New Boys On The Block
Sydney Morning Herald
Tuesday September 6, 1994
THEY'RE the new faces on the home mortgage scene, though some have had low-profile operations for some years as what used to be called mortgage banks.
The bigger operators among the new boys, such as Australian (or Aussie)Home Loans, have even begun to challenge the big banks as a significant force in the home-lending market. For their part, the banks tend to dismiss the mortgage providers as a gimmick.
The banks still hold almost 90 per cent of home mortgages, trailed by building societies and credit unions. Meanwhile several major life offices have signalled that they intend to take a larger role in home lending.
But the new boys are starting to make an impression with their low rates and their giveaways, in a market expected to be worth around $50 billion in mortgages written in 1994 - many of them to replace existing mortgages.
According to one of the new faces, the managing director of FAI First Mortgage, Mr John McGee, these operations will be providing more than 50 per cent of Australian home loans by 2000.
In today's deregulated lending market, home buyers no longer need to demonstrate a "relationship" with a bank to get a loan. And borrowers have few scruples about shopping around for better rates - even if they already have a home loan.
While many home loans are still for 20- or 25-year terms, it's long been accepted that most are paid off in seven years as home owners move on. With recent fluctuations in the market as many home owners rushed to switch from variable to fixed or "honeymoon" rates, many loans are repaid in four or five years.
The new lenders are known as mortgage originators - though most don't generate funds themselves and you don't usually see their names on mortgage documents. For the protection of the lender - and to a lesser extent the borrower - a trustee company normally issues the mortage.
What the originators really do is get access to big licks of funds, divide them up and market them as mortgages to home-buyers and residential investors- often with the aid of a mobile sales force. They are claimed to have generated more than $5 billion in loans in the past 15 years and at current levels of activity could be writing mortgages worth as much as $1.5 billion a year.
The funds usually come from banks and other institutions, including life offices, merchant banks and even super funds.
Most of these institutions don't maintain home-lending divisions but are attracted by the predictable profits and near iron-clad security of mortgage lending to home buyers and investors.
In recent times some of the loan funds have been securitised - effectively the mortgages are packaged up and used directly as security for fundraising in the money market.
Whichever of these avenues is used - and some mortgage originators change fund sources regularly - it's steering secure and profitable business away from the major banks.
As well as Aussie Home Loans, FAI First Mortgage and BMC Mortgage, which are profiled below, the new operators include RAMS Mortgage, First Pacific Mortgage and Heine Management (largely in Melbourne).
According to Mr Andrew Willink of the interest rate research group Cannex, most of the new providers are not that well known in the market, which may deter some borrowers.
"While these originators have got a low variable rate, some still have high fees in terms of application and mortgage insurance," he says. He adds that when you do a full comparison of the loan costs they don't necessarily come out on top - "but there are some very attractive products from people like Macquarie Bank or through PUMA."
"That's really where the money comes from, people like PUMA, or AMS(Australian Mortgage Securities - an arm of the AMP). As for RAMS Mortgage, they go to the market themselves. They issue the bonds and have the mortgages sold," Mr Willink says.
IN contrast, he says, BMC and First Pacific Mortgage have a variety of lenders and can offer a service to clients. "They can say 'for you, this product would be better'. That product may be a PUMA product or an AMS product or a Primary Industry Bank product," he says.
Mr Willink says some of these operators used to be known as mortgage bankers but cannot describe themselves as bankers any more, so have taken to calling themselves "originators".
Some of the newcomers are relatively small businesses to be handling such big sums, even if they are only passing on cheques to someone else. Nor is their financial status necessarily as substantial as borrowers might expect. ASC records suggest one sizable operator has only $1,000 in paid share capital while another appears to have only $100. Australian Home Loans Ltd, for instance, had accumulated losses of close to $1 million by June 1993, according to accounts lodged in February this year.
And the auditors Horwath and Horwath qualified AHL's accounts for that year by stating: "The company has incurred a loss on operations of $690,390 for the year to June 30, 1993, as trustee of the AHL Unit Trust and as at that date current liabilities exceeded current assets by $817,718."
