Pressure on non-bank lenders

By George Lekakis

October 05, 2007 07:00am

BORROWERS are being urged to consider refinancing their mortgages with major banks as the funding crisis afflicting non-bank lenders intensifies.

A raft of non-banks including RAMS, Resi, Bluestone, Liberty and Collins Home Loans, have increased pricing on their mortgage products by up to 1 per cent above the 0.25 per cent official rate rise announced by the Reserve Bank in early August.

The biggest rises have been on non-conforming loans which include low documentation mortgages.

Roger Mendehlson, the chief executive of debt collection company, Prushka, warned yesterday that thousands of home borrowers ran the risk of copping massive rate rises by keeping their mortgage with non-bank lenders.

He said that the difficulty of completing securitisation programs and the higher cost of raising funds in the wholesale market meant that non-banks would continue to increase rates on standard and non-conforming loans.

He said many non-banks could hit the wall in the near future which meant that loan books would fall under the management of liquidators.

In such circumstances the loan books would be sold to investors looking to get a return on expensively funded assets.

"It has become obvious that an increasing number of non-bank lenders are finding it difficult to refinance substantial short-term debt on commercially viable terms -- ultimately proving their model is failing," he said.

"The last thing we want to see are more Australians losing their homes due to issues resulting from the takeover of failed non-bank lenders."

Mr Mendelson said borrowers should consider absorbing the short term pain of exit fees and other penalties that may be involved in refinancing their mortgage with a bank.

"My advice to borrowers, particularly if they are highly geared, is to look at switching over to the banks," he said.

"Anyone who can, should refinance with a major bank for peace of mind."

The four major banks -- Commonwealth, NAB, ANZ and Westpac -- fund a larger proportion of their loans through cheap retail deposits and are therefore less exposed to repricing pressure caused by the liquidity crisis in wholesale markets.

Anthony Starkins, the principal of independent financial planning group First Samuel, believes the major banks are likely to benefit from funding problems in the home loan market.

However, he warned that some mortgage brokers may be reluctant to encourage borrowers to refinance because trailing commissions they receive from non-banks may be higher than what they get from the banks.

"It is obvious that the non-bank lenders are passing on increases above the recent rate rise announced by the Reserve Bank," he said.

"So, they should be looking for independent advice from advisers and brokers that do not accept commissions from product providers."

Mr Mendelson warned that it might already be too late for some borrowers with non-conforming loans and high loan-to-value ratios.

"If you're highly geared and you have a bad credit history, the banks are not going to want to have you on their books," he said.

Most mortgage contracts in Australia give lenders wide scope to re-price mortgages as they see fit.

It is competitive pressure, rather than legal principles, that prevent lenders raising rates beyond reasonable levels, Mr Mendelson said.

"Borrowers rely on the goodwill of their lenders not to be unreasonable," he said.