Since the passage of the Consumer Credit Protection Act (2009), Australian lenders continue to stress the importance of responsible lending. As more lenders offer non-conforming home loans, borrowers are asking “What is a nonconforming loan?”
The simple answer to the question is that a nonconforming loan is one that does not conform to typical lender standards in some way. For instance, applicants for these non conforming loans might have blemished credit or a shorter than required employment history. More Australians are in search of non conforming mortgage loans because owning a home is one of the top personal financial goals throughout the nation. The market for non conforming home loans has increased as much as 40 per cent over the past years according to some industry reports.
Borrower Advantages
A non conforming home loan has several important advantages for these borrowers. Among these advantages is that a non conforming mortgage can exceed 80 per cent of the secured asset value.
Because asset value is essential to non conforming lenders, location of the property is essential to the qualification process. Non-conforming lenders and property insurers therefore prefer low-risk areas instead of inner city or rural secured assets. Selecting an accurately priced property in a low-crime area is an important lender consideration and loan-to-value ratio. Buyers hoping to qualify for a non conforming home loan should search for these properties.
Global Financial Crisis and Mortgage Approvals
Prior to the global financial crisis (GFC) that began around 2008, more than 95 per cent of Australians were approved for mortgage loans. Many lenders offered qualified buyers up to 100 per cent or more of the home purchase price. Australian default rates on home mortgages were historically low before this challenging worldwide crisis.
The GFC caused a credit crunch and a domino effect. Australia’s lenders had less money to lend for mortgages as some borrowers had greater personal financial struggles.
Non conforming home loans can help borrowers in the GFC aftermath. Prime lender reports estimate that an average 25 per cent of borrowers don’t fit the financial parameters or underwriting criteria for a conforming loan today.
It is important to note that non conforming loan interest rates may be higher than those charged on typical mortgage loans. Responsible borrowers must factor higher costs when accepting these mortgage products because late payments or default on a home mortgage can have a serious negative impact on the borrower’s credit.
Qualifying for Non Conforming Mortgage Loans
A borrower falling outside prime lending underwriting guidelines is considered a non conforming borrower. Lenders view the non conforming home buyer as a higher risk. Non conforming borrowers may have one or more of these characteristics, such as:
• Self-employment, recent or long-term
• Tax debt
• Multiple credit applications or inquiries
• Small or no down payment/deposit
• Less than desirable employment history, job tenure or stability
• Additional debts, such as credit cards or personal loans
• Approaching retirement age
• Short-term Australian residency (difficulty in checking borrower’s credit history)
• Prior credit refusals
Mortgage Backed Securities
Institutional investors are once again packaging, buying, and selling residential mortgage backed securities. In the past 18 months, more than three billion in new deals have been put together by Australian originators. A portion of these transactions were issued in U.S. dollars.
According to Moody’s rating agency, higher mortgage loan standards in Australia have resulted in higher quality credits for these residential home loan portfolios. Non conforming home loan portfolios from Australia are of higher credit quality than those issued in the US and UK prior to the GFC. Liquidity is important to non conforming lenders and improves access to buyers.
Historical Performance
Both the US and UK have non conforming residential lending markets but neither the US nor UK have issued large amounts of non conforming mortgage loans since that time.
In comparison to these markets, Australia’s non conforming lenders suffered lower default rates. Australian home prices did not decline to the extent that they did in either the US or UK.
Some Australian lenders underwrite loans for borrowers with less than perfect credit. Limited ability to verify borrowers’ financial condition or those who don’t meet standard underwriting criteria can be approved for today’s non conforming loans.
Conclusion
Most Australians consider the repayment of a mortgage loan as a legal and moral privilege. Lower default rates over recent years show that Australian home buyers carefully consider how much home they can afford. Most Australians are responsible borrowers.
Non conforming borrowers can access the funds they need to purchase a home. History reflects that, over the long-term, quality real estate purchase can improve the borrower’s net worth and financial condition.