At that time the auditors said the ability of the company to pay its debts as and when they fell due was dependent on continued support from creditors and financiers.
However, the managing director of Aussie Home Loans, Mr John Symond, points out that the 1993 accounts reflected the first full operating year for AHL - a new business which was "taking on the strong banking sector" - and has now turned around.
He says the 1994 draft accounts show gross income more than doubled from 1993's $1.97 million, resulting in an operating profit of approximately$100,000. For the year to June 1995 it expects to post an operating profit of"some millions". And since June 1993, its loan portfolio has more than tripled in size to $600 million.
He emphasises that AHL does not require a large balance sheet because of the nature of its business - the origination and management of loans on behalf of financial institutions.
So how safe are borrowers with the mortgage originators? Mr Willink says the use of a trust structure should mean that borrowers are protected. Access to the money is "very much hands-off" as far as originators are concerned, he says.
But borrowers should certainly establish that their interests are protected. "It is something that people should be aware of. 'When I pay my rent, my interest and part of my principal, what level of comfort do I get that it's going direct to repay my principal?' It's a good question."
Perpetual Trustee is among those which lends its name to these mortgages. Mr Trevor Howell, the chief executive of corporate services, says the products suit some of the mid-range and smaller institutions which don't have a distribution network.
"The advantage of the trust structure is that it allows several of the mid-range institutions to pool their money, which then in turn provides the pool of finance which goes out to the various borrowers," Mr Howell says.
"Then, with a lot of them, the mortgage brokers substitute for what would normally be the large branch banking network. So that they can be the ones who go to people's homes and do the deals with the knowledge that they are writing the business on behalf of the trust, with the trust in turn representing the various institutions," Mr Howell says.
"We act as trustee and really are there to represent the interest of the people who have put the money up."
The trustee also has a role in ensuring that the borrowers' repayments go to the right place, Mr Howell says.
"Most Australians would say that their mortgage is theirs. In fact of course it's the exact opposite - the mortgage is actually an asset of the person who put the money forward."
In the same way a company can sell its trade receivables to a factoring operation, he says, there's no reason why an institution can't sell off its mortgage portfolio.
"The borrowers will always continue to make their repayments, which are channelled through to the lender in the form of their return out of the trust structure.
"I don't know that I'd express any great concern from the borrower's point of view. It's just the trust structure at work."
Mr Willink believes many borrowers still find the banks attractive for their "honeymoon" rates - which are usually offered for the first six or 12 months of a home loan, after which it reverts to the standard variable rate. However, in the current climate of rising interest rates these are beginning to dwindle.
He says the new lenders have most appeal to the mature secondhome buyer and the investor who knows what he wants. An investor looking for a fixed rate loan will go to whoever's got the cheapest money, he says.
First-home buyers, in contrast, might derive more comfort from going to an established lender with a branch network. It can offer facilities most newcomers cannot, such as early repayment facilities and offset accounts.
But this could change from now on.
The new lenders, as middlemen in the mortgage market, are largely unaffected by the Reserve Bank's move to double the banks' risk weighting on loans in excess of 80 per cent of home value.
Since this is "first-home buyer territory", it will inevitably mean major banks reducing their exposure to first-home buyers or charging higher rates in the area - leaving a lucrative gap for the new lenders.
F AI First Mortgage: This has been operating for some 3 1/2 years, and has offices in Sydney, Melbourne, Brisbane and Canberra, plus a team of mobile consultants. The general manager, marketing, Mr Lance Hodgkinson, says it has written total mortgages of some $400 million - all in the name of various trustees.
FAI First is a wholly owned subsidiary of the listed FAI Insurances.
Mr Hodgkinson says its most popular loan is "our principal and interest variable rate loan which is available to the home owner or investor, or anybody looking to refinance or consolidate."
With this loan, both types of borrowers get a rate of 7.75 per cent variable. There are no fees to set the loan up, apart from government charges and mortage insurance.
"That's where we're writing all our business and we're doing very well with it. It's a great product," says Mr Hodgkinson.
