Quality shines brighter than quantity

It is a sort of chicken and egg situation.

One of the reasons behind the current property boom is the cheap money available. Yet mortgage lenders are becoming concerned about people over-borrowing due to the ready availability of easy finance.

As always with any subject concerning property, the situation is not new.

It is a sort of chicken and egg situation.

One of the reasons behind the current property boom is the cheap money available. Yet mortgage lenders are becoming concerned about people over-borrowing due to the ready availability of easy finance.

As always with any subject concerning property, the situation is not new.

Macquarie Securitisation deputy managing director Frank Ganis says some players in the residential mortgage market are taking higher risks and cutting margins, to win market share.

"With low rates and with the affordability of houses at an all-time high, mortgage originators are writing lots of business," he says.

It is this environment that will cause problems when interest rates start to rise. The warning signs have started, with the main banks lifting their longer-term rates by anything up to 50 basis points.

Ganis says Macquarie tests the quality of each mortgage by finding out if the applicant can afford to pay at a 9.5 per cent rate. Mac-quarie's current rate is 6.25 per cent and it feels 3 per cent is a good buffer to check affordability.

"We are saying 'no' to a lot of loans," Ganis says. "We are not cre-ating a loan book for the sake of it."

The quality of loans is something Heine Management is always con-cerned about, says executive director of mortgages, Michael Iaco-bucci.

"A lot of mortgage organisations are contributing to the danger of defaults by writing low-quality loans," he says.

"At Heine, we are not a huge-volume operator as we are only inter-ested in quality loans and that is where we want to stay."

Ganis says Macquarie looks for loans where the cash flow provides the strength of the investment, not the security held against the loan.

"There are still problem loans in the market, but the onus is on the lender," he says.

The quality of the loans has lead to better margins for mortgage bonds in the institution market.

Macquarie Securitisation head of structured finance Phil Richards says a recent issue was 50 to 60 basis points above margin. This com-pared well to 18 months ago when the company could only achieve 16 to 18 basis points in the marketplace.

"While offshore bond issues are stronger, Australian mortgage-backed bonds are nearly always rated AAA by the major rating agencies," he says.

It is a market that is worth $23.6 billion and rising, according to Standard and Poor's.

Iacobucci says mortgage backed-securities have been providing good liquid alternatives to cash for institutional investors, with the ad-vantage of the AAA rating.

Commercial lending, which is mainly used for mortgage trusts, has also become competitive and that is driving margins down, says Iaco-bucci.

"We have been seeing some institutions lending 1 per cent over base rate, but at Heine we have knocked back more applications in the past 12 months than ever before," he says.

One problem that has emerged is buyers with secured funds are finding it hard to find quality commercial property to buy. Iacobucci says in the $5 to $10 million segment, there are less quality transactions being performed.

"Above $10 million, the quality of the transactions improve and there is good business for mortgage lenders," he says.

Heine is careful about gearing a mortgage and works on a 60 to 70 per cent lending rate.

"You have got to be selective even if it means writing less business as it is better to lend on quality than quantity," he says.

Ganis says Macquarie runs a similarly tight ship with its loan book. "A good, tight credit performing market will turn to favour us when others are just book-building," he says.

"We have a lot of uncertainty coming into the residential and commercial property markets with things like GST and increasing rates, so we prefer to have quality loans, not quantity," he says.