In the Press
28 July 2008
Banks study mortgage insurance options
Australian banks are reviewing their in-house mortgage insurance operations in light of a new capital accord introduced in January.
The introduction of the Basel II banking regime, combined with rules that came into force 2 1/2 years ago requiring lenders to capitalise their mortgage captives at the same level as stand-alone mortgage insurers, has made such in-house divisions more capital intensive.
The onset of the credit crunch has exacerbated the problem. As the major banks have increased their share of the mortgage market because of pressures facing non-bank lenders, their captives are being required to provide more mortgage insurance policies.
Rising interest rates are also putting greater pressures on homeowners. A survey of 2000 Australians for mortgage insurer Genworth Financial, published last week by Retail Financial Intelligence, found 25 per cent of people use more than half their income to service mortgage repayments, compared with 12 per cent last year.
The proportion of people anticipating problems repaying their mortgage rose from 15 per cent in 2006 to 27 per cent in April 2008.
The increase in demand for mortgage insurance policies comes as the cost of capital is rising sharply, raising questions about whether lenders' in-house divisions can expand profitably.
In May St George Bank surprised investors when it revealed its mortgage insurance arm suffered a $38 million net reduction in investment earnings, prompting the bank to reduce its equity exposure given volatile market conditions and new capital guidelines.
It is understood that the banks have been in discussions with specialist insurers such as PMI, Genworth and MGIC as part of their business reviews.
"We are having a look at our LMI [lenders' mortgage insurance]," a spokesman for ANZ Banking Group said, adding that a decision on the future of the unit would probably be made by the end of the year.
Some banks have already sold off their divisions. BankWest sold its mortgage captive insurance subsidiary, Western Lenders Mortgage Insurance, in June last year.
Brisbane-based Suncorp has also sold its subsidiary. Westpac said there were no plans to sell its captive mortgage insurance unit.
"It's business as usual as far as we are aware," a spokeswoman said. "We're not aware of any reconsideration of this business. The state of the mortgage market in Australia is far more stable than other parts of the world, where a number of mortgage insurers have either been put on a ratings watch or downgraded."
Not all lenders have in-house mortgage insurance operations. Some, including National Australia Bank and Commonwealth Bank of Australia, prefer to outsource to third parties.