excuses excuses, page-50

Hi Warnie,

So you're a mortgage broker, hey? Six investment properties, plus a mortgage broking business...no longer you're a property permabull! Anyway, good luck to you.

I think it would be salutary for everyone interested in property to not underestimate the impact of the credit crunch on property, even property here in Australia.

Here's one example I can think of:

"Whether the broker gets paid more commission or not is irrelevant.

large banks pay about .7%
non bank lenders about 1%

not that big a difference."

The mortgage broking industry has thrived in an environment of cheap credit, booming non-bank lenders and a booming property market. The point spread you stated shows one of the main reasons why. If you write a loan for me with a nonbank, your commission (based on your numbers) is over 40% higher than if you wrote my loan with a bank lender. That's a massive margin.

Nonbank lenders in Australia are in the process of imploding. Many, as you know doubt are aware, have closed their books for new loans. This is because nonbank lenders must raise virtually all their money from OS money markets. The securitisation market in the US is CLOSED for business for people like RAMS.

This is because credit is no longer cheap. I'm not talking about interest rates, I'm talking about how much nonbank entities have to pay to raise money over the call rate. Westfield recently raised over 1.1 billion. Do you know what they had to pay for that? 3.75% points above US treasuries, more than THREE TIMES the point spread from a similar deal in 2006. So their cost of credit has more than trebled. There's a big difference in creditworthiness between Westfield and RAMS.

So if credit isn't cheap, and nonbank lenders have put up the shutters, and the property market is looking shaky...Banks like CBA can just hit up depositors, pay them no interest on their savings, and flip their money into mortgages. And this means nonbank lenders either don't exist, or won't be paying you such a fat premium.