eChoice Sold To CBA Subsidiary

The Voluntary Administrators have announced that they have accepted an offer and executed an unconditional sale agreement with, Finconnect (Australia) Pty Limited (as subsidiary of Commonwealth Bank of Australia) to sell the assets of the eChoice Administration Group companies.

This does not include the assets of the eChoice companies which have existing contracts with brokers or lenders that have not been placed into administration. The assets consist principally of the eChoice concierge platform, IT, intellectual property and staff.

The sale to Finconnect will allow eChoice’s employees, suppliers, brokers, lenders and leadership team to continue to operate and deliver for customers as they always have, but benefitting from the support of a larger financial institution, with minimal impact to current roles and leadership structure.

The Administrators will continue with their review of the affairs of the Administration Group with a view to the preparation of a report to creditors next year. This report will provide details of the Group’s financial affairs, including its background and historical trading. At this stage, the Administrators are not in a position to advise in respect to these matters or provide any further details pertaining to the sale agreement. These are issues properly considered in the report to creditors.

In accordance with the orders of the Federal Court of Australia made on 14 December 2017, this report will be forwarded to creditors to convene a meeting of creditors to be held by 29 March 2017.

Genworth Changes Recognition of Premium Revenue

Genworth Mortgage Insurance Australia Limited (Genworth  today advised an expected greater fall in Net Earned Premium.

ASIC had raised concerns about the basis used by Genworth to recognise premium revenue in the financial reports for the year ended 31 December 2016 and the half-year ended 30 June 2017 having regard to the pattern of historical claims experience in earlier underwriting years.

Genworth said that it has finalised its annual review of the premium earning pattern (also known as the “earnings curve”). The review process included a detailed evaluation and recommendation by the appointed actuary and supporting work and recommendation by independent reviewers.

The change to the premium earning pattern will negatively impact Net Earned Premium (NEP) by approximately $40 million, and as a result 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction

The modified premium earning pattern reflects an expectation of the future emergence of risk based on a consideration of all identified relevant factors, but principally:

  • losses from mining related regions, which form the majority of the incurred cost of the last 2 years, continuing to occur at late durations; and
  • improvements in underwriting quality in response to regulatory actions, along with continued lower interest rates, extending the average time to first delinquency, while continuing to be beneficial to overall loss levels.

The change will have the effect, in aggregate, of lengthening the average duration of the period over which Genworth recognises its revenue by approximately 12 months. It also has the effect of introducing a third separate earnings curve for business written in 2015 and later. The change however does not affect the total amount of revenue expected to be earned over time from premiums already written.

The two earnings curves that comprise the previous premium earning pattern were first introduced in 2012. The last time the Board approved a change to the premium earning pattern was in September 2015, with this change applied to the financial statements in the third quarter of 2015. The Company conducted an annual review of the earnings curve in 2016 but no change was made to the curve based on the information at that time.

The modified premium earning pattern will be applied to the recognition of revenue in the income statement for the fourth quarter of 2017 and in subsequent reporting periods. The Company’s Unearned Premium Reserve (UPR) balance of $1,087 million as at 30 September 2017 remains unchanged. As was highlighted in the half year (2 August 2017) and third quarter (3 November 2017) results announcements, any change to the premium earning pattern has the potential to change the Company’s 2017 full year guidance.

The change to the premium earning pattern will negatively impact Net Earned Premium (NEP) by approximately $40 million, and as a result 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction.

Based on preliminary estimates, the Company expects the full year loss ratio to remain between 35 and 40 per cent as the NEP reduction is expected to be partially offset by the fourth quarter incurred loss expectations, and preliminary estimates of the Outstanding Claims Reserves as at 31 December 2017 which currently reflect more favourable recent incurred loss experience.

The change to the premium earning pattern is expected to have minimal impact on Genworth’s regulatory solvency ratio which is expected to remain above the Board’s target capital range of 1.32 to 1.44 times the Prescribed Capital Amount as at 31 December 2017. The Company has completed an on-market share buy-back to a value of approximately $50 million and following this announcement intends to continue the
buy-back for shares up to a maximum total value of $100 million, subject to business and market conditions, the prevailing share price, market volumes and other considerations.

The Board continues to target an ordinary dividend payout ratio range of 50 to 80 percent of underlying NPAT and will continue to evaluate other capital management opportunities.

The Company notes that this full year outlook is based on preliminary expectations and recommendations that remain subject to completion of the year end process, including the external audit, market conditions and unforeseen circumstances or economic events. The Company expects it will be in a position to provide guidance for the 2018 financial year at the time of announcement of its 2017 full year financial year results.

