S&P says low doc not a problem for AOFM
Standard & Poor's has backed the government's decision to direct the Australia Office of Financial Management to invest in residential mortgage backed securities with a higher proportion of small business loans when it invests the additional $8 billion the government has allocated to support new RMBS issues.
Lenders offering low doc loans to self-employed borrowers in the small business sector did not get much relief from the first round of AOFM funding. Low doc loans were limited to 10 per cent of the RMBS issues in which the AOFM could invest its first $8 billion.
S&P head of structured finance, Fabienne Michaux, issued a statement yesterday saying the ratings agency considered low doc loans to be higher risk than fully documented loans because self employed borrowers have more variable incomes.
But the agency's view was that providers of low doc loans had "managed to strike an appropriate balance between the additional risk posed by low doc loans and the provision of finance to an important segment of the community and broader economy."
The majority of low doc loans are mortgage insured and low doc lenders usually require a higher equity contribution from the borrower.
Michaux said: "No prime fully insured Australian RMBS transaction has been downgraded by Standard & Poor's as a result of underlying performance deterioration.
"Low doc loans form a significant portion of some of the portfolios backing transactions rated by S&P, with some consisting exclusively of this type of loan. We are currently comfortable with the performance of these portfolios."