"Six months ago you'd have no problems getting a deal, say, for a pub approved. Now, you wouldn't get a similar deal done. And nor will you get lenders to acknowledge it's because they've changed credit policies."
But they have, says Mark Haron, director at aggregator Connective.
"You'll find more of this credit rationalisation in the commercial space since home loan lending policies are more rigid. It's easier that way," he says.
Capital is the problem. Or finding lenders with enough of it to lend. Tightened global liquidity is the most serious impact of the global credit crunch. And as a result lenders have had to take some drastic measures. Tightening credit policies is the one closest to the surface.
But for brokers it's a double whammy. Because while some lenders are simply tightening up the rules, others are simply not lending at all.
"And as the impact of the crisis unfolds lenders will become increasingly fussier about to whom they will lend," Haron says.
Harry Senlitonga, senior financial analyst at research group CANNEX, says they've noticed many lenders pulling out. Especially in the non-bank space. He also points to the scarce liquidity, as the root cause of it, and higher overall risk factors.
It seems lenders either pull their products off the shelf, or they reduce promotion to reduce volume of specific products.
"So it's wait and see if they employ one of these strategies, rather than tighten the lending criteria," he says.
Second way out
The role, too, of the mortgage insurer is worth considering in the credit rationing mix. It's no secret that lenders align their propriety credit policies to those of the mortgage insurers, especially in the non-conforming space. Uninsured loans become much riskier propositions for the lender.
Stevan Sipka, CANNEX's institutional relationship manager says any specific requirement the mortgage insurer has will be equally reflected in the lenders policy. "It's the old adage," he says, "if the mortgage insurer approves the deal then let's do the deal."
And when the mortgage insurer declines a loan application Sipka expects you'll find the lender reducing the LVR to provide a level of comfort for the related risk.
There is no doubt mortgage insurers are being more particular as far as Haron is concerned. And this impacts in a very direct manner on lender decision-making, and their credit policies. "Particularly," he adds, "the non-bank lenders."
Then there is government's capital adequacy requirement for lenders to consider. Mostly on the higher side of the risk equation. Take low doc lending as an example. Many commentators say this is dead, and certainly, now, on some of the riskier loan profiles it is.
"See, without the backing of the mortgage insurer, lenders will want to stay away from the high LVR low doc stuff – because the capital adequacy requirements make them too expensive to do," Haron explains.
But this is nothing new he is quick to point out. Similar credit rationing has been used in the past by lenders when capital has been scarce.
In addition you'd expect mortgage insurers' claims to have sky rocketed. As a result they are turning each new claim over many times over before agreeing to settle it. They're protecting themselves and would be unwise not to.
Quantity before quality?
Haron's biggest concern as an aggregator is that lenders are coming down harder on broker deals than on the ones they originate themselves. "Especially since part of our role is to get our brokers access to lenders," he says.
Mortgage broking is a tough job right now. And since lenders carry a significant part of their fixed cost structure in their own propriety channel the job might get tougher still, as they begin to favour their own branches and direct channels. Particularly if, or as, capital continues to tighten.
Many lenders are faced with having only a fixed amount of capital to lend out, explains Haron, and they have the option of where to place it.
"And since the propriety channel is costing them money anyway they may as well try and have it make them some money in return," he says.
Still, this could equally be an ideal time for lenders to reassess the profitability of their third party channel. "Since it carries less fixed overhead cost," he adds.
CANNEX's Sipka agrees. "From a lot of the guys we've been talking to, its interesting that the numbers show that it can cost up to three times more to 'process' a broker-originated deal as opposed to a direct deal," he says.
And given that every lender has different lending criteria, processes and documentation requirements only exacerbates the situation.
If that's not enough, brokers also have to deal with the claim many lenders make that broker deals come with a higher propensity to go bad. The reality is there is no hard evidence to show this claim to be true.
Not that it hasn't stopped some lenders using it as an excuse to cut ties with brokers, as mortgage manager Carrington National did in mid-September. As many as seven out of 10 broker loans are currently in default, claimed Carrington boss, Gino Marra, though he declined to explain why this was the case.
According to Sipka, there shouldn't be an increased chance of a deal going into arrears simply because it was a broker-introduced deal. "After all," he says, "it's the lender not the broker who decides whether or not to approve a deal."
Often brokers cop this criticism for introducing lower quality business, chasing volume. But it is a notion both Haron and Sipka reject. "And there are many lenders both behind closed doors and openly, who would also disagree," adds Haron.
Sipka says it's a time-based problem, and trusts that a good number of committed brokers will stick around since he is convinced they play a very important role in the lending space.
"I guess when people look to start pointing fingers brokers often become an easy target. I'd be interested to see some data from the people making the accusations," he says.
Afterall, regardless of who originates it, all the lending is approved by the lender themselves. Haron adds that even the branch deals are done through delegations given out to the lenders own sales staff and managers.
Deeper in it?
All the experts predict it'll be 18 months to two years before we ride out of this downward cycle. And that it could be longer if the industry doesn't perform the correct due diligence audits now. What lenders and brokers should be shooting for in the short term is to iron out all the problems, to truly know where the bottom of capital market crisis is.
Then, with good intentions and a bit of luck, investors should start returning. Investment companies still need to chase returns for their investors, and they'll return when they recognise more transparency in the securitized lending market. "They'll be back when six to nine month margins in residential mortgage backed securities are good enough," Haron says.
Other market commentators say that if you'd asked them as little as three months ago, they'd have predicted "it'll all be cleaned up in another year". But recent developments in the US mean it's all changed again. Looking ahead, it seems, like we're still heading towards the peak, rather than being over the hill yet.
In the last 12 months the lending landscape has changed significantly. Ninety percent of new loans are generated from banks. Given the volatility of the credit crisis, banks probably have more ability than other lenders to offer stable finance products to the market. Products that will still be around in the next couple of years.
"Ninety percent of new loans are generated from banks and we are seeing an increasing number of loans are coming from the direct channel," says CANNEX's Harry Senlitonga.
Trading conditions in the current economic cycle means brokers are jumping through hoops. This much is not news anymore. The economy is flat and there are limited lending opportunities.
Non-banks are rationalizing credit, and many of the small players have been priced out of the market. In addition the non-conforming market has been highly affected by what is happening overseas.
"And the non conforming market has been highly affected by what is happening overseas," Senlitonga adds, "which has basically turned their funding tap off."