Today’s Daily Reckoning comes with a siren sounding and coloured lights flashing. Once again the moneymen are coming out to securitise the Australian property market. And in the US too. Ignore this trend at your peril.
Australia’s non-bank sector is ‘roaring back to life’ according to the Australian Financial Review on 15 May. That came after Queensland firm Firstmac raised $1 billion through the sale of mortgage-backed securities.
The AFR says that is the largest deal by a non-bank lender since the 2008 crisis. And things are looking rosy:
‘The group’s online portal has allowed Firstmac to increase its loan book by $100 million a month, which at 20 per cent a year is four times the pace of the broader home-loan market.
‘The milestone deal almost restores the securitisation market, which governments hoped would foster competition, to its pre-financial crisis heights. Then mortgage-backed bonds financed one in five home loans allowing non-bank lenders to capture 10 per cent of the market.’
Of course, there is a catch for the rest of us. The Australian Prudential Regulation Authority (APRA) does not regulate non-bank lenders.
That means the lending restrictions and tough talk directed at the big banks don’t apply. Hey, isn’t that kind of weird? Aren’t the feds trying to stop the ‘housing boom’ from getting out of control?
Non-bank lenders are part of the ‘shadow’ banking industry. Part of that means they have to borrow the money that they lend. Their business models rely on cheap access to wholesale funds.
Now, that’s all fine and dandy while short term interest rates stay below long term bond yields. But these shadow banks do run the same old risk that has plagued banks all along: they are borrowing short to lend long.
If you cast your mind back to the credit crunch of 2007–2009, it was firms like these that got wiped out.
When the short term interest rate is below the long term rate, the yield curve is said to be positive. But any inversion of the yield curve can put lenders in a very vulnerable position. One takeaway from that is: make sure you’re watching the yield curve. The RBA sure does.
You only have to look over to America to see the same trend to non-bank lending in action. Unlike here, mortgage credit in the US remains quite tight for middle to lower class borrowers.
On 12 May the Wall Street Journal highlighted the fact that there was largely no net change in US mortgage debt in the first quarter. That’s in contrast to other areas of the economy where credit growth is going up, like auto and student loans.
That’s because major banks in the US have retreated from certain borrowers and riskier home loans thanks to regulations and fines levied on them in the wake of 2008. But there’s simply too much money to be made for it to be left on the table.
Last month the Wall Street Journal reported than non-bank lenders are aggressively moving in the US to capture market share.
Last year Quicken Loans, one of the nonbank lenders, took the most market share of loans insured by the Federal Housing Administration. Their clientele have weaker credit scores and can get loans for as little as a 3.5% deposit down.
Quicken Loans is not alone. See for yourself…
Source: Inside Mortgage Finance
Of course, for our purposes today it’s enough to note that the rise of non-bank lending will drive more money into both the US and Australian property market.
And make no mistake, the US housing market is really starting to move. In May the National Association of Realtors in the US reported that prices in 148 out of the 174 metro areas they’re tracking are up for the year. 51 of those are showing increases in the double digits. The largest rise is 33.4% in Texas.
This is perfectly in accord with the predicted cycle of our property clock over at Cycles, Trends and Forecasts,and just as colleague Phillip J Anderson forecast.
If you don’t have our clock pinned somewhere near your desk or stuck to the fridge, you are at a substantial investment disadvantage. It’s astonishing how the economy moves…well…like clockwork! Check it out here.
That’s because everybody is looking to get on the property bandwagon now. The Australian Financial Review reported on 18 May that,
‘Hot property markets have spurred a number of companies in the sector to have a run at the ASX boards, with Metro Property Development and Garda Capital Group among those in the initial public offering pipeline.
‘Now a company that provides risk assessment and analytics for mortgage loans is preparing for a potential float… Loan RQ is chaired by founder Graham Andersen, who is a former Barclays Capital managing director and Allco Finance Group principal.’
Allco Finance Group? Mmm, that’s interesting. What the article doesn’t mention is that the 2007 subprime crisis sent Allco into administration.
As you can see, I’m not kidding about that clock. Like they say, what goes around comes around. If you want to know how to time this information to your advantage, go here.
For The Daily Reckoning, Australia