Pepper eyes NZ market after GE purchase

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Australia's Pepper Home Loans will be looking at opportunities in the New Zealand market once it completes the purchase of GE Capital's A$5 billion (NZ$6.47 billion) mortgage book which includes about A$800 million of New Zealand mortgages.

Monday, July 4th 2011, 7:25AM

by Jenny Ruth

Pepper chief operating officer David Holmes says he expects the GE purchase, which still needs sign-off from Australia's Foreign Investment Review Board and New Zealand's Overseas Investment Commission, will be finalised by mid-July.

"As a lender in Australia, we're looking at the New Zealand market and looking for opportunities there," Holmes says.

Pepper, one of the few Australian non-bank lenders who rely on securitisation for funding to have weathered the global financial crisis (GFC), specialises in lending to those who don't qualify for bank loans, rather than trying to go head-to-head with the mainstream banks, Holmes says.

"There's no market in going head-to-head with the major lenders because they will always beat you on price," he says. "The cost of funds pre and post-GFC are vastly different."

Pre-GFC, it was possible to securitise prime mortgages at just 12 or 13 basis points above the bank bill rate. But now even prime lenders at looking at margins of 100 basis points above bank bills.

The Australian standard variable mortgage rate currently is about 7.7% and Pepper's lowest rate currently is 8.25%, rising depending on clients' individual circumstances and peaking at 9.75% for its 90% loan-to-valuation product.

Holmes says while the 10-year old Pepper's mortgage booked peaked at about A$3.5 billion, it is currently just below $1 billion. However, as a survivor, it now also services mortgages that were originated by other non-bank lenders which have since gone out of business.

Because Pepper doesn't use lenders mortgage insurance (LMI), it hasn't qualified for any of the A$20 billion the Australian Federal Government has poured into the securisation market since the GFC began.

However, both Commonwealth Bank of Australia and National Australia bank provide it with warehousing facilities - it is those two banks and Westpac who are funding the GE purchase. In December last year, it sold successfully sold about A$200 million in the first securisation issue of its type in more than two years. The "AAA" rated parts of the issue were priced between 130 and 220 basis points over the bank bill swap rate.

Pepper won't be making the mistake of assuming the New Zealand market is the same as the Australian market and it will first closely examine the GE customer base here.

It will also be talking to local mortgage brokers - all Pepper mortgages are sourced through brokers - about possible niches it might fill here, Holmes says.

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