Double whammy for non-banks
Banks are not only hitting non-bank lenders with much higher 'warehousing' fees, but are undercutting their own headline rates to maximise their advantage.
Non-bank lenders are becoming resigned to the idea that the residential mortgage backed securities market (RMBS) will not reopen in any meaningful way for at least 18 months and possibly not for three to five years.
Non-banks reliant on wholesale funding not only face the problem of a scarcity of investors to buy their paper, the warehouses where they stored their loans before being on-sold to investors are either filling up rapidly or are virtually full.
Mortgage warehouses are similar to warehouses used by retailers. The owner of the warehouse charges a fee for storage and the retailer makes money by turning over his stock five or six times a year.
But with warehouses virtually full because of lack of demand from investors for RMBS paper, the relationship between the owners of the warehouses and the suppliers is changing. The end result is much higher costs for non-banks.
During the RMBS boom times a non-bank lender such as Puma could fill a warehouse with $1 billion in loans in a month. But in reality it never got to that because Puma was constantly rolling over its stock from the warehouse into the term market.
Before the credit crunch it used to cost a non-bank mortgage originator about 15 basis points to store its mortgages in a warehouse. Industry sources say it is now at least 90 basis points and in some cases higher.
It is estimated by industry sources that there is currently about $30 billion in warehouse facilities in Australia. The Big Four major banks have the largest share of that followed by Deutsche Bank and ABN Amro. SocGen pulled out of the warehouse market earlier this year and now has about $4.5 billion in run-off.
The dislocation in capital markets is forcing the providers of warehouse facilities to rethink their funding arrangements as they are forced to provide capital against them.
Some banks have used the warehouse problem to tighten the screws on non-bank lenders. In the good old days non-banks with a full warehouse could roll over the facility for 12 months and have certainty of funding for a reasonable period. Not any more.
Some warehouse providers are either forcing short-term rollovers at a much higher cost or refusing to renew at all and moving to liquidate the assets.
One major bank is now treating its warehouse facility as if it were a long-term debt facility and not a short-term parking spot. That imposes a much higher cost on the non-bank that provided the mortgages because, without various credit enhancements, a portfolio of mortgages is rated BBB.
The rising cost of warehouse facilities is one of several factors causing growing desperation among some non-bank lenders.
Rob Emmett at Collins Securities has called on Graeme Samuel at the ACCC to force the major banks to raise their variable rate home loans by more than one per cent to a headline rate of 10.80 per cent. Emmett says the major banks are involved in anti-competitive behaviour by deliberately under-pricing their mortgages to force non-bank lenders out of business.
He says in a submission to the parliamentary inquiry into competition in the banking and non-banking sector that the ACCC should act to boost the standard variable rate offered by the major banks from about 9.6 per cent to about 10.8 per cent.
Emmett's submission is one of several to the inquiry that said the real standard variable home loan rate being offered by the big four banks is 8.90 per cent, not the headline rate of 9.6 per cent. All wealthy and low risk borrowers with loans or $250,000 or more are being offered a discount of 0.70 per cent.
Non-banks reliant on wholesale funding not only face the problem of a scarcity of investors to buy their paper, the warehouses where they stored their loans before being on-sold to investors are either filling up rapidly or are virtually full.
Mortgage warehouses are similar to warehouses used by retailers. The owner of the warehouse charges a fee for storage and the retailer makes money by turning over his stock five or six times a year.
But with warehouses virtually full because of lack of demand from investors for RMBS paper, the relationship between the owners of the warehouses and the suppliers is changing. The end result is much higher costs for non-banks.
During the RMBS boom times a non-bank lender such as Puma could fill a warehouse with $1 billion in loans in a month. But in reality it never got to that because Puma was constantly rolling over its stock from the warehouse into the term market.
Before the credit crunch it used to cost a non-bank mortgage originator about 15 basis points to store its mortgages in a warehouse. Industry sources say it is now at least 90 basis points and in some cases higher.
It is estimated by industry sources that there is currently about $30 billion in warehouse facilities in Australia. The Big Four major banks have the largest share of that followed by Deutsche Bank and ABN Amro. SocGen pulled out of the warehouse market earlier this year and now has about $4.5 billion in run-off.
The dislocation in capital markets is forcing the providers of warehouse facilities to rethink their funding arrangements as they are forced to provide capital against them.
Some banks have used the warehouse problem to tighten the screws on non-bank lenders. In the good old days non-banks with a full warehouse could roll over the facility for 12 months and have certainty of funding for a reasonable period. Not any more.
Some warehouse providers are either forcing short-term rollovers at a much higher cost or refusing to renew at all and moving to liquidate the assets.
One major bank is now treating its warehouse facility as if it were a long-term debt facility and not a short-term parking spot. That imposes a much higher cost on the non-bank that provided the mortgages because, without various credit enhancements, a portfolio of mortgages is rated BBB.
The rising cost of warehouse facilities is one of several factors causing growing desperation among some non-bank lenders.
Rob Emmett at Collins Securities has called on Graeme Samuel at the ACCC to force the major banks to raise their variable rate home loans by more than one per cent to a headline rate of 10.80 per cent. Emmett says the major banks are involved in anti-competitive behaviour by deliberately under-pricing their mortgages to force non-bank lenders out of business.
He says in a submission to the parliamentary inquiry into competition in the banking and non-banking sector that the ACCC should act to boost the standard variable rate offered by the major banks from about 9.6 per cent to about 10.8 per cent.
Emmett's submission is one of several to the inquiry that said the real standard variable home loan rate being offered by the big four banks is 8.90 per cent, not the headline rate of 9.6 per cent. All wealthy and low risk borrowers with loans or $250,000 or more are being offered a discount of 0.70 per cent.
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