APRA's low-doc mortgage rules favour non-bank RMBS issuers

In its "Structured Thinking" client bulletin for 29 October, Moody's Investors Service assessed the impact of last month's review of 'low-doc' mortgages by the Australian Securities and Investments Commission.  

The review indicated lenders have tightened lending standards since the 2010 implementation of responsible lending laws.

Unsurprisingly, Moody's asserted that higher lending standards were credit positive for Australian residential mortgage backed securities with exposure to low-doc loans.

That means non-bank RMBS programmes by Pepper, Resimac, Liberty, RedZed and Sapphire, and others, will benefit most from the improved lending practices, because of their relatively higher exposures to low-doc loans originated after the 2010 implementation of the responsible lending requirements.

Bank-originated securitisations have limited exposure to low-doc loans, as banks have reduced low-doc loan approval volumes by around 90 per cent to A$500 million per quarter since 2008. Beyond that, "we expect the quality of newly originated low-doc loans to continue to improve due to ASIC's recommendations", wrote Moody's.

Moody's added that the possibility of fraud (particularly where mortgage brokers submit false information to get loans approved on behalf of clients) was also lower because lenders have additional processes in place to verify information.