Powered by MOMENTUM MEDIA
subscribe to our newsletter

‘Regulatory risk’ bad news for LMI

Analysts expect further regulatory measures to curb investor lending will hurt LMI provider Genworth, which recently lost one of its largest clients.

In a trading update on Friday, Genworth advised that its second-largest customer has provided the company with 30 days’ written notice that they are terminating the exclusivity agreement for the provision of LMI with effect from 8 April 2017.

The customer is understood to be Macquarie Bank.

“The company remains in discussions with this customer about managing default risk in the context of other insurance alternatives,” Genworth said in a statement.

In a research note this week, Morningstar forecast Genworth's gross written premiums (GWP) to decline 12.5 per cent in fiscal 2017.

Advertisement
Advertisement

“We continue to expect further weakness in fiscal 2018 and forecast a reduction in new business volumes when Genworth’s third-largest customer contract expires in November 2017,” Morningstar analyst David Ellis said.

“We also assume further regulatory initiatives will slow investor home lending growth, potentially impacting new business flows for Genworth,” Mr Ellis said.

Morningstar noted that Genworth primarily operates on short-term supply and servicing contracts for the banks, setting pricing and the percentage of high-LVR loans the banks will insure with the firm.

While Morningstar does not envisage any significant structural change in the use of LMI in Australia, analyst David Ellis highlighted that banks’ risk appetite is cyclical, changing with market conditions.

He noted that CBA, Genworth’s largest client, contracted a lower percentage of insurance in 2014, and lower again in 2015.

PROMOTED CONTENT


“While lenders may use other forms of risk mitigation, such as additional fees and higher interest rates, we believe they are limited by how far they can go with these options,” Mr Ellis said.

Regulatory risk

Morningstar warned that “regulatory risk” would impact Genworth as APRA seeks to ensure the stability of the Australian housing market and broader financial system.

Mr Ellis explained that while a mandatory requirement to purchase LMI on high-LVR loans would provide a tailwind for the LMI provider, the regulator has taken a view that “a reduction in high-LVR loans is appropriate”, effectively shrinking the potential size of the market in which Genworth operates.

“Pressure by APRA on the banks to reduce investor home lending is also having an adverse effect,” he said.

“In Australia, about 20 per cent of new residential lending is at an LVR above 80 per cent.”

Morningstar’s assumption of “further regulatory initiatives” come as investor lending continues to rise, despite existing measures imposed by APRA on the banks.

The latest ABS housing finance figures, released last week, show that investor lending was up 4.2 per cent in January to be 27.5 per cent higher over the year.

ANZ Research noted that the recent acceleration in investor activity “is sure to keep both the RBA and APRA on high alert, as market sentiment shows no signs of easing”.

[Related: Same game. New rules]

‘Regulatory risk’ bad news for LMI
mortgagebusiness

Latest News

The chairman of the financial services regulator has resigned from his position, effective immediately. ...

Refinancing settlements for the first nine months of the calendar year 2020 are up 27 per cent on last year’s volumes, having peaked in Ju...

The Tasmanian-based lender has seen a 43 per cent rise in settlements in the first quarter of the financial year, driven by strong demand fr...

FROM THE WEB

Join a group of highly informed brokers.

Broker Pulse, a community-driven knowledge base of lender performance Reveal exactly which lenders are making life easiest for brokers and their clients by taking this monthly survey and joining a group of highly informed brokers who leverage these insights every month.

JOIN NOW
podcast

LATEST PODCAST: Victoria’s surprising appetite for new homes

Do you expect to see strong uptake of the HomeBuilder scheme?

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.