Pepper Home Loans believes the market share of so-called non-conforming home loans could be five times what it is now if they can overcome the stigma still attached to them.
Pepper’s head of sales and distribution, Mario Rehayem, said Australia’s version of the infamous sub-prime loan is still tarnished by the reputation of its US equivalent and its role in the financial crisis.
Arrears on these form of loans never reached the heights of sub-prime in the US, and he stressed the credit checks done on borrowers who take out these loans are more rigorous than for “prime” mortgages because of their higher risk.
“The percentage of the market we believe non-conforming loans should represent is 8 to 10 per cent of the total mortgage market,” he said. Before the financial crisis, non-conforming loans made up about 12 to 15 per cent of mortgages.
He estimates non-conforming loans now account for about 1.5 to 2 per cent of the mortgage market. The Reserve Bank put it at about 0.2 per cent at the end of 2013.
Mr Rehayem said the chief barriers to greater take-up were brokers’ lack of knowledge about these products and an unwillingness to have the difficult discussion with borrowers who may be dismayed at being told they are not creditworthy.
“When a broker physically tells a client that they have been declined, there is an emotional transaction that takes place – you have told someone they are not good enough,” he told an RFi mortgage conference in Sydney on Thursday.
“Then the broker tends to shy away from offering an alternative option because they don’t know what the options are, or baulk at having a discussion with a client who thinks they are a 4.25 per cent person, and now they are going to 5.9 or 6 per cent person.”
As of December 2014, 2.3 per cent of all securitised mortgages were backed by non-conforming loans. However, they form a big part of non-bank lender’s portfolios, with half of the $1 billion in securitisations of mortgages by non-bank lenders in 2014 for these types of loans.
Almost three-quarters of Pepper’s loans are non-conforming, with 38 per cent of them classified as “credit impaired”, which could mean they have failed to make repayments in the past or were bankrupt, but there is still “market opportunity” in Australia given their low share of the mortgage market.
Non-conforming loans often go to people who have volatile earnings, such as the self-employed, or those with no or poor credit histories. They are subject to more rigorous credit assessments and must pay a higher interest rate to account for their higher risk.
He said their “credit impaired clients” had also all endured some form of hardship such as sickness, divorce, loss of job or failed business ventures. “These clients are not repeat offenders – they were great payers until such an event occurred.”
Since the financial crisis, the Reserve Bank has been keeping a close watch on the share of these loans in the market and has indicated it would like to keep the percentage at present levels as this reduces risks to the financial system.