Banks keep the lid on their smaller competitors

In Australia, non-bank mortgage lenders have cornered between 15% and 20% of the home loans market and, by one account, are writing about 50% of new mortgages.

In New Zealand, non-bank lenders have only about 5% of the market and are writing not much more than that of new mortgages.

The problem here, partly, is that the banks keep taking over non-bank lenders. Sovereign was once the largest non-bank lender, but then it was taken over by the ASB Bank.

But there seems to be a more fundamental problem. While Kiwis aren’t at all averse to depositing money with lenders offering the highest interest rates, whether they are banks or not, they seem reluctant to borrow from non-banks. Logic would suggest it should be the other way round.

Nevertheless, it’s a fact of life acknowledged by Australia-based Wizard Home Loans, which is currently writing nearly $40 million a month in mortgages in New Zealand.

Angelo Malizis, Wizard’s chief executive, says the mortgage lending system here is "very conservative" and dominated by "the all-powerful banks."

For that reason, his firm stresses that it is one-third owned by ABN Amro, "one of the largest banks in the world."

William Cairns of mortgage bankers Cairns Lockie says one constraint on non-bank lenders here is that most of the mortgage brokers are ex-bankers. "They’re more used to dealing with banks than non-banks."

But the major banks had more of the New Zealand market to begin with than they had in Australia, Cairns says.

New Zealand still retains eight building societies, but they’re all niche operators mostly confined to their regions with the largest being Southland Building Society. Since the 1980s, the bigger building societies have been transformed into banks or taken over.

While the same trends have been evident in Australia, building societies still retain a much larger slice of the market. Australian credit unions are also involved in the mortgage market, unlike in New Zealand.

Yet another reason the non-banks are doing better in Australia is that there’s a much stronger anti-bank feeling in the community there.

"People were wanting to get away from the banks. Non-banks had people ringing them," Cairns says. The non-banks also had the advantage of having real people answering their phones, unlike the electronic systems at the banks.

While four of the five major banks in New Zealand are Australian owned, their staff are still New Zealanders. "The banks here aren’t so distant and the average Kiwi staff in the banks are friendly.

In most cases, people are going to treat you reasonably OK," Cairns says.

Kerry Finnigan, chief executive of the Hanover Group which owns Elders Home Loans, one of the other significant local non-bank mortgage lenders, says a major problem in recent times for non-bank lenders is that they’re funded through securitised structures.

While they have been able to offer competitive interest rates in the floating area, "the moment you move into the fixed arena, they become non-competitive and the New Zealand psyche likes the fixed interest rate mortgage," Finnigan says.

"That’s likely to change with the recent rise in interest rates. The pricing of securitised structures could become more competitive," he says.

Both Finnigan and Cairns also agree that the banks in New Zealand have been better at competing with the non-banks, having learnt from their experience in Australia.

For example, while they don’t like revolving credit type structures, they’ve been quicker to make them available here. "They clearly don’t want to see a repeat of what’s happening in Australia," Finnigin says.

He notes that the mortgage lending structure in the US is quite different. There, banks have a very low share of the market with the bulk of mortgages being written by securitised organisations such as Fannie Mae.

The non-bank lenders insist the banks won’t be able to keep hogging the New Zealand market.

Finnigan says the Australia-based wholesale mortgage companies who provide much of the finance to non-bank lenders here are "very aware of the pushback they’re getting from the banks."

But they have an added incentive in competing, he says. "This is their sole purpose in life. It’s not like a bank which has tentacles into other aspects of people’s financial affairs."

Wizard’s financing comes from Australian Mortgage Securities, a mortgage securitisation company jointly owned by Wizard and ABN Amro, and both Elders and Cairns Lockie also use AMS. The latter two also use another Australia-based wholesaler, Interstar. Cairns Lockie also uses another Australian wholesaler Liberty and its own contributory mortgage.

Cairns says Wizard is probably already the sixth largest home loan lender in New Zealand behind the five major banks and ahead of TSB Bank and Southland Building Society. His own firm is already bigger in the market than any of the building societies bar Southland.

Non-bank mortgage lending is an emerging industry in New Zealand, he says.

"We have a tiger in a cage and the door’s about to be opened. In Australia it’s mauled a lot of people," Cairns says.

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