Genworth notes that it has had discussions with ASIC about the premium earning pattern. The modification to the premium earning pattern announced today was determined following the outcome of Genworth’s annual review. In particular, Genworth believes that the premium recognition pattern as applied to prior released financial statements was the correct pattern to apply in respect of those financial statements. Genworth does not intend to restate financial statements already released to the market.

ASIC notes the decision by Genworth Mortgage Insurance Australia Limited (Genworth) to change the recognition of premium revenue in its upcoming financial report for the year ending 31 December 2017.

Genworth has announced that the change will negatively impact net earned premium by approximately $40 million and as a result net earned premium for the 2017 year is expected to be approximately 17-19% per cent lower than the 2016 year, instead of previous guidance of a 10 to 15 percent reduction.  The change affects the recognition of revenue for the fourth quarter of 2017 and subsequent reporting periods.  The unearned premium liability at 30 September 2017 remains unchanged.

ASIC had raised concerns about the basis used by Genworth to recognise premium revenue in the financial reports for the year ended 31 December 2016 and the half-year ended 30 June 2017 having regard to the pattern of historical claims experience in earlier underwriting years.

What To Do When The Interest-only Period On Your Home Loan Ends

There is a sleeping problem in the Australian Mortgage Industry, stemming from households who have interest-only mortgages, who will have a reset coming (typically after a 5-year or 10-year set period). This is important because now the banks have tightened their lending criteria, and some may find they cannot roll the loan on, on the same terms. Interest only loans do not repay capital during their life, so what happens next?

Our friends at finder.com.au have put together this guide for households in this position, authored by Richard Whitten*.

Interest-only loans offer borrowers several years of very low mortgage repayments. However, there is always that fateful day when the interest-only period ends, and if you’re not prepared for that moment, it can really hurt. It’s a serious problem, with almost 1 million Australians already facing mortgage stress.

Many borrowers aren’t even aware of what it will mean financially when their loan switches from interest-only to principal and interest repayments. This makes interest-only loans a risky product, and it’s the reason why the Australian Prudential Regulation Authority (APRA) has been cracking down on interest-only lending.

Borrowers with interest-only loans need to be prepared for the day that their loan reverts. When that day comes, borrowers have three options.

Extend the interest-only period

You could try to extend the interest-only period. If you’ve crunched the numbers and you realise that you cannot meet the increased cost of principal and interest repayments, this could really help.

Of course, this is not a good position to be in and your lender could easily refuse your request. However, they probably don’t want to lose you as a customer, and if you’re facing genuine stress, it’s in both of your interests to come up with a solution.

But keep in mind that the bank always wins. Interest-only loans cost borrowers more in the long run compared to principal and interest loans and extending the interest-only period only adds to your overall mortgage costs.

Switch to the principal and interest period

You could opt to do nothing and your loan will revert to principal and interest repayments. However, you should definitely review your loan and your financial position before this happens. Make sure you calculate your new repayment amount so that you’re not caught out.

There are several advantages to this option: it requires the least amount of effort and by repaying the principal of your home loan you’ll finally be moving towards paying off your debt.

It also means that you’re building equity in your home. If you think about the equity in your home as a form of savings, those enormous monthly repayments don’t seem so bad.

But you do have one more option.

Refinance your home loan

You’re a customer, after all, and you’re not locked into your home loan. You could try to negotiate a better rate with your current lender or you could refinance to a completely new lender. This allows you to either switch to a new interest-only loan or find a principal and interest loan with a lower interest rate or better features.

Be sure to compare your interest-only options carefully and read the fine print on both your current loan and the one you’re planning to switch to. You might have to pay various discharge or early exit fees to leave your current home loan and application or establishment fees to begin your new one. You’ll need to balance these upfront costs with the potential long-term savings that come with a lower interest rate.

And as with most things in life, you just need to do your homework.

*Richard Whitten is a member of the home loans team at finder.com.au. His role is to explain all the complexities of the home loan industry in ways that help consumers make better life decisions.

Aren’t mortgage applications tough enough?

From Mortgage Professional Australia.

Amid regulatory and market concern, banks are scrambling to make mortgage applications tougher, leaving brokers to pick up the pieces, writes MPA editor Sam Richardson

Although ASIC and APRA didn’t exist, applying for a mortgage in 1960s Australia was a highly regulated business. The government controlled not only lending conditions but even your interest rate, and you’d have to head to a branch to apply for a loan. Now you can apply without ever setting foot in a bank or even leaving your computer.

It’s become easier to get a mortgage; for some, too easy. Over four days in late September two major banks added extra checks to an already-extensive application process. ANZ introduced a Customer Interview Guide requiring brokers to ask questions about everything from a customer’s Netflix subscription to whether they were planning to start a family. Three days later CBA introduced a simulator that would show interest-only borrowers how their repayments would change and affect their lifestyle. Customers would be required to fill in an ‘acknowledgement form’ to proceed with an interest-only application.

