The Low Down on Lo–Doc
Sunday 4 July 2004
Over the past three years, lo-doc lending has emerged as a force in the Australian and New Zealand residential mortgage market. While still a small percentage of the market, based on worldwide trends Bluestone estimates that around 15% of all new lending will be done in a lo-doc format within the next two to three years, with the non-bank sector writing proportionally more of the market.
By The LandlordLo-doc lending covers a range of different product styles and is delivered by several lenders. The range of lo-doc products has meant that the distinction between lo-doc and non-conforming has become blurred, and despite important differences, some commentators are using the terms interchangeably.
Lo-doc products can be defined broadly as loans delivered by lending institutions (traditionally from prime lenders) to predominantly self-employed borrowers, requiring a reduced set of documentation as evidence of serviceability (the ability of a borrower to make regular payments on their loan).
Compared to standard mortgage products, many lo-doc products have a lower loan to value ratio (LVR) and the maximum size is limited to mitigate some of the additional risk arising from this reduced evidence. Importantly, most also require mortgage insurance. By contrast, non-conforming products are typically delivered by specialist lenders, who focus on lending to riskier borrower segments using a risk-adjusted pricing model.
Most specialist lenders do not use mortgage insurance, and many will take self-employed borrowers with some adverse credit issues to a higher loan balance, and often a higher LVR. The incremental risk is carried by a mix of strategies including charging an additional risk margin which is available to cover losses, tighter security criteria (reducing potential market value declines), and more robust arrears and enforcement processes.
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