Genworth questions crackdown

Australia’s largest mortgage insurer says forcing banks to cap lending is creating additional risk factors.

Genworth CEO Georgette Nicholas. Picture: Renee Nowytarger

Australia’s largest mortgage insurer has warned that the drive to for banks to limit lending is creating additional risk factors and unintended consequences in the mortgage market, forcing borrowers to find higher-cost loans to make up the difference.

The increased use of unsecured debt and cross-collateralisation of properties, especially parental guarantees, to achieve a lower LVR was adding to the risk in the market, said Genworth chief executive Georgette Nicholas.

Her comments come as regulators have been clamping down on banks writing mortgages with high loan to valuation ratios, as part of broader efforts to cool a heated housing market on Australia’s east coast. Typically lenders require mortgage insurance on loans above 80 per cent.

“Data indicates that loans in the 75-80 per cent LVR range default more frequently than loans with a greater than 80 per cent LVR,” Ms Nicholas said.

“These dynamics create risk in periods of stress and have similar characteristics to those that caused increased delinquencies in Europe and the US during the housing crises there.”

Shares in the insurer jumped 6 per cent yesterday to close at $3.20 as the company outlined a $100 million share buyback and a special dividend, even though its half-year profit fell 35 per cent. Genworth net profit fell to $88.7 million in the six months to June 30, down from $135.8m a year ago. The decline was partly due to a $25m mark-to-market loss on its investment portfolio. A weak housing market in Western Australia and Queensland weighed on the result, offsetting growth in NSW and Victoria. Loan delinquencies rose in all states, while paid claims also increased. “We still see most delinquency development coming from Western Australia, particularly the mining regions but also a little in metro Perth as pressure spreads into that area, and then also from the mining regions in Queensland,” Ms Nicholas said.

The insurer expects house price growth to moderate in the coming year, as regulatory measures to slow growth in investor lending and limit the flow of interest-only lending take effect. Ms Nicholas warned rising interest rates will add to mortgage stress in regions already under pressure.

“Low mortgage interest rates allow many households to have a prepayment buffer to any potential stress event. However, the recent repricing and continued repricing of mortgage books by lenders does pressure the serviceability of loans in the low-rate environment and could cause additional stress in areas that are already impacted by lower employment.”

New business fell 6.4 per cent to $13.1 billion in the half, while gross written premium declined 4 per cent to $182.3 million, reflecting tighter standards as lenders back away from risky loans. Genworth expects GWP for the full year to be down 10-15 per cent.

The full-year loss ratio is expected to be between 40 and 50 per cent. The company will pay a special dividend of 2c a share.