As for its source of funds, Mr Hodgkinson says FAI First draws on"securitised trust moneys and the primary source is two organisations, Australian Mortgage Securities or PUMA Management, which is a subsidiary of Macquarie Bank.
All FAI First loans carry mortgage insurance. "At times people get a little concerned because it can be more expensive on the higher loan-to-value ratios. However, it's a one-off premium and then they get the benefit of the lower rate for the life of the loan."
For a loan of less than 75 per cent of the valuation, this works out at$125 per $100,000 borrowed. It's considerably more for a 90 per cent ratio, but Mr Hodgkinson says most borrowers fall under the 75 per cent figure.
As for changes in interest rates, "we're staying steady at this point. Clearly it's going to be a bank-led change," he says.
To whom do FAI's loans most appeal?
"The borrowing public has tended to look for alternatives. That doesn't mean to say they don't go back to their bank. But those who have actually sat down and looked at our products have generally bought," Mr Hodgkinson says.
"We've got a cross-section. We lend right up to 95 per cent of home value, which is the first-home buyer market," he says. And with the change in the Reserve Bank's risk weighting on loans over 80 per cent of value, "we're going to get more attractive in that area".
"But generally our borrowers tend to be the middle market, those who have got equity in their homes and are buying an investment property, or are trading up to the next home.
"They're fairly secure people, often double-income because the children are growing up," Mr Hodgkinson says.
"They're the ones that are looking around, because they've got time to do that, and they're seeing that this sort of product is attractive.
"We've got a great little business here which doesn't have much profile."
AUSSIE Home Loans: This has been operating since 1992 and has written a total of around $600 million in home loans. The group recently changed its strategy on funding, says the managing director, Mr John Symond.
"We originally kicked off by using regional banks' funds that didn't have a retail presence on the eastern seaboard, like Adelaide Bank.
"But we've recently hopped into securitisation in a big way. In fact, we are the first major player into securitisation on a full retail basis." It, too, has linked up with PUMA.
Its mortgages are always written either through Permanent Trustee or Perpetual Trustee.
It is a public unlisted company with private shareholders, and emphasises that it is all Australian owned.
AHL claims it will soon be in the top 10 home lenders in Australia.
Among its best sellers are its variable home loan at 7.85 per cent, which will not be reviewed till January next year. Investors get the same rate but not the current bonus - AHL has waived its $775 upfront fee for owneroccupiers and is also giving $200 cash back, whether for refinancing or purchasing.
"That's just killing the market at the moment," says Mr Symond.
The rate on this loan is linked to the money market's 90-day bank bill rate, but according to Mr Symond, "if bank bills go silly they can switch at no cost to the variable rate at 8.75 per cent or go to fixed at no cost".
In effect, Mr Symond says, AHL offers three safety nets for anyone anxious about the volatility of money-market linked loans:
* They can switch to a fixed rate loan at no cost.
* They can switch to AHL's normal variable rate, which has always been close to the bank variable rate.
* They can opt to pay out the loan at no cost.
Mortgage insurance is mandatory for loans in excess of 76 per cent of valuation, says Mr Symond, but is not required on lower ratios.
"If someone wants to borrow up to, say, 85 to 90 per cent they would be looking at around 1 per cent of the loan amount," Mr Symond says.
Borrowers can make extra payments at any time during the loan, he says.
"With our program, because we're a couple of years ahead of some of the other new players, our mortgages have got a lot more sophisticated bells and whistles because we're into home loans and nothing else."
Mr Symond says AHL borrowers are about 50:50 first home buyers to established borrowers. Its residential investors are 90 per cent PAYE taxpayers - "just little, ordinary people who look on this as their superannuation".
AHL has headquarters in Parramatta and branches in Canberra, Sutherland, Gosford and Newcastle, and is about to open in Dee Why, the CBD, and the eastern suburbs. Staff number about 100, including 40 mobile consultants, and AHL is doing around 1,500 home visits a month.
"We'll do close to $100 million in loans (in August)," Mr Symond says.
BMC Mortgage: BMC Mortgage, which has been around since 1980, is what used to be described as a mortgage banker. Today it has more than $200 million under management, mostly to investors, plus a few commercial loans. It has branches in Sydney, Brisbane and Melbourne.
