The canary in the coal mine

Aussie non-bank lender Banksia Securities (S&P: unrated; Moodys: unrated; Fitch: unrated; Dagong: AAA+++++ WOULD BUY DEBENTURES AGAIN) has abruptly shut down and called in the receivers as of late last week. 

it looks like the rural finance company’s mortgage book started turning sour and ate through the company’s wildly optimistic bad-loan provisions, which would make it an early casualty of the slow melt in Aussie housing over the last two years. The Age speculates:

a sudden realisation by a new management team about a long-term decline in the quality of loans, rather than a single large event, triggered the decision to freeze assets. 

Banksia has more than 1000 loans, mostly to farmers, families and small companies in regional Victoria. It does not make loans over $10 million.

It does report high levels of overdue mortgage repayments. More than 10 per cent of $500 million worth of mortgages were more than 90 days overdue at June 30, 2012. 

10% of your loan book being more than 90 days overdue smacks of some - ahem - subprime underwriting decisions: compare it to this chart from the Richmond Fed, showing delinquency rates through the peak of the US housing meltdown.

Banksia’s turf was the working-class farming towns of Victoria’s Goulburn Valley, which has been hit relatively hard by the end of Australia’s 20-year uninterrupted run of housing price growth. They were lending to the subprime end of a subprime market, so it’s not entirely surprising that they sank beneath the waves without much provocation (though it was a bit surprising that they sank just four weeks after the auditors had given them a clean bill of health, and took $660 million of investors’ money with them).

But if this little company was able to run up 10% delinquencies in a bad corner of the market, it’s not unreasonable to expect the big four banks’ mortgage books to start degrading soon as well - especially since the first shakeout of nonbank mortgage lenders in 2008 left the big four banks (ANZ, NAB, Commonwealth and Westpac) as the 80-90% majority providers of mortgages, right as the market peaked. 

(Disclosure: I don’t own a house in Australia, and I’d rather like to move back there one day but housing is SO BLOODY EXPENSIVE, so you could probably say I’m net short Aussie housing and seriously talking my book.)