ANZ and CBA are trapped between a rock and a hard place. On one side is the mantra of customer convenience and choice, but on the other the lenders and regulators are desperate to avoid public embarrassment. Brokers have been caught in the middle.

Not tough enough

Two weeks before the majors took action, Swiss investment bank UBS published an alarming and controversial report. Surveying 907 recent borrowers on their experience of getting a mortgage, it argued that the “ease of attaining approval had improved over every prior vintage back to the 1990s”.

Therefore, UBS concluded, “we believe there is little evidence to suggest customers are finding it more difficult to attain credit or that mortgage underwriting standards are being tightened from a customer’s perspective”. That was a problem, UBS argued, because the banks had already written $500m of ‘liar loans’ based on inaccurate information, with ANZ the worst affected.

UBS’s conclusions have been met with intense criticism. ASIC senior executive Michael Saadat told the Senate that, because of the sophistication of the verification process, “we think consumers are probably not the best judge of what banks are doing behind the scenes to make sure borrowers can afford the loans they’re being provided with”.

Yet while it defends lending standards with one hand, ASIC has been strengthening them with the other. The regulator is currently embroiled in a long-running court case against Westpac over the bank’s estimation of customer expenditure, in addition to dictating tougher rules for interest-only lending in April and preparing a ‘shadow shop’ of brokers later this year. Additionally, the Consumer Action Law Centre told MPA that verification was “critically important” and that it supported high standards. For Consumer Action, ASIC and UBS, application standards are still very much a work in progress.

The cost of compliance
Brokers have a very different opinion. Mortgage Choice CEO John Flavell has publicly stated that “lenders are more scrupulous than ever”, explaining that “new legislation requires brokers and lenders to forensically examine a borrower’s assets and liability situation”.

While no friends of the broker channel, UBS noted that brokers “arguably do much of the application heavy lifting” and brokers can attest to the impact of tightening lending standards. Turnaround times have actually got worse over the past year, according to 40% of respondents to MPA’s Brokers on Banks survey. Compliance and bank mismanagement have negated the gains of huge investments in technology, the experience of one broker suggests: “I have been doing this for 20 years. Twenty years ago we were getting unconditional approval in five days. We are still struggling for that 20 years later.”


“If I go back four or five years, I was amazed at just how loose many of the processes were” – Martin North, Digital Finance Analytics

Easier, not shorter
Martin North, principal of consultancy Digital Finance Analytics, has studied mortgage applications for years and has observed an improvement in standards. “If I go back four or five years, I was amazed at just how loose many of the processes were and in fact what would happen is the information would be captured on the form but never used in the underwriting process,” he says.

Progress has been driven not by extra questions for borrowers, North explains, but by an increase in documentation required from applicants. North believes there is room for improvement, however, particularly when it comes to understanding borrower expenditure. Only half of households have formal budgeting, he explains, and “whether it’s a real lie that households have not been truthful with the lenders, or whether they’ve got the best estimate and it might not be accurate, is probably the moot point”.

Applications can be made easier, North argues, but “easier doesn’t necessarily mean shorter”. Improvements in technology could improve underwriting standards for banks while pre-populating interactive application forms for consumers and offering time-saving solutions to brokers.

This is already occurring. Realestate.com.au’s new home loans offering integrates an online calculator into its website, which indicates how a borrower’s lifestyle would be impacted by mortgage repayments on a particular property. When borrowers apply for conditional approval the calculator’s details are fed into the form, allowing a quick online form to lead to instant approval.

For brokers, Advantedge has introduced two mobile apps to make collection of identification documents faster. Looking further ahead, banks have committed to sharing data within two years, which according to Australian Bankers’ Association chief executive Anna Bligh means that “at the click of a button, Australians will be able to directly share their transaction data with other banks or financial services”.

Should technology meet these lofty expectations, today’s paper-heavy application process could eventually be viewed in the same way that we view the branch of the 1960s today. Yet until this technology kicks in, brokers should prepare themselves for more heavy lifting.

Verifying expenses ‘could be automated and digitised’

From The Adviser.

The head of a white label provider has revealed that several banks are looking into making the verification of income and expenses a digitised and automated process.

Brett Halliwell, the general manager of Advantedge Financial Services, has said that living expenses — a topic that has come under scrutiny in recent weeks — could be better handled by technology, opening up brokers to be “much more focused on the value-add side”.

Speaking to The Adviser, Mr Halliwell said: “Brokers, to my mind, really perform two distinct functions. One is sourcing leads (and the customers who have the need to obtain finance) and working with that customer to establish their needs and recommend products that will suit them to make sure that they have the right product and right mortgage for their lending needs. The second half of what a broker needs is really about fulfillment — filling out paperwork and doing the responsible lending steps, such as providing verification of different things that are being provided.

