A trail book buyer has stated that a rise in arrears is not to be celebrated, but an extension of the average loan life could serve as a “consolation prize” for brokers in a tough economy.
TrailerHome director Nick Young said arrears and loan life did not have a cause and effect relationship, but were both symptoms of a deteriorating economy.
“The underlying issue of mortgage arrears increasing is a reflection that the economic climate is deteriorating. When the economy is deteriorating, people are less active in the housing market. That means that along with arrears going up, the average life of a loan also goes up,” he said.
While a difficult economy may be nothing to cheer, Young said brokers could take some measure of comfort in the lengthening of average loan life.
“It’s not that arrears are good or there are any benefits in arrears, and to an ongoing mortgage broker running a business I certainly wouldn’t want to say the economy deteriorating is great, but the very, very small silver lining is that the average life of a loan is going to go out and so the value of the book is going to go up. It’s not even a silver lining. More like a consolation prize,” Young said.
The comments come as the Fitch Dinkum Index has indicated arrears posted a shock rise from 1.52% to 1.57% for the final quarter of 2011. While Young said the rise is significant for lenders, he said brokers would not be as hard hit.
“We’re talking about an extra 0.05%. If you’re a bank and you actually lent money on very fine margins, that’s a big number. But if you’re a broker and you were getting trail on 98.48% of your loans and now you’re only getting trail on 98.43%, have you really been affected? Probably not. But, the average loan life is extending out,” he said.
Young commented that this longer loan life could offset the impact of a small portion of arrears on brokers’ books.
“If you’re a broker with 100 loans on your book, you had maybe one in arrears and 99 performing. When you move to an environment where there are two loans in arrears, those two are not paying trail but the other 98 loans are there for longer. Net on net, the trail book is more valuable,” he said.
Regardless of the small portion of arrears that may exist in a broker's trail book, industry consultant Kym Dalton said brokers must still keep a close eye on borrowers falling into hardship.
"Loans in arrears that fail to cure can quickly turn into defaults, potentially triggering portfolio performance criteria in lender's contracts, which could cause the agreement to be terminated with the loss of all trails. Borrowers in default are also aggrieved borrowers, leading to reputation damage, not to mention attention from EDRs and ASIC. At the extreme defaulting borrowers could cause lenders a principal loss which the acquiring broker may need to cover," Dalton said.
Trail books to benefit from arrears shock