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Volatile market conditions and tightening funding requirements have prompted non-bank lenders to re-think their risk management strategies
Risk management is now high on the agenda for funders when dealing with their distribution partners. But as fallout from the US sub-prime crisis continues to reverberate here in Australia, barriers are being erected to safeguard against potential pitfalls.
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While funders re-think their approach to lending standards, Australia’s mortgage managers have also started to question how they tackle risk in their businesses, and whether current management processes are adequate.
The overall consensus is that a tightening of risk management across the board is essential for the longevity of the non-bank sector. Moreover, an increased focus on risk management will bolster the lender/ borrower relationship – giving them greater faith in non-bank products.
RedZed’s managing director Evan Dwyer is confident in the non-bank sector’s ability to adjust to new standards and remains unfazed by the recent market shake-up. “It’s a good thing for Australian lenders,” he says.
Adaptation required
Mortgage manager Resi – which has recently implemented a new sales programme to adapt to tightened lending criterion – is also positive that the sector can step up to the mark. But it will involve time and investment to educate those on the ground.
“Every day we see change in the industry. Everyone from our back-end infrastructure to our front offices has to be up-to-date,” says Resi’s national manager Lisa Montgomery.
It’s not only lending standards that are in a state of flux though. The lending process is also entering a period of slowdown as lenders struggle to give the right advice to borrowers about the changed lending conditions.
Ms Montgomery says borrowers are confused and aren’t reacting normally to interest rates rises, making it difficult for mortgage managers to stay focused.
“Everyone is leveraging off the new lending standards but we still have to take a reactive approach to manage in the current environment,” says Ms Montgomery.
Mr Dwyer agrees that the loan process is set for a slowdown, but views a change in the pace of lending brought on by new standards as a positive development for non-bank lenders.
“The non-bank sector has always been based on quality – not volume. Lenders especially in the non-conforming market will find it easy to adjust to new requirements,” Mr Dwyer says.
The flight to quality is important for all industry participants, according to Mr Dwyer, who predicts the biggest impact will be on the prime loan cycle.
A tight ship
Arguably a more pressing concern for the industry is that the demands of funders and mortgage insurers could distract mortgage managers from looking at their own risk management strategies.
Mr Dwyer says RedZed has started importing processes to protect its underwriting but he admits it can be easy for mortgage managers to be less focused on their own risk management standards when they have so much on their own plates.
“We’ve come from a golden era of lending in the non-bank sector to a period of massive change. It can be easy to assume that basics like your professional indemnity insurance and title insurance are still doing their job to protect you,” says Mr Dwyer.
One of the biggest risks for mortgage managers is the rise in fraudulent activity by borrowers struggling to meet tighter lending requirements.
Carrington National has witnessed such activity first hand. “We’ve seen an increase in fraud over the last six-12 months and have consequently hired a full-time risk manager to check for compliance,” says Carrington National CEO Gino Marra, with fraudulent documents including IDs, payslips and dummy financials in their sights.
The rise in incidents of fraud has also prompted Carrington National to look at its own level of insurance cover, which it found wanting.
“When we actually looked at our professional indemnity cover, it didn’t protect us from fraud the way we thought it did,” says Mr Marra.
Professional indemnity insurance will protect mortgage managers against claims against them from the borrower in some instances – but won’t provide cover if the loan was obtained using fraudulent documents.
Mortgage managers may find they need to be covered by a separate insurance policy to safeguard against fraud.
Moreover, mortgage managers need to be aware that disclaimers in their lending contracts can see their insurance made void. “It’s important to clarify with your insurer that you’re covered if you have signed a buy-back loan agreement, for example,” says Mr Marra.
Risk proofing
In the current lending environment, it’s easy for mortgage managers and lenders to become distracted. But solid lending processes that take into account the potential impacts of fraudulent behaviour will go a long way towards easing the compliance pressure – as will the industry working together.
“Retailers, lenders and insurers are all reliant upon each other for success and agreeing to standards is really about showing mutual respect for each other’s needs,” says Ms Montgomery.
Australia has had the advantage of being privy to the UK and US experience of introducing revised lending practices – which are ultimately good for the Australian mortgage market.
Says Mr Dwyer: “It’s important for everyone who participates in the industry to get involved with improved practice. You just have to suck it up and get on with it.”
