Low docs - Back from the brink

Five or six years ago lenders were falling over themselves to get a piece of the action from self-employed borrowers and low docs were written thick and fast.

At the peak of their popularity in June 2007, the low doc mortgage market was worth an estimated $38 billion.

But the wheels came off low doc lending when the global financial crisis hit. Funding dried up, banks re-thought their risk appetite and the reckless lending practices of our American cousins made low doc lending about as popular as the mullet.

Research from Genworth Financial found the number of low doc loans issued in the year to August 2009 fell dramatically to just 8 per cent, as funders started to pull back from this out of favour sector.

Some industry pundits even went so far as pronouncing the low doc market dead.

However, over the last few months, there has been a flurry of new products hitting the shelves, indicating that there is life in low docs yet.

RE-IGNITION OF LOW DOC

Earlier this month, Advantedge injected a much needed boost into low doc funding with the launch of a new low doc loan.

Adelaide Bank followed hot on the heels of Advantedge's announcement with its own launch.

With two major funders back in the market, mortgage managers were given a much needed funding boost.

Collins Securities and Homeloans Ltd were amongst the mortgage managers that were quick to roll out their own products. Collins Securities launched a new low doc mortgage, while Homeloans loosened the credit restrictions on its low doc products.

Homeloans announced it would cover the cost of Lender's Mortgage Insurance (LMI) on its ultra-range of low doc loans on LVRs up to 70 per cent. The company's general manager third party distribution Tony Carn says the recent improvements to low doc funding provided the company with the perfect opportunity to ease its lending criteria.

"In the past there has been the perception that with the introduction of licensing, low doc loans would become a dead space, but this is simply not the case. There has always been a demand for low doc loans and the industry is now in a better position to cater to this demand," he says.

THE EFFECT OF NCCP

There has been a lot of discussion about the role licensing will play in the future of low doc loans.

As Mr Carn points out, there are some industry pundits that believe the National Consumer Credit Protection Act 2009 (NCCP) and subsequent responsible lending obligations will stifle lending in this area.

Collins Securities general manager Allan Willoughby believes the NCCP will wipe out no-doc lending in the future. In addition, Mr Willoughby believes responsible lending obligations will make the income verification process much harder for some borrowers including those that are not true self employed applicants.

"Those not ideally suited to a low doc loan will find it hard to pass the income verification procedure," he says.

Moving forward, Mr Willoughby expects responsible lending will force the sector back to its traditional banking roots.

Low doc loans have veered away from their true intentions since they were first introduced in the late 90s.

Originally intended for genuine self-employed borrowers that wanted to buy a property, low doc loans were soon used by investors and even non-conforming borrowers.

"In the early days - from an arrears perspective - low doc loans actually performed better than our full doc loans," Adelaide Bank's general manager third party lending Damian Percy says.

When low doc loans were first introduced, borrowers only tended to declare their true income however, by 2004 borrowers had learned they could be approved for a loan they might not otherwise receive if they declared all their ‘potential' earnings.

This significantly changed the profile of a low doc borrower.

Mr Percy says, now thanks in large part to the NCCP, lenders have realised that low doc products were being misused, and in response, are starting to re-jig their lending criteria in line with responsible lending obligations.

Earlier this month, Adelaide Bank had announced its plans to return its low doc lending criteria back to old school traditional banking principles - whereby a borrower's accountant is used in the income verification process.

Moving forward, Mr Percy says he expects to see the majority of lenders re-jig their income verification procedure.

"I think some will return to traditional banking principles, while others may introduce alternative verification forms," he says.

Pepper's chief operating officer David Holmes agreed that other lenders would use alternative income verification procedures moving forward.

"The old low doc loan is dead and what has replaced it is an alternative, more responsible form of lending," Mr Holmes says.

THE ROAD LESS TRAVELLED

Mr Holmes says he expects insurers to become more scrupulous than they are at present, Genworth's acting chief executive Paul Caputo says the insurer has no plans to change its current low doc policy.

Genworth made fairly substantial changes to its low doc policy back in 2008. The insurer required any low doc applications to be supported by at least one year's worth of BAS.

Mr Caputo says the company has no immediate plans to change to make further changes to its policy, as he believes the current policy changes will satisfy the requirements of the NCCP.

"I don't think we will see any substantial changes made to this product. We feel comfortable that the policy changes we have made to date are appropriate for the market and appropriate under the regulatory requirements."

But while the introduction of NCCP will not encourage Genworth to change its current low doc policy, he agrees the incoming legislation will see the traditional self-employed borrower return to the market.

He expects to see a slight up-tick in the number of true self-employed borrowers.