Will lending loosen up in 2010 ?

Howdy folks,

With the end of the noughties ensuing, maybe it's timely to look forward to 2010 and what that lending environment will bring to us investors.

Just happened to receive a newsletter from Investors Direct by Bill Zheng and I paste below the main point he was making:

" ................ Let me throw in my own two cents here, hopefully they can give you a few more angles to consider with your investing activities.

Lending is still not getting easier, but there are encouraging signs that Australia may start to get out of this tight lending environment next year (but no guarantees).

If you ask anyone who has borrowed money recently, especially property developers and commercial real estate investors, they will tell you that they have never been so frustrated dealing with lenders over the last 12 months than any other time before.

I spoke to a valuer who does a lot of commercial property valuation, he told me that many valuers need to do a lot more work to get the same valuation done, and very often they are losing money by doing a valuation because the lenders keep asking them to provide more information.

His view was that he would have appreciated it, if the lenders would just tell him and the borrower upfront that they don't want to lend the money. It would have saved everyone so much time and money. This is just some evidence on how tough lending is in the commercial and development market.

If you look at residential mortgage lending, it has become more difficult for both the borrowers and the mortgage professionals as well. Lenders have asked a lot more questions and put on a lot more restrictions on just about all areas of the assessment, everyone has to work harder but still with less chance of getting a loan.

Amongst all the not so encouraging news in the credit market, there are some interesting developments I have noticed since my last newsletter to you:
A non-bank residential mortgage lender has recently managed to borrow money from some financial institutions in the private sector here in Australia, without having to go to overseas lenders in the securitization market. Apparently they were over subscribed too.

For those who are not familiar with the lending industry, a very large percentage of the residential mortgages here in Australia were borrowed money from the international market using a process called securitization. Since the Global Financial Crisis, the securitization market is almost closed or too expensive for just about any lender to raise more money.

This non-bank lender is obviously not getting the money they want from the international market. It has to go through all the trouble to raise the money locally. This goes to show that the local financial institutions seem to have more faith in our own mortgage quality and property price stability than the international market which has been bashed quite badly from other parts of the world.

How significant this event is in terms of getting credit flowing better again is still too early to tell, but I won't be surprised that other non-bank lenders may follow suit and making more money available to us and hence borrowing condition may get a little easier sooner.

A second tier Australian bank was able to raise money from the international market without using the Australian government's guarantee. Up until recently, only the big 4 banks could do so. So this shows a level of recovery of the international credit market, or at least some confidence in Australian borrowers.

A few overseas banks are getting active in the Australian mortgage lending space. Some of them are making strategic baby steps starting next year. Others have already been aggressively making offers to buy large mortgage businesses.

I spoke to a senior executive of one of these foreign banks a few weeks ago and tried to find out whether their interest rates will be competitive compared to the Big 4 banks here. To my surprise, they will be if they want to compete on price. His explanation was that because the big 4 banks here in Australia has twice as much gearing as they have in terms of how much mortgage lent vs how much deposit the bank has. The lower the gearing, the cheaper it is to raise money for a bank, all things being equal.

Apart from that, these overseas banks don't carry a large retail network of branches, so the overhead is lower. They also don't have much bad debt to write off compared to the local Australian banks since they are relatively new to our mortgage market here.

I am quite encouraged by this new development, if some of this eventuates into something concrete next year, we will see more competition in the lending market, and the borrowers will definitely benefit, and it can also help property prices too.

Australia as a country is quite highly leveraged, but we have a very large resource pool compared to a relatively small population. If a country can't repay its debt, it can always sell its assets to reduce debt so that it can buy itself time to recover.

Some of Australia's best assets are commodities (that we have more than we need) and life styles (that are the envy of many other countries).

If you have seen commodity hungry countries buying into Australian mining stocks, or newly arrived migrants bidding for $3m+ homes, you know they are, in an indirect way, helping to reduce our debt. If only the US and the UK can sell their way out of trouble, they may be able to avoid a recession too! ................."

According to some US commentators we are in the eye of the storm:


There is also a nine minute video here about the double bubble in US housing:


The Alt A and Option ARM loans that are due for re-sets in 2010 and 2011 will no doubt affect the US housing market further.

Personally I don't think it will translate to property value losses here, although there are markets and sub-markets that will perform at different rates of increase and decline. Not the purpose of debate here. My point relates to confidence of money and it's flow to us as investors.

What I envisage (and I am no economist or financial services wiz) is that credit may become even tighter. I don't see how the purse strings can be loosened when (as with the toxic NINJA loans) the white wash will affect the supply of credit.

Also how exposed are our banks, municipalities and other investment groups to some of these products that may (as with subprimes from 2008) also have been packaged up by the smoke and mirrors merchants (investment banks) and onsold as investments?

Are there any more collapses to come on the back of financial products that are derivatives of derivatives and backed by nothing but fresh air and toxic debt? :rolleyes:

My glass is half full as far as our values here (except perhaps brand spanking new FHOG estates with the ensuing rate rises), however will the choke-hold on money supply and money confidence stifle our market?

