US players to ‘exploit’ gaps in Aussie mortgage market

Last year saw US giants KKR and Blackstone enter the local home loan market, specifically the non-bank lending space, via the acquisitions of Pepper and La Trobe Financial.

According to Deloitte financial services partner Heather Baister, an expert on mortgage and securitisation markets, Australia’s housing and credit fundamentals are now looking very attractive to global investors.

“We have seen non-banks grow and develop and they have consistently been able to access the RMBS market. They are widely trusted there,” Ms Baister said.

“When you combine that with the international view of the Australian housing market, which is a very resilient market, one that is able to be funded through RMBS and one that still has margins — which you don’t have in a lot of the other global jurisdictions — I think that is really where the opportunity is coming through.”

KKR’s $682 million acquisition of Pepper and Blackstone’s 80 per cent stake in La Trobe Financial are significant — not only are these two of the most established non-bank players in the country, they are also groups that target non-conforming borrowers. It is in this niche where a more detailed knowledge of credit is found and where margins have largely been protected.

“In the prime sector, the margins are tighter,” Ms Baister said. “That is why you are seeing more investment into those non-bank lenders focused on the non-conforming space.”

The strength of Australia’s RMBS market is also worth noting. 2017 was a bumper year in Australia. Securitisation issuance was at its highest since the GFC. Last year saw $36.9 billion of RMBS issuance, of which $14.7 billion came from the non-banks. Over $8 billion of issuance was made up of non-conforming loans.

Meanwhile, increased regulatory scrutiny of the banking sector by APRA has forced the ADIs to tighten credit and even pull out of some markets, such as non-resident lending and property developer finance.

“That has created a real opportunity for non-bank lenders, which is a reason why US players are coming in now,” Ms Baister said.

“They are using their liquidity to exploit gaps in the market, such as foreign income or foreign resident investment into Australia.”

[Analysis: Americans are betting big on Australian mortgages]