Rising defaults -- Take the strain

With 12 interest rate rises since 2003 and the latest series of fuel price hikes, many borrowers are feeling the pinch. Mortgage defaults reached record highs in the first quarter of this year, with New South Wales the stand-out state.

Moody’s Investors Service recently analysed trends in home borrowing in Australia between 2004 and 2007. Their findings revealed that Australians are not only borrowing more, but that average loan-to-value ratios have increased markedly – along with the number of delinquencies.

Credit ratings agency Standard and Poors’ backs up these findings. According to its research, approximately 1.45 per cent of prime borrowers are at least one month behind on their repayments, while sub-prime defaults rose from 1.97 per cent in December 2007 to 2.57 per cent just three months later.

Behind the eight ball

Borrowers can fall behind on mortgage repayments for a range of reasons, not all of them terminal. Some are simply experiencing short-term financial difficulty. But it is borrowers in serious distress that will cause brokers the most angst – both from a personal and professional perspective.

“It’s one of those areas that can be a bit delicate at times because it is full of emotion and stress,” says FBAA president Peter White.

In most cases, the lender will want to work out a solution to keep the borrower in their home. But if all options have been exhausted, it is not in the lender’s interest to keep a non-performing loan on their books, says Genworth country executive Peter Hall.

“The lender may face deterioration in their portfolio, which may have wider implications for the other services they offer,” he says.

Mr White says brokers can play an important role in helping borrowers to find a solution to help them work through their particular situation – including accessing their super if necessary.

“A lot of people probably aren’t aware that if they are under severe mortgage stress, once they hit a certain point they can apply for an emergency release of some of their super through the Australia Prudential Regulatory Authority (APRA),” says Mr White. >>

“It might not suit everyone but the broker can at the very least help their client to assess their situation and to help them work out a way to get back into the market at a future time.”

Working together

The good news is that most Australians are willing to help themselves, and to seek help, with the mortgage usually “the last thing a person stops paying”, says Loan Market Group’s Jennifer Nielsen.

The introduction of national industry regulation slated for end 2009 is being heralded as a fresh opportunity for brokers to sell to borrowers the benefits of the additional advice and support brokers can offer.

According to John Flavell, NAB Broker’s head of sales, in any case most borrowers have the expectation that their broker will be able to present them with solutions to help them manage their debt.

“There are a lot of really good brokers out there who are sitting down with people and looking at their overall picture and providing really good guidance and advice in relation to how things can be structured,” Mr Flavell says.

>> This includes providing them with relevant information and solutions to manage all of their debt effectively, including personal debt, says Ms Nielsen.

“Brokers can assist their customers by getting them to consolidate their growing credit card debt, for example. Their expertise can ensure homeowners can avoid being in a situation where they face the possibility of defaulting on a loan repayment and in the very worst case scenario, having their property foreclosed [on],” she says.

According to Mr Flavell, the opportunity is ripe for brokers to lay the foundations for long-term relationships by looking beyond their customers’ immediate needs.

“Brokers need to really be looking at what the customer’s whole financial lifecycle is going to be and how their needs will change so they can provide them with a solution that will manage those requirements not just in the short- but the medium- and long-term as well,” says Mr Flavell.

Mr White says having an open line of communication with the borrower is a good starting point.

“It can be as simple as getting on the phone and speaking to them – because communication is paramount,” he says. “The broker should be in regular contact with their client but simple techniques like marketing their database to offer smart tips and remind customers that help is available can be really effective.”

 

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WHY BORROWERS DEFAULT

Data collected by Genworth Financial’s mortgage hardship program has revealed that injury and unemployment are more likely to put borrowers under serious strain compared to rising interest rates and over commitment.

Key reasons for repayment delays:

Illness or injury – 36 per cent

Unemployment – 16 per cent

Diminished earning capacity – 16 per cent

Maternity leave – 11 per cent

Relationship breakdown or divorce – 4 per cent

Over extension of financial commitments – 2 per cent

 

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PITCHING IN: DEFAULTING BORROWERS AND THE ROLE OF THE BROKER

Brokers and borrowers need to realise the importance of an accurate and realistic assessment of repayment capabilities, Homeloans Ltd head of underwriting Les McDonald tells Mortgage Business.

MB: How has the role of the broker changed as a result of the current economic conditions?

LM: Unfortunately it hasn’t. If you look back a year ago credit criteria was much more relaxed; now it has become quite strict – however there has been no educational process to match it. There is an appalling lack of education and experience in the market today where many brokers simply don’t have the financial acumen to identify a borrower who is struggling, or will struggle, to meet mortgage repayments.

MB: Why should brokers take a proactive role in helping clients manage their financial commitments?

LM: It gives brokers the opportunity to retain a client for life if they can analyse when they are under stress, or if they can access a product to better suit their cash flow. If you go back and look at why trail commission payments were ever introduced to this market, it was because of client retention – which means understanding and managing clients’ needs and wants, as well as being able to identify when they are struggling. Many brokers however simply see trail as part of their income and not as a retention issue – it’s hard hitting but that’s the truth.

MB: What actions can brokers take to help their clients manage their financial commitments more effectively?

LM: Brokers need to have the confidence to ask their clients some serious questions about whether or not they can manage their financial situation, and borrowers also need to be able to come forward and ask for help if they are struggling. If brokers can run a proper mortgage health check, for example, it can make a significant difference.

MB: Why are today’s borrowers struggling to manage their finances?

LM: The biggest factor that has influenced bad financial situations is unsecured debt, most importantly reckless credit and store card spending.

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BORROWER STATS

1.1 million – The number of Australian borrowers paying more than 30 per cent of their income to service their mortgage.

1.45 – The percentage of prime home loans that were at least one month behind on repayments in March 2008.

14.6 – Percentage of sub-prime mortgages in arrears at the end of March 2008.