers are placing more deals with the challenger banks and alternative lenders. Borrowers who qualified for a prime loan with the majors yesterday are finding themselves declined today. What will you be able to offer them tomorrow?
Major aggregator AFG recently noted that there has been a “structural shift” in the Australian lending market away from the big four.
Morgan Stanley reported that the non-banks are growing their mortgage books at twice the rate of the big four as tighter lending standards continue to weigh on the majors.
The report found that on a year-on-year basis, major banks’ home loans are tracking at 5 per cent growth, non-majors or other banks’ at 8 per cent and the non-banks’ at 10 per cent.
Non-bank lender Bluestone has experienced a surge in demand from brokers in recent months following its entry into the near-prime space.
Speaking to The Adviser, Bluestone’s head of sales and marketing, Royden D’Vaz, observed that what used to be known as “vanilla deals” have now become a thing of the past.
“The biggest frustration for brokers at the moment is they don’t know what a deal is anymore,” Mr D’Vaz explains.
“What a deal looked like two months ago, surprisingly, they are not going to be able to get it across. This is the bit that they are finding very challenging. I speak to brokers on a regular basis and see their frustration. They get a decline and even the BDM can’t explain why the deal [is] declined because it is all based around the algorithms of the credit scorecard.”
BDMs and credit assessors in the dark
Mr D’Vaz believes that the days of brokers looking at a home loan deal based on an individual’s circumstances are quickly disappearing as the big banks move to automated credit assessment and algorithms to underwrite residential mortgages.
“It’s all based on a historical scorecard or an algorithm that the BDMs and credit guys can’t override anymore,” Mr D’Vaz says.
“They just don’t know why it has suddenly been declined, because on the face of it, it would have been a deal just a few months ago.”
Bluestone is one of a handful of Australian non-bank lenders that have attracted the attention and capital backing of American investors. The well-timed acquisition of Bluestone’s Asia Pacific operations by Cerberus Capital Management enabled the non-bank lender to realise immediate opportunities.
“Near-prime is growing. It’s a prime deal that isn’t quite there. Two months ago, it was a deal, but it’s not anymore. These are deals that don’t fit the mainstream lenders but are not credit-impaired. The borrowers have clean credit histories,” Mr D’Vaz says.
While Bluestone verifies the expenses and incomes of its borrowers with the same level of scrutiny as the banks, Mr D’Vaz says that the key difference is in its assessment of deals on a case-by-case basis.
What is near-prime?
It might be having its day in the sun right now, but near-prime lending was introduced as a concept by Pepper Money back in May 2012, according to the group’s director of sales and distribution, Aaron Milburn.
He says that it was driven by feedback from brokers who were looking for a solution for their self-employed clients who were emerging as an underserved segment of the market.
“Brokers told us their self-employed clients were being rejected by the banks due to a prior credit blemish even though they could demonstrate a clean credit history over the previous three years,” Mr Milburn says.
Near-prime has since evolved to bridge the gap created by traditional lenders tightening their lending criteria in all aspects of prime lending.
Mr Milburn adds that it helps to think of near-prime as an elastic band, which expands and contracts depending on internal and external factors.
Mr Milburn says: “With a client remaining in the middle of this, what near-prime does very well is provide brokers with certainty and a high level of comfort that solutions exist when the mainstream lenders say no.”
Since launching the concept in 2012, Pepper has witnessed exponential growth in near-prime volumes, experiencing double-digit growth every year.
The reasons are plain to see. Change is constant and the mortgage broker who only deals in vanilla clients is servicing a smaller and smaller segment of the market.
“In a changing industry, diversification is key,” Mr Milburn notes.
“Those who write only prime loans need to expand their solution toolkit to incorporate near-prime to stay in the game. The way borrowers are making a living is changing, with more self-employed people and more people earning income from multiple sources.
“Near-prime can be the ideal solution for those earning non-standard income, which is often a key reason why credit-worthy borrowers are left behind by the banks.”
[Related: Specialising in specialist]
James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.
He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.
He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.
James holds a BA (Hons) in English Literature and an MA in Journalism.
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