Mortgage lending: Australian firms feel the impact of US market crisis

17th August 2007
By Petter Ingemarsson

Australian mortgage lenders have been caught up in the global credit crunch.

The US sub-prime mortgage sector crisis has triggered a global repricing of risk, affecting Australian firms that seek overseas funding. For example, non-bank lender RAMS's stock price has fallen from $2.50 to $0.86 recently, due to difficulties in rolling over short-term debt and a profit downgrade. However, while lenders' near-term futures look shaky, the situation should gradually improve.

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The tightening debt market in the US has affected Australian non-bank lenders that rely on funding their mortgages with overseas short-term debt. One company to be affected is home loan provider RAMS, which recently announced that the unfavorable credit market would impact upon its profits, causing its stock price to slide by 26%.

The following day, RAMS was unable to roll over $600 million in 30-day debt in the US market, causing its stock price to plummet as low as $0.56. The stock closed at $0.86 that day, having lost almost two thirds of its value since being floated for $2.50 on July 27, 2007.

RAMS's loan portfolio contains no sub-prime loans but the company relies on the US short-term debt market to raise money for its loans.

RAMS now has six months to refinance $6.2 billion of commercial paper exposure in the US, and increased funding costs has led to concerns that the lender will have to raise the rates for customers of its 60,000 home loans.

Other non-bank lenders such as Bluestone have also been hit with higher borrowing costs. Some banks that are engaged in securitization will also be affected by the higher rates demanded by investors in mortgage-backed securities.

Going forward, the tight global credit market may cause long-term problems for non-bank lenders as funding conditions will be more difficult. Increasing competition from banks has already eroded non-bank lenders' share of the Australian mortgage market, and developments such as mortgage packages have provided the banks with further advantage.

The near future is expected to be rocky for non-bank lenders, but the situation should gradually improve as the current volatility in the credit market subsides. Given this, the next six months will certainly be exciting for RAMS stockholders.
'End Intelliext

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