Non-bank mortgage lender Pepper Money suffered a heavy fall in mortgage originations in the June half and its book ran off, as it struggled to keep up with banks chasing market share with cashbacks and discounted rates. Pepper originated A$1.7 billion of mortgages in the six months to June – down from $2.7 billion in the December half and $4.1 billion in the June half last year. It also had trouble holding onto borrowers as refinancing activity picked up during the half. At the end of June, its mortgage book was worth $12.4 billion – down from $13.5 billion in the December half and $14 billion in the June half last year. And higher cost of funds made its mortgage business less profitable. The net interest margin on its mortgage book fell from 190 basis points in the December half to 183 bps in the latest half. Pepper moved to fill the gap by shifting its focus to its asset finance business, which it claims is the biggest in the country. Asset finance originations rose from $1.3 billion in the December half to $1.8 billon in the latest half, and assets under management rose from $4.7 billion to $5.6 billion. It also shifted the focus of its mortgage origination to non-conforming and specialist lending. The change of direction did not do much for the bottom line. Pepper reported a net profit of $52 million for the six months to June – down from $72.2 million in the previous corresponding period. Net interest income was $184.9 million, compared with $192.5 million in the previous corresponding period. Operating expenses rose from $94.7 million to $122.4 million over the same period. Loan losses rose from $13.9 million to $24.7 million. All of the increase was in the asset finance division. Mortgage loan losses fell from $4 million in the June half last year to $2.5 million in the latest half. Mortgage loan losses represented 28 bps of the book. Pepper chief executive Mario Rehayem said the outlook for the second half was more positive. A number of banks have withdrawn their cashback offers and mortgage rate discounting has been reined in, taking some of the heat out of the market. Rehayem said funding margins are likely to narrow, as issuance has declined this year and demand remains strong. During the half, Pepper completed three mortgage-backed public funding transactions, raising $2.35 billion, and an asset-backed issue worth $723 million. It also raised $733.5 million in a private term securitisation. None of these deals were for prime RMBS. Pepper’s share price collapsed after its results were announced. Opening the day at $1.55, the shares traded as low as $1.29 before closing at $1.33 – a fall of 14.2 per cent for the day.