Credit rationing intensifies as global credit crunch hits home

New Zealand banks and wholesale mortgage lenders are tightening credit criteria, pulling longer term loan offers and hiking rates for riskier lenders in a further extension of the Credit Crunch sweeping the globe. Mortgage brokers say banks have reduced loan to value ratio limits, increased margins for 'low-doc' (riskier) loans, tightened the pool of professions that can be lent to and in some cases removed fixed rate mortgages altogether. A low-doc loan is granted to a borrower without documentation of income. They are often used by self-employed borrowers or those operating as traders. "Those looking for finance must realise that the rules have changed and lenders are imposing more stringent conditions. Expect further tightening in credit conditions," said William Cairns at mortgage broker Cairns Lockie. "Lenders are asking for 100% confirmation of income, with low-doc loans being looked at more closely," said Cairns. Mike Pero Mortgages also said banks had tightened lending criteria. GE Money Home Loans withdrew its mortgage rate offers to brokers this week and dropped its own 2 and 3 year fixed mortgages because of massive hikes in funding costs on wholesale markets. ASB's Sovereign dramatically tightened its rules for 'low-doc' lending through brokers this week, ending low-doc lending with an LVR of over 80%, withdrawing investment property loans with an LVR over 80%, adding a 1% margin to all low-doc loans, imposing a Lenders Margin Insurance (LMI) fee on all low doc loans and ending low-doc lending for builders, real estate agents and property developers. Meanwhile broker Asteron withdrew all but its floating rate from the market as funding dried up for fixed mortgages from its wholesale funder. "100% mortgages are all but gone, and 90-95% mortgages are harder to obtain. The days have gone when the banks will give you yearly increases in your credit card limits. Business finance is becoming more difficult to obtain, lenders are requesting principal components with commercial property loans, whereas two years ago, interest-only was fine," Cairns said in his fortnightly commentary. "The question asked is sustainability of income. If income has fluctuated over the past three years for someone like a property developer, it is now less likely that they will be given a loan," he said. "If someone has had a steady income of, say NZ$80,000 over at least three years, then there would be less restrictions on them than someone whose income fluctuated," Cairns told interest.co.nz. Mike Pero Mortgages CEO Shaun Riley said that they had experienced most changes in the last six to twelve months, with nothing major in the last few weeks. "The two main criteria that have been changed are: tighter servicing requirements and lower loan to value ratios," he said. Cairns said that Lenders Mortgage Insurance (LMI) criteria had also tightened. Lenders often require borrowers to take out LMI in order to not be exposed if the borrower defaults on a loan. Joanne Stone of Genworth, a LMI provider, told interest.co.nz that: "We have seen a decline in volumes for LMI over the last 6 months, however this is in line with the changing market conditions caused by the global liquidity crisis, and the decline in mortgage lending. We are seeing the types of lenders using LMI remain stable." Genworth also acknowledged it was rejecting some 'fire sales' of properties to ensure unfairly low prices were not paid. Genworth must pay the lender the difference if the sale price in any mortgagee sale is less than the mortgage.