“I think the digitisation of that space could be made more efficient. To take an example, one of the key functions of brokers is to verify identity, to verify income, to verify customer expenses and to make inquiries to verify existing liabilities by the customer.

“I think that over time a lot of those steps could be automated and digitised; for example, by obtaining direct access to customer bank accounts and ATO records and effectively examining and making inquiries to the customer’s existing banking arrangements. A lot of that work can actually be done more efficiently and more effectively.”

Mr Halliwell elaborated that “a lot of banks are looking into processes that can do that”, noting that NAB has been “leading the way” with its new “customer journeys” exercise within the mortgage space that “is utilising agile project management techniques to deliver incremental change [and] overall change for the customer experience over time”.

The customer journey teams look at major life events that customers share with the bank (such as finding their first home and applying for a loan) and aim to provide fast, personalised decisions based off the information they have on the customer.

Supported by technology such as chatbots and machine learning, the customer journeys experience aims to make better use of customer data and escalate any roadblocks within 24 hours (with the CEO seeing any unresolved roadblocks within 72 hours) in a bid to deliver solutions more quickly.

The Advantedge GM continued: “I think over time there will be an opportunity for brokers to be much more focused on the value-add side, which is customer-needs–focused, rather than back-office-paperwork [focused]. While [the latter] is very important, it’s not necessarily done as efficiently as it could be.”

Looking forward, Mr Halliwell said that he expected the mortgage industry to continue to see “strong regulatory focus by APRA and also ASIC”, specifically on the area of expense verification.

“I certainly [expect] a move away from standardised industry benchmarks such as HEM to something that is more tailored towards individual customer circumstances.”

‘Industry standard guides’ could be rolled out

Another area that the head of the white label company said could be changed in the near future is the amount and type of information provided to lenders from the third-party channel.

“I think there is going to be an increased need from lenders wanting to have information provided by brokers about customer responses to responsible lending questions,” Mr Halliwell said.

“So, I think that will be enhanced by industry standard guides whereby brokers will be able to document the customer conversations that they have and that will cover responsible lending areas — such as foreseeable changes to circumstances and why they are selecting certain products (i.e., why interest-only is appropriate) — using an interview guide.”

Mr Halliwell added: “That is important because, when you think about the broker-customer experience, the banks aren’t actually dealing with the customers; it is the brokers that are sitting in front of the customer having the conversation with them.

“So, it is important that the banks can be given access to very clear information about the conversation that was held and are given visibility to information that might have been provided either to or from the customer.

“I think there has been some work done by banks within the industry who have been considering what options are available, and I’d expect that individual banks will be making their announcements over the coming weeks.”

Indeed, the first moves in this direction have already been made. Last month, the chairman of the prudential regulator called on lenders to “devote more effort to the collection of realistic living expense estimates from borrowers” and give “greater thought” to the appropriate use and construct of benchmarks.

Speaking at the Australian Securitisation Forum 2017 on 21 November, the chairman of the Australian Prudential Regulation Authority (APRA) said that the regulator had been “increasingly focused on actual lending practices” and “confirmed there is more to do… to improve serviceability measures, particularly in relation to the assessment of living expenses and the identification of a borrower’s existing debts” to ensure that borrowers can afford their mortgages.

The Westpac Group became the latest lender to implement changes to its serviceability calculator (after AMP announced that it was bringing in additional expense requirements).

WA moves to all-digital refinancing

From Australian Broker.

Western Australia has joined the digital loan revolution, bringing in paperless processing for all loan refinances within the state.

The milestone was reached last Friday (1 December) on the WA banking industry’s deadline to switch across to the new Property Exchange Australia (PEXA) platform.

Mike Cameron, PEXA’s group executive of customer & revenue, said that conducting refinances online has often halved the total transaction time.

“What once took an average of 40 days is now down to about 20 days thanks to the new digital way.”

The fastest refinance time PEXA has achieved thus far has been 20 minutes, he said.

“In that situation the banks moved fast to accommodate an urgent customer request. In the past a paper-based refinance could typically take more than one month to process.”

The move by Western Australia means it is the third state after New South Wales and Victoria to move away from traditional paper-based refinancing.

“Four months ago NSW and Victoria became the first states to process refinance transactions online. In this short space of time most refinances in these two states are now digital.”

More than 135 banks around Australia have signed on to digitise their back office operations and finalise any property transfers through PEXA, Cameron said.

From 1 May next year, property transfers in Western Australia will also move to the digital space, he added.

“The number one reason to settle properties online is to remove the consumer frustration and pain points that often occur when home sales are finalised using outdated pen and paper conveyancing methods.”

