Where does Pepper get its money? The big banks. When you see the word "warehouse", it simply means loan, in this case from one of the majors to the non-bank lender. Westpac, ANZ and Commonwealth are the biggest players in this market.

A potent cocktail is brewing: property prices have run 30 per cent in three years – 46 per cent in Sydney – household debt versus income again hovers at record heights, and interest rates at record lows, while the banks are effectively financing high-risk low-doc loans with just 5 per cent deposit down.

It's just that they are doing it via warehouse loans to third parties. The party will end for these third parties at some point. And when it does, the banks will enjoy a modicum of protection. Their warehouse loans are usually for 12 months.

During these 12 months, the non-bank lender (NBL) tries to pull together enough loans to issue RMBS (residential mortgage backed securities) to investors, typically professional debt investors, to lay off its risk. Still, what the Big Four are essentially doing is renting their taxpayer-backed balance sheets so the ex-merchant bankers running the NBLs can chop out high-risk mortgages.

Should these go kaput, they will enjoy the luxury of being incorporated as "Limited Liability" companies. Their promoters will have made millions already, their shareholders will cop it on the chin, and management will trot out the "sorry, it's a perfect storm" line, as did Allco and Babcock & Brown in the wake of the Global Financial Crisis. As secured creditors, the banks will stand first in the queue to claw back the leftovers from their receivers. The regulators, for their part, will say the system has been protected as only shareholders of non-bank lenders will feel the pain.