US SUB-PRIME MORTGAGE MARKET EXPLAINED: BCU benefits from being a self-funded lender

In view of the current media attention on the US sub-prime mortgage market and the talk about increased interest rates, community credit union, BCU, is keen to highlight why locals are benefiting from its lending practices and mutual structure (ie being owned by its customers rather than by external shareholders).

Media reports, incorrectly grouping all non-bank lenders together, have often misled consumers by reporting that non-bank lenders are coming under pressure to increase mortgage interest rates.

Not all non-bank lenders are the same

BCU, while not a bank, is governed by the same strict regulations as the Australian banks.

Called an ADI or ‘authorised deposit-taking institution’, BCU (like the major banks) is licensed to accept deposits and is closely regulated by APRA (an authority set up by the Australian Government).

Organisations that only provide loans and cannot accept deposits (non-ADIs) are more likely to rely on wholesale and/or overseas money to fund their loans. They may, therefore, find themselves under pressure to increase mortgage interest rates over and above any Reserve Bank increase as one way to offset their increased costs.

BCU benefits from being a self-funded lender

BCU is not directly affected by the current US mortgage crisis because it has no direct exposure to the overseas money market.

‘Here at BCU we’re basically self-funded, which means we fund almost all our loans internally from our profits and members’ deposits,’ explains Lyndon Kingston, CEO. ‘Because of this we aren’t directly subject to the same pressure as the non-ADI sector to increase mortgage rates beyond any increase in the cash rate set by the Reserve Bank of Australia.’

What is causing the current crisis overseas?

The current lending crisis in the US is due to the high number of people defaulting on their loan repayments causing record numbers of mortgage foreclosures. Many of these borrowers were high-risk loan candidates with poor credit histories and were offered ‘sub-prime’ or what we call ‘non-conforming’ loans.

What’s a sub-prime or non-conforming loan?

These are loans used mainly by people who do not meet normal lending criteria, or who have impaired credit histories. Such loans are considered to be high risk and usually attract a higher interest rate.

The current situation has arisen in the US where lenders have offered very large numbers of sub-prime or non-conforming loans to high-risk applicants. Combined with falling US house prices and rising interest rates, large numbers of these borrowers are currently experiencing mortgage distress and defaulting on their repayments.

What’s the flow-on effect?

The high number of mortgage defaults in the US has sent shock waves through the American money market. This has increased the cost of money on the wholesale international money markets. Lenders who fund their loans this way may face increased costs.

Why BCU is well positioned

BCU’s loans are largely self-funded and the credit union doesn’t offer loans outside its own closely adhered to responsible lending policy.

’We’ve always had a reputation in the region as a “responsible lender” and we’ve certainly not noticed any increase in defaults. We do not offer non-conforming loans,’ said Lyndon. ‘Our duty of care is to ensure that people can repay their loans. We’re not in the business of exposing our members to unacceptable risks.’

How does this benefit locals?

The credit union was formed 37 years ago by banana growers who saw the benefit of community banking and had the vision to start their own credit union. Those members with funds, saved with the credit union so that those who needed loans could borrow to grow their business, buy a home or car. This philosophy of members helping other members is still strong today.

With BCU, local money stays in the local economy. ‘At times like these the benefit of banking locally with a community credit union becomes more apparent. And when I say banking, I mean savings and loans,’ says Lyndon Kingston.

‘I would encourage anyone looking for a new home loan or looking at switching loans to come and talk to their local lending manager at BCU about the benefits of banking with a community credit union.’