Shadow banks swoop as five lenders quit sub-prime home loans

Australian Financial Review Feb 13, 2019 12.45pm

Duncan Hughes

Digital home-loan lender Tic:Toc is launching into the sub-prime mortgage market targeting small business owners as five other lenders quit the sector claiming "industry changes".

Tic:Toc's move follows stakes being taken in the online lender by Genworth Mortgage Insurance Australia and La Trobe Financial, which is part of the US investment giant Blackstone Group.

Other major lenders, including Commonwealth Bank of Australia and Bank of Queensland, pulled out of the sector to be replaced by regulation-lite shadow banks, including Pepper Money and Resimac.

Adelaide Bank, Perth-based Bluebay Home Loans and Resolve Finance's mortgage division are also quitting the sub-prime sector blaming changing marketing and funding conditions.

The move comes amid growing controversy about a credit squeeze for small business operators, debate about the future of mortgage brokers as a distribution channel and growing popularity of online and regulation-lite shadow bank providers.

Changing needs

Sub-prime, or low documentation, loans are mortgages that have different documentation requirements to full documentation loans. They are often used by self-employed borrowers, who might find it difficult to provide conventional proof of income.

The loans and shadow bank lenders, which are not authorised to take deposits, are growing rapidly – albeit off a low base – following a toughening of lending standards by authorised deposit taking institutions.

Adelaide Bank is removing low documentation products from February 25 for new and existing customers. Bluebay Home loans and Resolve are funded by Adelaide Bank.

"This considered decision aligns with industry changes, specifically in terms of working in the best interests of customers," an Adelaide Bank spokesman said.

"The Adelaide Bank product suite remains robust and in line with our ongoing commitment to meeting the changing needs of our partners, customers and industry."

Bluebay and Resolve said lending policies including credit increases, product conversions, partial discharges and substitutions of security will be updated to accommodate existing customers with low-doc credit accounts, with no additional funds or increases to existing limits permissible.

Bluebay and Resolve's existing low-doc customers will be able to change to a fixed rate up to and including June 30, 2019.

Existing low-doc customers requiring additional funds, or wanting to increase limits, will be required to provide the same income and spending information required for full documentation borrowers.

Recent lending tightening enforced by prudential regulators is putting pressure on small business owners and interest only borrowers coming to the end of their fixed term.

For example, about 900,000 loans – or about one in six mortgages based on the nation's $1.7 trillion mortgage loan book – will need to be extended with their existing lenders, switched to higher principal-and-interest repayments or transferred to a new lender, according to analysis by finder.com.au, which monitors loan rates. Borrowers began renewing loans last year and the shift is expected to continue over the next four years.

Significant growth

Tighter lending and growing demand is contributing to explosive growth for the lightly regulated shadow banks that are targeting subprime borrowers with easier terms and faster approval times, according to new analysis.

Tic:Toc, which automates and digitises the mortgage application process, is launching CO:Lab home loans targeting business owners and customers looking for home loans or ways to refinance for investing into their business.

Tic:Toc chief executive Anthony Baum claims a business owner can use the equity in their home loan to invest in their business and could save 6 per cent on standard loan rates from major banks.

Shadow banks, which are not authorised as deposit-taking institutions, are growing at more than twice the rate of their rivals but still account for only 9.5 per cent of the mortgage market, according to analysis, according to analysis by Canstar, which monitors rates and fees.

Small businesses claim credit has been drying up as banks impose tighter assessments of mortgages following the banking royal commission.