PEXA has created a settlement tracking app called SettleMe that lets buyers and sellers track the final stages of the property transfer.

“For buyers, PEXA lodges title documents electronically bringing peace of mind. For sellers, funds are sent electronically to bank accounts, with no waiting for cheques to clear.”

At the time of writing, more than $80bn of property has been transacted through the PEXA platform with that number predicted to grow further, Cameron said.

eChoice confirms voluntary administration

From The Adviser.

Award-winning aggregator eChoice confirmed that Geoffrey Reidy and Andrew Barnden of Rodgers Reidy have been appointed as voluntary administrators of eChoice Limited and 13 subsidiary companies, pursuant to Section 436C of the Corporations Act.

The appointment was made by the secured creditor, Welas Pty Ltd, which has supported eChoice for many years but reached the view that it could no longer continue to support the aggregator in its current form.

Welas took the step to appoint the voluntary administrators to enable eChoice to assess its options on how to secure and sustain the future viability of the business.

“The voluntary administrators have not been appointed over any group companies with existing contracts with brokers or lenders,” the company said in a statement.

“Accordingly, the administration will not affect ongoing third-party stakeholder contractual obligations, such as trail payments by lenders to these companies and payments of trail by these companies to brokers.”

eChoice has confirmed earlier today that broker commissions, including trail payments made by lenders, will not be impacted by the appointment of voluntary administrators.

The eChoice aggregation business has experienced significant growth over the last financial year, with broker numbers up by 38 per cent over the 12 months to 30 June. Settlements also increased more than 25 per cent over the year to 30 September.

The Adviser understands that the administrators are seeking to sell off a number of underperforming entities within the eChoice Group, namely the aggregator’s lead generation and digital development arms. It is believed that the administrators are already aware of one major financial institution interested in the businesses.

“In the meantime, it is business as usual as far as possible,” the group said. “The focus of the business will be to ensure that employees, suppliers, lenders and brokers are able to deliver for customers as they always have.”

Non-bank Better Choice Confirms Launch of New Non-Resident Mortgage

From The Adviser.

After listening to feedback from brokers, a national mortgage manager has revealed that it will soon launch a new mortgage product for overseas buyers.

Better Choice has this year consolidated Iden Loan Services, Future Financial and Pioneer Mortgage Services under the Better Choice brand and is now providing prime residential loans to owner-occupiers and investors, complementing its existing specialist and low doc residential and commercial product range.

Product innovation has been a high priority for the mortgage manager, which distributes exclusively through the broker channel and has eight different funders.

“One of the things that our brokers have told us is that they need a non-resident product,” Better Choice head of relationship management Natalie Sheehan told The Adviser.

“We currently offer a mortgage to expats. As of next week, we will be offering a non-resident product. That’s for foreign investors purchasing residential and commercial real estate in Australia.

“This is something we have been trying to bring to market for a while. We have the funding in place and will be bringing that product to market next week.”

The major banks pulled out of the non-resident lending market in 2015. Only a handful of lenders still offer mortgages to foreign buyers.

But innovative products have been a blessing for Better Choice, which has seen a 70 per cent spike in settlement volumes after expanding its product suite in July.

Investor and interest-only mortgages have been hugely popular as the banks use pricing and policy levers to limit the growth of these products.

Ms Sheehan said: “We definitely listen to what our brokers are telling us and it is clear they are struggling to find a solution for their clients because of the tightening up of servicing.

“Also the tightening up of policy around investment lending. When brokers are looking for products, we are talking to our funders and looking at new product design.

“We have been able to deliver additional choice and convenience to our brokers, who in turn can now offer better solutions to their clients.

“Having multiple funders allows us to choose a range of options to meet our brokers’ needs for a tailored solution for their clients, all under one umbrella. This also allows us to seamlessly transition existing specialist borrowers into a prime solution as their credit profile improves.”

Fintech Spotlight – Tic:Toc:The 22 Minute Home Loan

This time, in our occasional series where we feature Australian Fintechs, we caught up with Anthony Baum, Founder & CEO of Tic:Toc.

Whilst there are any number of players in the market who may claim they have an online application process for home loans, the truth is, under the hood, there are still many manual processes, workflow delays and rework, which means the average time to get an approved loan is often 22 days, or more.

But Tic:Toc has cracked the problem, and can genuinely say they can approve a loan in 22 minutes. This represents a significant improvement from a customer experience perspective, but also a radical shift in the idea of home lending, moving it from a “specialised” service which requires broker or lender help, to something which can be automated and commoditised, thanks to the right smart systems and processes. Think of the cost savings which could be passed back to consumers!

But, what is it that Tic:Toc have done? Well, they have built an intelligent platform from the ground up, and have turned the loan appraisal on its head, through a five-step process.

