Some New Zealand banks are more likely to suffer significant losses on home loan defaults than their Australian counterparts because of the looser lending polices adopted on this side of the Tasman, reports the Sunday Star Times.

The high levels of debt some banks have tied up in low-deposit mortgages and the low level of default insurance NZ banks carry on their mortgage portfolios makes it more likely they will suffer losses as housing values continue to slide and the economy teeters on the verge of a slump.

This country's five largest retail banking groups ANZ/National, ASB, BNZ, Kiwibank and Westpac hold about $155 billion of outstanding debt on residential mortgages between them.

Mortgages for 80% or more of a property's value are considered to be the most risky for lenders, because if property values decline and a bank has to conduct a mortgagee sale, it may not be able to recover the full amount of its loan.

In the current economic climate that is increasingly likely.

Latest sales figures from the Real Estate Institute show that median dwelling prices in many parts of the country have declined by more than 10% since September last year and declines in many other regions are approaching the 10% threshold.

In Australia, banks protect themselves against any shortfall in the amount they may recover from a mortgagee sale by buying Lender's Mortgage Insurance (LMI).

That is an insurance policy which reimburses the bank for any such losses.

The largest provider of LMI in Australasia in PMI Mortgage Insurance, which has about a 60% share of the mortgage insurance market.

PMI chief executive Ian Graham said the company had been operating for 40 years in Australia and nearly 20 years in New Zealand, but there were major differences between the two countries.

In Australia the banks insured virtually all of their mortgages as a matter of course, but in New Zealand this was much less common, he said.

New Zealand banks tended to insure only a small proportion of their mortgages, preferring to carry the risk of any losses themselves.

The one exception to this appeared to be Kiwibank, which said all of its mortgages for more than 80% of a property's value either carried LMI cover or were part of the government-sponsored Welcome Home Loan scheme, in which case they were 100% government guaranteed.

The other major banks appear to carry only low levels of LMI.

According to ASB's disclosure statement, it has LMI cover on 10.4% of its mortgage portfolio, although these policies covered about a quarter of its mortgages where it had loaned more than 80% of what the properties were worth.

ANZ/National, Westpac and BNZ were not able to provide any information about their levels of LMI cover when contacted by the Sunday Star-Times.

However, Graham believed the current economic downturn and its effect on house prices may force a rethink by New Zealand on taking out LMI.

"New Zealand has had a reasonably long period of economic growth and stability and therefore losses on mortgages have been relatively low over a long period of time, so there hasn't been any reason [for the banks] to change," Graham said.

"It will be interesting to see whether the current downturn in the housing market leads to some changes from the lenders' perspective."

The Reserve Bank has also had some concerns about the way the banks have been calculating the probability of borrowers defaulting on their mortgage repayments and on the calculations used to estimate losses resulting from forced sales.

In its March Financial Stability Report, the Reserve Bank said the trading banks' own default estimates were "low in relation to to comparable estimates observed internationally, and low on the basis of the Reserve Bank's own modelling results".

This suggests the banks have been underestimating the likelihood of lenders defaulting on mortgage repayments.

The Reserve Bank also criticised the way the banks calculated how much they would be likely to recover from forced sales.

The banks' forced sale recovery calculations "were not sufficiently calibrated to economic downturn conditions and did not include loan-to-value ratio as a risk driver," the Reserve Bank said.