US private equity giants are embarking on the lucrative mortgage lending business in Australia, ignoring the risks of a declining market to seize an opportunity created by the withdrawal of major local banks.
KKR, Blackstone Group, and Cerberus Capital Management have all recruited small, local mortgage lenders over the past 14 months, providing the heavy backing that has made non-bank lenders the fastest growing source of new home loans this year.
Since non-banks are unable to take deposits, much of their foray into mortgage lending is financed through the capital markets. While total residential mortgage-backed securities (RMBS) issues declined this year, smaller lenders accounted for more than half of the market.
“The non-banking sector is changing,” said Andrew Papageorgiou, investment manager at Realm Investment House, Melbourne fund manager. He believes that support from KKR and others will improve access to deeper European, UK and US funding markets: “Having a large private funder changes the nature of the conversation with your senior bank funder and opens up probably a lot of options, ”Papageorgiou said.
After KKR agreed to buy the non-bank lender Pepper Group in August 2017, Blackstone took an 80% stake in La Trobe Financial Services at the end of the year, and Cerberus Capital Management agreed to buy Bluestone in February.
Under pressure from regulators, the big banks that dominate mortgage lending have fired their horns.
Westpac and his peers have limited interest-only loans and investment loans, halted lending to foreign buyers, and introduced stricter income and expense auditing. The stricter standards have allowed non-banks to take a near-high-end market share, said Taosha Wang, credit analyst at Pacific Investment Management in Hong Kong.