The first step, when a potential customer is seeking a home loan, is to start with the prospective property. The applicant completes some relatively simple details about the home they want to purchase or refinance, and the system then applies, in real time, some business rules, including access to multiple automatic valuation models (AVMs) to a set confidence level, to determine whether a desktop valuation, or full valuation is required to progress, or whether the prospective deal is within parameters. If it is, the application proceeds immediately to stage 2. In the case of a refinanced loan, this is certainly more often the case.

In the second step, the business rules at Tic:Toc focus on the product. They have built in the responsible lending requirements under the credit code. This means they can apply a consistent set of parameters. This approach has been approved by ASIC, and also been subject to independent audit. Compared with the vagaries we see in some other lender and broker processes, the Tic:Toc approach is just tighter and more controlled.

Up to this point, there is no personal information captured, which makes the first two steps both quick, and smart.

In step three, the Tic:Toc platform takes the application through the eligibility assessment by capturing personal information and verifying it through an online ID check, and then makes an initial assessment, before completing a financial assessment.

In step four, for the application to progress, the information is validated. This may include uploading documents, or accessing bank transaction information using Yodlee to validate their stated financial position. Tic:Toc says their method applies a more thorough and consistent  approach to the financial assessment, important given the current APRA focus on household financial assessment and spending patterns.

After this, the decisioning technology kicks in, with underwriting based on their business rules. There is also a credit underwriter available 7 days a week to deal with any exceptions, such as use of retirement savings.

The customer, in a straightforward case if approved, will receive confirmation of the mortgage offer, and an email, with the documentation attached, which they can sign, and send the documents back in the post. So, application to confirmed offer in 22 minutes is achievable.

The lender of record is Bendigo and Adelaide Bank, who will provide the loan, and Tic:Toc has a margin sharing arrangement with them, rather than receiving a commission or referral fee. Of course the subsequent settlement and funding will follow the more normal bank processes.

Since starting a few months ago, they have had around 89,000 visits from some 66,000 unique visitors and in 4 months have received around $330m of applications, with a conversion of around 17% in November. Anthony says that initially there had been quite a high rate of people applying who were declined elsewhere in the first few weeks, but this has now eased down, and the settlement rate is improving. They also had a few technical hiccups initially which are now ironed out.

In terms of the loan types, they only offer principal and interest loans (though an interest-only product is on the way), and around 50% of applications are for refinance from an existing loan.  Around 75% of applications are for owner occupied loans, and 25% from investors.

The average loan size is about $433,000. However, there are significant state variations:

In the short time the business has been up and running, they have managed to build brand awareness, receive a significant pipeline of applications, and lay the foundation for future growth. The team stands at 40, and continues to grow.

The firm also has won a number of innovation awards.  They have been listed in the KPMG and H2 Venture’s Fintech 100 (as one of the emerging stars); was a finalist, Best Banking Innovation in the Finder 2017 Innovation Awards; and a standout (and case study), in the Efma Accenture Distribution & Marketing Innovation Awards.

Looking ahead, Tic:Toc is looking to power up its B2B dimension, so offering access to its platform to broker groups and other lenders. Whilst the relationship with Bendigo and Adelaide Bank has been important and mutually beneficial, they are still free to explore other options.

In our view, the Tic:Toc platform and the intellectual property residing on it, have the potential to change the home lending landscape. Not only does it improve the risk management and credit assessment processes by applying consistent business rules, it improves the customer experience and coverts the mysterious and resource heavy home loan process into something more elegant, if commoditised.

Strangely, within the industry there has been significant misinformation circulating about Tic:Toc, which may be a reaction to the radical proposition it represents.

Reflecting on the conversation, I was left with some interesting thoughts.

First, in this new digital world, where as our recent Quiet Revolution Report showed, more households are wanting a better digital experience, it seems to me there will be significant demand for this type of proposition.

But it does potentially redefine the role of mortgage brokers, and it will be a disruptive force in the mortgage industry. I would not be surprised to hear of other lenders joining the platform as the momentum for quicker yet more accurate home loan underwriting grows.

As a result, some of the excessive costs in the system could be removed, making loans cheaper as well as offering a quantum improvement in customer experience.

Time is running out for the current mortgage industry!

APRA On Housing – Risks Lurking Beneath

Wayne Byers, APRA Chairman spoke at the Australian Securitisation Forum 2017.  Household debt is high, and continues to rise. There are a three interesting observations within his speech about the risks in the mortgage system, despite their recent interventions.

First, the trend in non-performing housing loans is upward, despite a relatively benign environment for lenders. The overall rate of non performing housing loans is drifting up towards post-crisis highs, without any sign of crisis.

Second, while the upward trend in low Net Income Surplus (NIS) lending appears to have moderated over the past few quarters, a reasonable proportion of new borrowers have limited surplus funds each month to cover unanticipated expenses, or put aside as savings.

