Low Doc Loans Not Sub-Prime

Australia certainly felt the aftershock of the emerging sub-prime market crisis in the US this week.

But as investors took the brunt of the subsequent equities correction, it’s unlikely creditors were too concerned about the same problem taking place in Australia.

Australia doesn’t really have an equivalent mortgage product and the businesses that specialise in these products don’t have the same leveraged exposure to the markets.

There have been a number property investment scheme collapses over the past 18 months in Australia but these were different beasts to what is happening in the US.

Low doc loans – or liar loans as the US market has labelled them – don’t just appeal to people with a bad credit history, but also small business people who tend to a) not keep records b) pay themselves poorly and c) suck the cash out of the business before it hits the books (yes, yes we know it’s illegal) who will have the capacity to repay over much longer periods.

The other thing to remember is that low doc loans, while a feature of these businesses, are not all they do, they sell full service and investment loans as well.

In a recent mystery shopping exercise conducted by brandmanagement they found that the most common consumer of a low doc loan was a self employed person who was making an investment in property, not a credit impaired individual gearing into somewhere to live.

The other element to examine is the average LVR (loan to valuation ratio) of the book that the lender has.

In Australia the best data we have suggests that both RAMs and Bluestone are running books with an LVR of about 70%. That means for every dollar of lending they have 70 cents in debt and 30 cents in assets.

Compare that for example to the data coming out of the American sub-prime funds is showing that their LVR ratios are running at about 87% and that as much as one third of the sub prime lending book is at 100% LVR – this in a market where the hot property markets – California, New York etc. – have fallen by as much as 10% over the past year and with economists predicting that there is another 10% to come off the market before it starts to recover.

Ouch. This might just get uglier yet.

From burningpants

Leave a Reply