Credit woes destroying lending market

THE global credit crunch is destroying competition in the home-lending market, leading to the threat of permanently higher mortgage interest rates.

Credit woes destroying lending market

THE global credit crunch is destroying competition in the home-lending market, leading to the threat of permanently higher mortgage rates.

The warning comes from two leading economists, who are calling on the Rudd Government to establish a scheme similar to those operating in the US and Canada, under which it would use its AAA credit rating to bolster the funds available for home lending, helping to keep small operators in business.

Without such support, home lending by smaller banks such as the Bank of Adelaide and Bendigo Bank, as well as non-bank lenders such as Aussie Home Loans, Bluestone and Liberty, will cease, according to the Melbourne Business School's Joshua Gans and Christopher Joye, director of economic consultancy Rismark International.

Since world credit markets were thrown into turmoil in August, the share of the home lending market provided by these lenders has shrunk from 25 per cent to 10 per cent, allowing the big five banks to increase their dominance.

"The mortgage market has taken a step back 15 years in time," Dr Joye said yesterday.

Competition from non-traditional home-lenders has brought the difference between standard variable home loans and the bank-bill rate, which sets bank funding costs, down from 4 per cent in the early 1990s to 1.4 per cent today.

Dr Joye said this gain would be reversed unless the Government acted to support the mortgage security market.

While the major banks use their retail and corporate deposits to finance most of their mortgage lending, smaller banks and non-banks bundle packages of their mortgages as collateral for bonds that are issued to investors, such as superannuation funds and other financial institutions.

For the past five years, about $50 billion a year of mortgage lending has been financed in this way, but since last year almost no mortgage-backed bonds have been issued.

"It's not like a reduction in volumes -- we're talking about a complete market collapse," Dr Joye said.

Although Australian lenders have virtually no sub-prime exposure to low-income people with little ability to pay, Australian mortgage bonds have been dumped by global investors along with their US equivalents.

The default rate on Australian mortgage bonds is only 0.84per cent, compared with 4per cent for prime mortgages in the US and up to 15 per cent for sub-prime mortgages.

But the collapse of the mortgage bond market has forced Macquarie Bank and RAMS to withdraw from the market, while lenders such as Adelaide Bank, Challenger and Suncorp have slashed their volumes.

Dr Joye and Professor Gans want the Government to establish an agency similar to the one known in the US as "Fannie Mae". Canada has a similar organisation. It raises funds using the government's AAA rating and then buys prime mortgage bonds from lenders.

Dr Joye said this would insulate the Australian mortgage market from the financial problems in the US.