Non-conforming borrowers: Opportunity knocks

A comparatively small but profitable share of the domestic mortgage market

Non-conforming borrowers: Opportunity knocks

While non-conforming borrowers only account for a comparatively small share of the domestic mortgage market, their steady growth suggests they remain a profitable market segment brokers can't afford to ignore.

The non-conforming mortgage market has grown to be worth a healthy $8bn per annum since Liberty first introduced the products to the Australian market in 1997.

While this may seem a small figure in a wider mortgage industry that is now worth in excess of $825bn, the non-conforming market still represents a lucrative niche for brokers and Liberty general manager for mortgages James Boyle only sees the niche expanding.

"Within traditional lenders credit is contracting, which is leading a lot more people needing to go to non-bank lenders," Boyle says. "We've only started to see this trend effecting customers recently but we will see it increase in the next year."

This is because as the traditional lending institutions tighten their credit policies people with an LVR of 80% may have to go with a non-conforming product whereas before they would have been able to use a traditional loan. Also with people getting squeezed by the credit crisis, there will likely be more people that have impaired credit.

Brokers can easily take advantage of this market which is increasing in size according to Mark Rice, managing director of GE Money Third Party Solutions. He says diversifying your product range to add non-conforming loans can quickly boost your business through tapping into an under-serviced area of the market.

"The Australian non-conforming market has grown rapidly and there are more and more borrowers falling into this segment every day," he says.

Rice points to changes in the way that Australian's have earned a living over the last ten years as one of the key factors in the rise of the non-conforming borrower.

"There are a many more people who have irregular earnings these days due to the growth in contract workers, self-employed and small business owners," he says.

"Until recently traditional mortgage products haven't kept pace with the changing employment trends leaving a big gap in the market; that market is now well serviced through a range of alternative lending products such as low and no doc loans."

Boyle agrees, saying that there is no question that Australia has a great history of entrepreneurship and that the number of people starting their own business continues to rise.

Some of these people need to be serviced with non-conforming products not only because of their irregular income streams but also because of different circumstances for example if they are buying a property which will serve as both a house and a shop.

However, brokers can bring their experience working on prime products to the table when looking to add a non-conforming segment to their business. Rice believes that brokers that have built sound businesses servicing mainstream residential borrowers have the opportunity to leverage those skills to also include non-conforming products. He says that a number of brokers are now capitalising on this lucrative sector.

"The skills brokers employ to succeed in the prime market work just as effectively with non-conforming borrowers," he says. "It's just a matter of adjusting to the needs of this market segment, getting up to speed on the products and expanding your network."

Boyle says the only difference between writing a conforming loan and a non-conforming one is the amount of effort that needs to go into it but he says the payoff is commensurate.

"Brokers have to look at each customer on their own merits - a little more individual attention is needed," he says. "Equally there's more reward for both the broker and the customer. Obviously, for the customer, it's something they have been trying to achieve for a while now so it is satisfying for them."

"For the broker, remuneration tends to be higher and they have the satisfaction of helping someone secure a particularly difficult loan."

Strength through diversification

For Robin Chng of Perth-based mortgage broker Platinum Personal Planners, the non-conforming market now represents an important segment of his business, with volumes through this channel accounting for 25-30% of business written over the last five years.

While he admits he had initial reservations about moving into the area - largely due to the perception it would be difficult - he says it has been a relatively simple way to grow his business and improve his competitive advantage.

"With more ammunition, you can fight a better war," he says. "We offer a whole range of products, including financial planning services and insurance; adding non-conforming products to our portfolio is simply another way to widen the range of products we sell."

Melbourne-based Stuart Styles of brokerage Arthurmac agrees with Chng that diversifying into non-conforming products is a simple and yet effective means to diversify and strengthen revenue streams.

"Offering both conforming and non-conforming products helps complete your product profile, which means you can help just about anyone who walks in your door," he says.

Rice believes that a growing broker interest in the non-conforming market bears testament to a changing attitude and understanding of what's actually involved.

"Most brokers are surprised at how similar the basics of non-conforming lending are to prime business," says Mark Rice. "Once the basic product knowledge is in place the principals of building a client base are exactly the same."

Rice's thoughts are echoed by Styles: "If brokers have been in the business long enough and know how to put a prime deal together, then they can definitely figure out non-conforming products and capitalise on this market."

Knowing your client

When prospecting non-conforming clients, the tactics and processes brokers engage with traditional residential mortgages also hold true: identifying a target market and matching the products and service they require.

Chng says the majority of his non-conforming customers are usually investors, developers and builders who have a good idea of what they are after - which narrows his target market and helps him tailor marketing material and even his approach to suit.

"For these borrowers a hard sell is certainly not needed," he says. "They do their homework and know what they are looking for. They also know what to expect - and understand that they may be subject to a higher interest rate."

Styles' customer base represents another segment of borrowers suitable to non-conforming products: those with financial difficulties.

While their situation and needs will differ from seasoned investors; he's adamant that this is an excellent market for brokers to tap into.

"Our non-conforming customers usually have financial issues that they want to resolve," he says. "Because of this they are typically keen to find out how you can help them and are appreciative of the options you put before them."

Chng and Styles agree that while entering a new target market - such as non-conforming - can serve up its own challenges, the service and support offered by non-conforming lenders has helped make the transition not only smooth, but valuable to their business.

"Non-conforming lenders' service levels actually tend to be that bit better than other lenders - whose service can differ a lot and can be spread pretty thin," says Styles.

Onwards and upwards

While the story no doubt continues to worsen for the US sub-prime market, in stark contrast the Australian market is in a far better state. What Australian lenders consider to be non-conforming loans are a far cry from the 110%, no doc loans that were written in the US and led to the global meltdown of the financial sector.

Non conformers in Australia are far more prudent and conservative than they were in the US. By definition sub-prime really refers to having some kind of credit impairment," Pepper Homeloans head of marketing and product, Ed Thian, says. "If you look at what Pepper does, the majority of loans are actually clean credit."

Thian says that brokers who work hard to bring in new business through the door will be rewarded with a higher conversion rate if they offer non-conforming products to customers that fail to meet traditional lenders' strict criteria.

"There are a number of files that just don't fit into traditional lending so as a consequence, they literally get binned," he says. "Non-conforming allows brokers to turn that sawdust into gold."

The broker arena is a more competitive place today than it was yesterday and it is only going to get tougher tomorrow. The brokers that survive the hard times and flourish in the good will be the ones that make the most of every opportunity and provide the best possible service to their clients.

If you are known as a broker that will find a way to get a deal done, one who will go the extra mile and who has a complete range of products to offer anyone who walks in your door, you will find yourself very busy as borrowers look to make sense of a new lending landscape.

Adding a non-conforming component to your business will help you provide a better and more complete service to your clients and it is not as difficult as you may think.

Tips for diversifying into non-conforming loans


  • Choose the right lender - comprehensive training and good service is a must
  • Ensure all of your staff are educated about the products
  • Be willing to spend time with and explain the products to borrowers
  • Thoroughly understand your clients' financial situations