Press releases
[Read article in Australian Broker Magazine]
Source: Australian broker magazine (www.ausbroker.com)
October 23, 2006 SYDNEY
The collapse of second mortgages and short term lending
Second mortgage financiers rely heavily on being able to access the last piece of equity in a client’s real estate asset. The recent interest rate hikes and subsequent decline and flattening in property values have resulted in a gradual evaporation of this component of security. The result – loan volumes have collapsed.
Short term caveat lenders and 2 nd mortgage companies who have relied on this remaining equity in securing their loans are now struggling to get loan applications past the valuation stage. Three years ago more than 60% of loans that made it to the stage of us conducting a valuation on the security, then proceeded through to settlement. Today we are lucky to have 20% of loans make it past the valuation stage.
Another issue facing 2 nd mortgage lenders, which is more concerning is the rise in delinquency of these types of loans. Lenders who then need to enforce their rights under their mortgages are faced with a near “Perfect Storm”. Due to the high levels of enforcements currently clogging up the courts, getting possession of property is now a painfully slow process. Once you have possession, property is taking longer and longer to sell, while the whole time the 1 st mortgagee is chewing up an ever declining equity position. Once you do obtain a buyer, you are faced with a purchase price that reflects a buyers market. The result - the lender must take a capital loss.
One strategy that some market participants (usually less experienced) have adopted in order to get more loans across the line is to skip the valuation process and rely on real estate agent market appraisals. When a short term loan is submitted it is important to make sure that the borrower can pay the money back (this is referred to as an ‘exit strategy’). Without a formal valuation, there is no way of really knowing if the security property is suitable for the proposed ‘exit strategy’. Brokers who use lenders who do not do formal valuations for high LVR loans are putting their clients at risk of losing their properties, this could be construed as professional negligence on their part by a court. Moreover, market appraisals done by real estate agents are historically unreliable and lenders relying solely on these should have no great surprise in finding that their loans are secured by thin air.
The early noughties were glory days for short term and 2 nd mortgage lenders as capital growth subsidized and fostered sloppy lending practises. Borrowers drunk on the dazzling capital growth being achieved were keen to access their paper profits.
In stark contrast, the current subdued property market has seen short term lending virtually implode. Recent and inexperienced market entrants have been forced to relax their lending standards in order to get loans settled, only time will tell for these participants. Only the most prudent and disciplined lenders will survive this shake out.
Daniel Dunsford has a Bachelor of Law and Bachelor of Engineering from the University of New South Wales. He is a director or Accom Finance a direct bridging financier. He can be reached at 1300 652 158 or by email accom@accomfinance.com.au.
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