The BMC managing director, Mr John Carson, says: "We've changed from institutional funds years ago to the Dutch market - today we get it from institutions, the securitisers all come and talk to us." But it mainly taps about five sources, including PUMA, AIDC and PIBA.
BMC regards itself as a mortgage originator and manager.
Overall the group has originated in excess of $1 billion in the years since it began as virtually a one-man operation. Up until a couple of years ago the majority was fixed rate interest-only mortgages, which are usually investor territory.
"Today we can offer a full range," Mr Carson says.
He says the Reserve Bank's change in weighting will affect some of its funding, "but because we've got a range we're in the fortunate position that we can still offer 90 per cent (of valuation) for owner-occupiers and 85 per cent for investors, so they won't have to do a little 'cocktail'.
"We can normally lend a bit cheaper than the banks anyway."
BMC has no mortgages on its balance sheet. It normally on-sells to others so the actual mortgage is usually through Permanent Trustee, National Mutual or Perpetual Trustee.
BMC is privately owned by its founder and three others, Mr Carson says. "So it's had the continuity of management and shareholdings."
Rates range from as low as 7.45 per cent (plus charges) - geared to a bill rate - and mortgage insurance applies above the 75 per cent loan-to-valuation level.
"We've got a 25-year principal and interest loan for either owner-occupier or investor, and you can have a rate geared to the 90-day bank bill which is currently as low as 7.45 per cent.
"You can flick from there into variable, which is currently 7.85 per cent. Once you're in that variable rate you can go into the fixed rates from one to five years, and back to variable at the termination of that."
Such switches are free, but once borrowers have quit the bank bill loan they can't go back into it.
Aren't these concepts a little complicated for most home buyers? Mr Carson says BMC is happy to go out to explain them. "But I think the reason that these have come into being is because the average guy in the street is more sophisticated than he used to be even two years ago, and they're looking for these sort of products these days.
"We're happy to deal with owner-occupiers - it's just that in the past the base has been built on fixed rate interest only. So that's where we've concentrated."
But that may change with the switch in the Reserve Bank's risk weighting formula.
"We may try and aim a bit more towards the owner-occuper - but we just feel we'll lose the plot if we try and go after the owner-occupier when the banks are going after the same guy.
"But if we can offer that 7.45 or 7.85 (per cent) to an investor when the banks are offering him 9.75, there is a distinct advantage. There's a whole range of products that are good."
Business is certainly big at the moment. Mr Carlson says BMC had been just going along quietly, but there has been a rush for funds in the past few months. In Sydney, BMC is writing in excess of $2 million a week, which equates to over $10 million a month, he says.
WHAT NEW LENDERS CHARGE FOR HOME MORTGAGES
% OWNER OCCUPIED
1-yr 3-yrs 5-yrs
Company Var. Fxd/Cap Fixed Fixed
Aussie Home Loans 7.85 7.75 9.95 10.75
BMC Mortgage 7.65 7.75 10.60 11.20
FAI First M'gage 7.75 8.50 10.85 11.45
First Pacific M'gage 8.00 n.a. 10.40 10.95
Heine Mortgage 7.75 9.25 10.95 11.75
Macquarie Resi 7.70 9.80 11.00 11.60
RAMS Mortgage 7.75 n.a. 10.25 n.a.
% INVESTMENT
1-yr 3-yrs 5-yrs
Company Var. Fxd/Cap Fixed Fixed
Aussie Home Loans 7.85 7.75 9.95 10.75
BMC Mortgage 7.65 7.75 10.60 11.20
FAI First M'gage 7.75 8.50 10.85 11.45
First Pacific M'gage 8.00 n.a. 10.40 10.95
Heine Mortgage 7.75 9.25 10.95 11.75
Macquarie Resi 7.70 9.80 11.00 11.60
RAMS Mortgage 7.75 n.a. 10.25 n.a
Rates should be confirmed with the company quoted.
Source: CANNEX.
© 1994 Sydney Morning Herald