Where LMI premiums were once a small expense in a homebuyer’s budget, they’re now accounting for up to $20,000 on a standard house purchase. But, according to brokers, it’s not just escalating premiums impacting on their loan books: it’s also the LMI insurers’ increasingly tight credit policies
Where LMI premiums were once a small expense in a homebuyer’s budget, they’re now accounting for up to $20,000 on a standard house purchase. But, according to brokers, it’s not just escalating premiums impacting on their loan books: it’s also the LMI insurers’ increasingly tight credit policies
Brokers are reporting that insurers are becoming even tougher with their credit approval policies, resulting in applications passing credit assessment through banks and lenders, before falling over due to LMI knockbacks.
“I think that, like a lot of lenders post-GFC, the insurers’ policies have got a bit tighter,” says Greg Mitchell, general manager of Homeloans Ltd. “The biggest issue is the credit scoring that has come into play. It could be the fact that it’s a single applicant; it could be savings, where they live, or the number of enquiries on their file – it’s often so grey, with no definitive reason for a decline.”
Of course, when a loan is declined from an LMI perspective, it’s not always the policies of two major LMI insurers in the market, Genworth and QBE, which are to blame.
It could be the case that the deal is on the skinny side to begin with, but the broker submits it anyway in the hope that it might just skate through.
“From a credit policy point of view, the insurers are never far from the lender, so if a broker is thinking, ‘This is borderline, but let’s see what the insurer says’, then there’s a good chance they already know what the outcome is going to be,” says Peter White, CEO of the Finance Brokers Association of Australia.
“There’s a very old anecdote that still stands today: LMI doesn’t make a bad deal good, and if the loan really wasn’t good from a credit perspective initially, LMI doesn’t make it any better.”
WHY IS LMI IMPACTING ON LOAN APPROVALS?
Sometimes considered as a ‘necessary evil’, LMI is actually “an important part of our finance structure”, says White.
“I’m pro LMI; I believe in it and I think it’s a good thing, so long as the insurers do the right thing by everyone,” White explains. “It’s done wonderful things for the banking system in this country for pricing competitiveness and diversification. It’s brought about big changes and reforms. But what I’m not in favour of is ripping people off – it should be fair play, and at the moment it’s not.”
White cites a lack of portability between lenders and securities as one of the main issues, along with the inability of borrowers to get a refund of their premium if they move on.
“What I want to see is fair and proper refunds,” he says. “The insurer makes an assessment of risk based on a 30-year loan, and if that loan discharges within the first year or two, you’re entitled to a partial refund. It’s a dirty little secret, buried in their credit policies; it’s ridiculous and it’s just not fair.”
Fair or not, the system as it stands does allow thousands of Australians with smaller deposits – borrowers who would otherwise miss out – to buy homes and investment properties each year. And while reports of LMI-influenced knockbacks appear to be on the rise, rigid credit policies are only part of the problem, says Greg Carlson, a career banker and mortgage broker and commercial lending consultant with Finance-iT.
“Ten years ago, they were called credit guidelines; you can liken it to a three-lane highway, where you could drive down that highway and get to your end destination by weaving and ducking and diving along those three lanes,” Carlson explains.
“Now they’re called credit policies, which means it’s a much straighter route. If an application doesn’t tick a box, it’s deferred or declined, no further discussion.”
Housing affordability is also getting tougher for new entrants, and new homes aren’t being built at the same rate because of land availability, Carlson adds, which is prompting new entrants to buy into newer, higher-density complexes.
This is where things start to become complex. With only two major LMI insurers in the market, risk can only be spread so far, and in any particular building, street, suburb or neighbourhood, they are determined to limit their risk exposure.
“Genworth and QBE LMI talk to each other and they know pretty much down to the street level how much LMI exposure exists in each area,” Carlson says.
“They will only take a concentration level of 30% inside any suburb or even that building, so if they’ve got more than one-third LMI exposure, the loan is declined – it’s that simple.”
HOW CAN BROKERS GET LMI DEALS APPROVED?
First and foremost, as a broker it’s your responsibility to be aware of potential LMI red flags, so that when you have a client looking to borrow over 80% of a property’s value, you can make them aware of any potential issues that could derail their loan application. It’s ideal if you can have this conversation before they settle on their dream property.
“Each insurer may look for slightly different things; QBE LMI might accept something as reasonable that Genworth may not. But, generally speaking, there are certain factors that could cause a deal to fall over,” explains Jessica Darnbrough, national spokesperson, Mortgage Choice.
“Anything that can impact the resale value of a home, by putting its appeal in question, is what they are interested in.”
These include properties that are:
Remember, too, that the deciding factor as to whether your client is approved or denied may have nothing to do with them, and everything to do with the specific property they’re trying to buy. Carlson recalls a situation when he was working in-house at a major bank where this was precisely the issue.
“We had ins with the developer and builder, a fairly large name, who had just put out an estate. A bulletin came out from the LMI insurer and they said, ‘We will not accept another loan in this particular street, as we have too much exposure in this one street already ’,” he says.
Carlson adds that if an applicant’s loan was approved by a bank but rejected at LMI level, the borrower could look for a property with different features or in a different location, and their outcome could be more positive.
“Be careful, though; the more enquiries a borrower makes, the worse off their credit rating will be,” he says.
You can also work with lenders who offer facilities with alternatives to LMI, such as in-house risk fees. The cost to the borrower is usually comparable to a standard LMI policy, but, crucially, they’re able to skip the insurer’s credit evaluation process.
“We do have funders and products that we can use to do up to a 95% lend, without credit scoring, and it can absolutely make all the difference,” explains Homeloan Ltd’s Greg Mitchell.
“The reality is that prior to these products coming on board, the deal is dead.”