The only positive I see from this (assuming I am correct and I could be wrong) is pent up demand for rental housing akin to a wound up spring ready to be let go. Supply will be tight yet demand is strong.

What are other people's views? :confused:
I'm far from an expert, but I also heard an economist talking on the radio yesterday (I recognised but don't recall his name right now, I think he's the main Commbank economics guy) saying that there's quite a lot of non-guaranteed funds being invested into Australian mortgages the past few months, ie consistent with what Bill's saying. He also interpreted this as showing that foreigners recognise that our housing market has held up much better than in most other western countries, and that Australian mortgages are still seen as a very safe investment, and safer than mortgages in either the UK or US. (No surprise to us, but good to see that funds are now flowing from these markets into ours, showing that they recognise it, too.)

I predict we've bottomed and the worst is over. My perception is that lending is easier now than it was even a couple of months ago, but I'd be interested to hear what the brokers' perspective is on that.

I don't think we're headed off to the next boom such as we came to think of as normal (with year-after-year of double-digit growth), but I do think we're probably heading back to steady, 5-10%-ish capital growth.

Very interested to hear other viewpoints. :)
If you ask anyone who has borrowed money recently, especially property developers and commercial real estate investors, they will tell you that they have never been so frustrated dealing with lenders over the last 12 months than any other time before.
Ain't that the truth. I've just fired a few emails off to my personal banker at one of the big 4 checking my pre-approval is still in place and she's run the usual list of hoops to jump through. They're still classing my small residential build as specialist commercial to a maximum 70% lend. What's more I have to pay for their valuations which would normally be covered for residential under my pro pack. She still hasn't confirmed the variable rate that will apply despite early indications it would be the resi rate less 85bp.

Its a nightmare at present. Hopefully I can still make it work at 70% but it does make it tougher. If anyone knows of a lender doing resi builds as resi builds let me know...

hi player
the market is a very interesting position at the moment for me.
on one side is the big 4 not wanting to fund comm (thou there is a few cracks there at the moment)
then there is the super funds (with balloon size accounts wanting to fund)
there is receivers holding stock or trying to drip feed the market with problem stock without alot of success but drip feeding all the same.
then there is the funds that are looking for capital to start funds for specific markets.
your question do I see a very different market in 2010
yes I do
I see that there will be a couple of new players and they will be big players and they won't be the big 4.
I think you will see 1 or even 2 making waves
1 I think will be an asian bank or boc or icbc
and the other will be a european bank not sure which this will be at this stage
it maybe a south asian bank as there are a few of those in this market at the moment
I think that they will take on the comm market and I think that they have started some time ago.
I think that the smug local banks need to rethink where they think or wish to be.

I hope that the movements slow that they are will make funding easier to get for development mainly but comm in general.
the comm market still has some way togo but thats because of the banks own fault and the way they asked valuers to discount there vals and inturn caused problems for other funders who in turn caused damage to these clients
we have not had a successfull claim for damages on undervaluing and damage to an assett
but from the way I am looking at it
if there was a class action against some of the valuers it could be aimed back at the directives of the banks in that market
for me alot of the stock being held by some of the banks was self inflicted as it was a tail spin effect of their directives.
this in turn put that bank in a position of attack and was sold or merged and I don't need to point the fingers there
but those same banks I think maywell have a case of a class action if it can be shown that it was a standard practice to require the undervaluation of an assett.
for me that problem is still in the market but will be washed out as the market takes back those silly vals and turns to some realistic valuation.
when that happens and the true position of an asset is gained then funders will fund.
and those funders I think are already understanding that.
maybe this is another area that mr rudd should have a look at.
how can a valuer value an assett on a cap rate of 7% in one month then a cap rate of 9% the next month and cap of 12% in the space of 4 months
yet the clearance rate at auction for comm has not changed from 6 to 7% for that area in the last 12months
so the clearance rate has not changed yet the cap rate for the valuers is half looking at it one way or double if you look at the other.
ask any one on the street if they think the valuers are anywhere near the true number and the answer is simply no
question why.
answer this question ? and if you can get true stability in the value and then you will find people that will fund.
in some place for me they are a bit of a joke.
I have sites 75% presold were $185 per site with $52,00 current and liquidator appointed.
new val came in at $125 per site
thats 9 mil
down to 2.5mil (75% drop)
upto 5 mil (100% increase)
in the space of 6 months ( is that a joke)
and yes these were and are bank instructed vals
markets don't move like that.
when you contruct a problem the market can't adjust to suit it.
it has to be washed out and thats what we are seeing
and I think that the banks that caused the problems understand what they have done and have been spending the time to correct that problem.
but there is a very long road ahead.
and I would love one of these problems to end in a court and see what happens
but thats me
I think lending requirements will stay pretty much as they are now for the first half of 2010. The lenders reluctance to take on high LVR loans is driven by restricting policies of the insurers.

However, the same insurers will want to become profitable again sooner rather than later, so as the property market here stabilises, so will their stance on tight restrictions for approvals.

The other factor is non-bank lenders and mortgage managers. If they can access funds at a cheaper rate, then it will increase competition and allow brokers to consider more competitive options for clients.

I can't see either of these having an impact until the 2nd half of next year.