There are many factors which have contributed to the current state of the mortgage industry, a major one being the Global Financial Crisis (GFC).
Although the mortgage industry has remained strong, it did suffer a major confidence blow during the GFC. This affected market share of many lenders in the mortgage industry, particularly non-banks.
In Australia, the GFC generated a lot of fear about what could potentially happen locally. Consequently, we saw a shift away from smaller lenders and a migration towards the big banks which were perceived as a safer option.
The Government inadvertently contributed to this perception when guaranteeing bank-held deposit funds. To consumers, this made it feel like the banks had government backing and therefore couldn’t fail. Consumers then perceived that not just their deposits but also their loans were “safer” with a bank.
Simultaneously Australian lenders were being impacted because the cost of funds significantly increased. This is because investors worldwide shied away from investing in mortgage backed securities even though the problems with consolidated debt obligations stemmed from US-rated mortgage securities. Unfortunately, like the stock market, confidence is everything regardless of what the facts and figures might indicate. Australia, being part of the globe could not escape the flow-on effects of the global financial crisis. With the traditional investors now reluctant to invest in Residential Mortgage Backed Securities generally, lenders and particularly the non-banks (which rely to a far greater extent on securitisation than the banks) were impacted the hardest. (Securitisation is the financing technique that converts the cash-flow emanating from assets such as home loans into units which are ultimately sold as Residential Mortgage Backed Securities).
In recognition that the Australian issued Residential Mortgage Backed Securities were a strong investment and that the non-banks are critical for competition, the Australian government stepped in during the GFC and became an investor in Australian issued Residential Mortgage Backed Securities. Unfortunately, this part of the GFC story has not been successfully communicated to the wider public. It clearly demonstrates both the importance of the non-bank lending sector as well as the quality of the Australian issued Residential Mortgage Backed Security.
Post GFC the Australian government continued to invest in Australian issued RMBS. Only recently the government has announced that they are no longer required as an investor given that the market and cost of funds are now at a pricing point (and confidence level) that investor demand for these securities has sufficiently returned.
With government support, lenders – both bank and non-bank were able to trade successfully throughout the GFC. State Custodians not only survived the GFC but emerged stronger. Committed to delivering to borrowers greater value and service, State Custodians is poised to reclaim from the banks, its rightful lending market share.