This article is an excerpt lifted from the August 2014 issue of Mortgage Professional. Download to read more!
Brokers are reporting that insurers are becoming even tougher with their credit approval policies, resulting in applications passing credit assessment through banks and lenders, before falling over due to LMI knockbacks.
“I think that, like a lot of lenders post-GFC, the insurers’ policies have got a bit tighter,” says Greg Mitchell, general manager of Homeloans Ltd. “The biggest issue is the credit scoring that has come into play. It could be the fact that it’s a single applicant; it could be savings, where they live, or the number of enquiries on their file – it’s often so grey, with no definitive reason for a decline.”
Of course, when a loan is declined from an LMI perspective, it’s not always the policies of two major LMI insurers in the market, Genworth and QBE, which are to blame.
It could be the case that the deal is on the skinny side to begin with, but the broker submits it anyway in the hope that it might just skate through.
“From a credit policy point of view, the insurers are never far from the lender, so if a broker is thinking, ‘This is borderline, but let’s see what the insurer says’, then there’s a good chance they already know what the outcome is going to be,” says Peter White, CEO of the Finance Brokers Association of Australia.
“There’s a very old anecdote that still stands today: LMI doesn’t make a bad deal good, and if the loan really wasn’t good from a credit perspective initially, LMI doesn’t make it any better.”
WHY IS LMI IMPACTING ON LOAN APPROVALS?
Sometimes considered as a ‘necessary evil’, LMI is actually “an important part of our finance structure”, says White.
“I’m pro LMI; I believe in it and I think it’s a good thing, so long as the insurers do the right thing by everyone,” White explains. “It’s done wonderful things for the banking system in this country for pricing competitiveness and diversification. It’s brought about big changes and reforms. But what I’m not in favour of is ripping people off – it should be fair play, and at the moment it’s not.”
White cites a lack of portability between lenders and securities as one of the main issues, along with the inability of borrowers to get a refund of their premium if they move on.
“What I want to see is fair and proper refunds,” he says. “The insurer makes an assessment of risk based on a 30-year loan, and if that loan discharges within the first year or two, you’re entitled to a partial refund. It’s a dirty little secret, buried in their credit policies; it’s ridiculous and it’s just not fair.”
Fair or not, the system as it stands does allow thousands of Australians with smaller deposits – borrowers who would otherwise miss out – to buy homes and investment properties each year. And while reports of LMI-influenced knockbacks appear to be on the rise, rigid credit policies are only part of the problem, says Greg Carlson, a career banker and mortgage broker and commercial lending consultant with Finance-iT.
“Ten years ago, they were called credit guidelines; you can liken it to a three-lane highway, where you could drive down that highway and get to your end destination by weaving and ducking and diving along those three lanes,” Carlson explains.
“Now they’re called credit policies, which means it’s a much straighter route. If an application doesn’t tick a box, it’s deferred or declined, no further discussion.”
Housing affordability is also getting tougher for new entrants, and new homes aren’t being built at the same rate because of land availability, Carlson adds, which is prompting new entrants to buy into newer, higher-density complexes.
This is where things start to become complex. With only two major LMI insurers in the market, risk can only be spread so far, and in any particular building, street, suburb or neighbourhood, they are determined to limit their risk exposure.
“Genworth and QBE LMI talk to each other and they know pretty much down to the street level how much LMI exposure exists in each area,” Carlson says.
“They will only take a concentration level of 30% inside any suburb or even that building, so if they’ve got more than one-third LMI exposure, the loan is declined – it’s that simple.”
HOW CAN BROKERS GET LMI DEALS APPROVED?
First and foremost, as a broker it’s your responsibility to be aware of potential LMI red flags, so that when you have a client looking to borrow over 80% of a property’s value, you can make them aware of any potential issues that could derail their loan application. It’s ideal if you can have this conversation before they settle on their dream property.
“Each insurer may look for slightly different things; QBE LMI might accept something as reasonable that Genworth may not. But, generally speaking, there are certain factors that could cause a deal to fall over,” explains Jessica Darnbrough, national spokesperson, Mortgage Choice.
“Anything that can impact the resale value of a home, by putting its appeal in question, is what they are interested in.”
These include properties that are:
- situated near high-voltage power lines
- located in a flood-affected area
- heritage-listed, due to the difficulty in changing them
- considered high-density – “Insurers tend to shy away from apartment blocks with more than 30 units,” Darnbrough says
- smaller than 40sqm in size – “Brokers should check with the lender, as they might include
- a balcony or car park in the square footage,” Darnbrough advises
Remember, too, that the deciding factor as to whether your client is approved or denied may have nothing to do with them, and everything to do with the specific property they’re trying to buy. Carlson recalls a situation when he was working in-house at a major bank where this was precisely the issue.
“We had ins with the developer and builder, a fairly large name, who had just put out an estate. A bulletin came out from the LMI insurer and they said, ‘We will not accept another loan in this particular street, as we have too much exposure in this one street already ’,” he says.
Carlson adds that if an applicant’s loan was approved by a bank but rejected at LMI level, the borrower could look for a property with different features or in a different location, and their outcome could be more positive.
“Be careful, though; the more enquiries a borrower makes, the worse off their credit rating will be,” he says.
You can also work with lenders who offer facilities with alternatives to LMI, such as in-house risk fees. The cost to the borrower is usually comparable to a standard LMI policy, but, crucially, they’re able to skip the insurer’s credit evaluation process.
“We do have funders and products that we can use to do up to a 95% lend, without credit scoring, and it can absolutely make all the difference,” explains Homeloan Ltd’s Greg Mitchell.
“The reality is that prior to these products coming on board, the deal is dead.”
This article is an excerpt lifted from the August 2014 issue of Mortgage Professional. Download to read more!