Third, there is only a slight moderation in the proportion of borrowers being granted loans that represent more than six times their income. As a rule of thumb, an LTI of six times will require a borrower to commit 50 per cent of their net income to repayments if interest rates returned to their long term average of a little more than 7 per cent. High LTI lending in Australia is well north of what has been permitted in other jurisdictions grappling with high house prices and low interest rates, such as the UK and Ireland.

So, APRA is finally looking at LTI and they acknowledge there are risks in the system. Better late than never…! LVR is not enough.  He also discussed the non-bank sector.

Here is the speech:

It is no secret we have been actively monitoring housing lending by the Australian banking sector over the past few years. Throughout this period, our efforts have been directed at reinforcing sound lending standards in the face of strong competition that, in our view, was producing an erosion in lending quality just at a time when standards should be going in the other direction.

Housing loans represent over 60 per cent of total lending within the banking sector. Our goal has been to ensure APRA-regulated lenders are making sound credit decisions which are appropriate, individually and in aggregate, in the context of broader housing market and economic trends. We have consistently called out a number of factors that are contributing to an environment of heightened risk, many of which have been with us for quite some time now. Household indebtedness is high: perhaps more importantly, the trajectory is clearly for it to rise further (Chart 1).

Chart 1 shows increasing percentage of household debt to income over time from June 1997 to June 2017

This trend is underpinned by a sustained period of historically low interest rates, subdued income growth, and high house prices. Combined, they describe an environment in which lenders need to be vigilant to ensure their policies and practices are both prudent and responsible. In short, heightened risk requires heightened vigilance: certainly by APRA, but also – and preferably – by lenders (and borrowers) themselves.

Our activities in relation to housing broadly fit into three categories:

  1. Industry-wide portfolio benchmarks: perhaps the most-publicised of our actions have occurred at the industry level through the temporary benchmarks in place in respect of both investor lending growth and new interest-only lending. These benchmarks have served to constrain higher risk lending, and discouraged lenders from competing aggressively for these types of loans. Standards and pricing have increased as a result, tempering the growth of new credit in these areas. I’ll come back to these impacts shortly.
  2. Lending standards: we increased our activities in this area as far back as 2011, when we wrote to the boards of the larger authorised deposit-taking institutions (ADIs) to seek assurance they were actively monitoring their housing portfolios and standards. In more recent years, we have also used measures such as hypothetical borrower exercises to test lending policies.2  This led to new, and in a few cases more prescriptive, regulatory guidance on appropriate lending standards and risk management in residential mortgage lending: this was first issued in 2014 and refined last year.
  3. Lending practices: as we have dived deeper into housing lending, we have increasingly focussed on actual lending practices – in other words, are lending policies reflected in the everyday conversations that lenders are having with borrowers? Sound policies only provide comfort if they are actually followed. Aided by file reviews conducted by external auditors, we have confirmed there is more to do in this area to improve serviceability measures, particularly in relation to the assessment of living expenses and the identification of a borrower’s existing debts.

Impact on lending activity

In thinking about the impact of our interventions on housing credit, it’s important to note that APRA can only influence the terms and price at which credit is supplied. We cannot influence the underlying demand. Actual lending outcomes will be a product of both, so I do not want to be seen to suggest that all of the trends that I am about to discuss are solely attributable to APRA – there are many forces at play. That said, there’s no doubt many of trends are ones we hoped to see.

Aggregate housing credit is now growing a little over 6 per cent: not that different from its growth rate before we introduced our industry-wide investor growth benchmark in 2014 (Chart 2).

Chart 2 shows housing credit growth percentage per annum

But it is clear that the strong growth in lending to investors has been curtailed. The emerging imbalance called out by the Reserve Bank in its September 2014 Financial Stability Review has been halted (although not reversed), and overall growth in credit to investors is now more in line with that to owner-occupiers. We have also had the added benefit that lenders have been forced to improve their management information systems, which in the absence of any regulatory requirements had grown lax in identifying the purpose for which money was being borrowed.

More recently, we introduced an additional benchmark with respect to new interest-only lending. The proportion of interest-only lending had been gradually building in Australia (Chart 3).

Chart 3 shows ADIs' interest only loans

In an environment of seemingly ever-rising house prices and low interest rates, an increasing number of borrowers had become comfortable maintaining high debt levels. To exacerbate this, lenders’ practices made it easy to refinance or extend interest-only terms, making it relatively simple for a borrower to avoid paying down their principal debt over an extended period of time.

Our announcement in March this year that APRA-regulated lenders should limit their new interest-only lending to no more than 30 per cent of new lending funded during a given quarter has had an immediate and notable impact (Chart 4).

