How residential mortgages are funded, created, managed and distributed is an incredibly dynamic and complex undertaking, involving a wide variety of different specialist organisations.
They’re participating in a competitive market that’s grown rapidly in recent years, with Australia’s residential lending sector worth approximately $1.45 trillion as at April 2015, made up of $954 billion in loans for owner-occupied housing and $503 billion in loans for investment properties.
In March 2015 alone, more than $31 billion in residential loans were written in Australia, up 3.5 per cent year-on-year. When it comes to the creation and selling/distribution of mortgages, around 85 per cent of this lending is handled by the country’s big four banks – Westpac, CBA, ANZ and NAB – with the remaining 15 per cent or so shared amongst Australia’s non-major and non-bank lenders.
While the big four and non-major lenders (Approved Deposit Taking Institutions – or ADIs) are able to draw upon deposits as a funding source for mortgages, non-bank lenders in particular – which includes companies such as Pepper, Bluestone and Liberty – rely heavily on the Residential Mortgage Backed Securities (RMBS) market, which accounted for just over $100 billion in mortgages as at the end of 2014.
RMBS is a key source of funds for non-bank lenders that can’t access deposits; another source they tap is the big four banks’ wholesale funding arms (warehouse funding), where tranches of funds are given to non-banks to create their own mortgage products.
All lenders increasingly rely on the third party channel to distribute their products – with mortgage brokers leading this charge – although non-banks, with little to no retail presence, are particularly reliant on them.
When it comes to mortgage product development beyond the ‘vanilla’ – or standard – types of mortgages, it’s the non-banks in particular that lead what’s become a vibrant and increasingly sophisticated specialist lending sector.
It’s this sector that provides loans for borrowers who would otherwise struggle to obtain funds, including borrowers who require high loan-to-value ratios (LVRs), have impaired credit histories, and/or are self-employed, amongst other types. RMBS is also supporting growth in white label lending products, which sees mortgages re-branded by the distributor – in many cases this may be a retail mortgage brokerage such as Mortgage Choice or Aussie, or mortgage aggregators such as PLAN or AFG.
Beyond the creation and distribution of mortgages, there are is diverse collection of specialist service providers dedicated to servicing the residential mortgage industry. These include everything from the technology required for loan applications between mortgage brokers and lenders; the skills and tools required for accurate credit verification and loan impairment management; through to the regulatory and legal requirements related to best practice lending.