Chart 4 shows ADIs' new interest only loans

Over the past couple of years, the share of interest-only lending has moderated in response to the more modest rate of growth in lending to investors (who typically make greater use of interest-only products). Nevertheless, having run at between 40-50 per cent of new lending for some time, interest-only lending accounted for about 23 per cent of total new lending for the quarter ended September.  Forecasts for the December quarter suggest something similar again.

While our focus was on new interest-only lending, the emergence of stronger price signals through differential pricing also motivated many existing interest-only borrowers to switch to principal and interest (P&I) repayments. This has resulted in a reduction in ADIs’ interest-only loans outstanding by around $36 billion, or close to 7 per cent, over the last six months. We see this switching as positive for the risk profile of loan portfolios, as it has increased the proportion of borrowers that are paying down principal on their loan and therefore working to reduce overall indebtedness.

In March, we also asked ADIs to increase their scrutiny of interest-only lending with high loan-to-value ratios (LVRs). As a result, many APRA-regulated lenders reduced their maximum LVRs for interest-only loans. Over the subsequent months, we have seen a continuation in the decline of high LVR lending, both in terms of interest-only and, to a lesser extent, P&I loans (Charts 5a and 5b).

Chart 5 High LVR and interest only
Chart 5b shows share of new lending by LVR

Within this broadly positive picture, however, there are a few other metrics that are continuing to track higher than intuitively feels comfortable.

First, the trend in non-performing housing loans is upward, despite a relatively benign environment for lenders (Chart 6).

Chart 6 shows ADIs non-performing housing loans

With historically low interest rates and an unemployment rate that for the past few years has drifted lower, an a priori expectation might have been for non performing housing loans to return to lower levels. Certainly, the current trend is influenced by geographic factors – in particular, the softening of activity and house prices Western Australia is a significant part of the increase. But nonetheless the overall rate of non performing housing loans is drifting up towards post-crisis highs, without any sign of crisis. Given metrics of non-performing loans are a product of historical lending practices, they do not tell us anything much about lending quality today. But it does support the proposition that the need to reinforce lending standards was warranted.

With this in mind, we are paying particular attention to lending with a low net income surplus (NIS). This measure represents the lender’s assessment of the surplus income borrowers would likely have left over each month, after taking into account living expenses, debt repayments and adding in some buffers. Low NIS borrowers are obviously vulnerable to shocks. Over recent years we have been challenging lenders to ensure that their serviceability methodology is robust, and includes adequate conservatism to ensure that borrowers are not unduly exposed if their circumstances were to change. While the upward trend in low NIS lending appears to have moderated over the past few quarters (Chart 7), this chart still shows a reasonable proportion of new borrowers have limited surplus funds each month to cover unanticipated expenses, or put aside as savings.

Chart 7 shows share of new lending by net income surplus

To add to this picture, we have also observed only a slight moderation in the proportion of borrowers being granted loans that represent more than six times their income (Chart 8).

Chart 8 shows share of new lending by loan-to-income ratio
As a rule of thumb, an LTI of six times will require a borrower to commit 50 per cent of their net income to repayments if interest rates returned to their long term average of a little more than 7 per cent. High LTI lending in Australia is well north of what has been permitted in other jurisdictions grappling with high house prices and low interest rates, such as the UK and Ireland.5

Current areas of focus

These last two charts are a useful segue into two key areas on which we are currently focussing.

The first is estimates of living expenses. Measures of NIS are dependent, amongst other things, on the quality of the lender’s assessments of borrower living expenses. Put simply, if living expenses are underestimated then measures of NIS are overstated. Lenders know that borrowers have difficulty estimating their expenses (and have an incentive to understate them), and so as a safeguard will typically use the higher of the borrower’s estimate and their own benchmarks of what a minimum level of living expenses is likely to be. These benchmarks are often based on the Household Expenditure Measure (HEM), with a degree of scaling for different income levels. Indeed, our recent review of lending files at some of the largest lenders provided interesting insights into the high proportion of loans that are being assessed for serviceability based on the lenders’ living expense benchmarks (Chart 9).

Chart 9 shows use of living expenses benchmarks

The use of benchmarks as the primary means of measuring living expenses operates to protect against instances of borrowers underestimating their expenditure. However, the prominent use of any type of benchmark within credit assessments only emphasises the importance of that benchmark being realistic. The HEM, for example, is a measure that reflects a modest level of weekly household expenditure for various types of families. It is open to question whether – even if it is higher than a borrower’s own estimate – such a benchmark always provides a realistic assessment of a borrower’s genuine expenditure needs. From APRA’s perspective, we would like to see the industry devote more effort to the collection of realistic living expense estimates from borrowers and give greater thought to the appropriate use and construct of benchmarks in instances where those estimates are deemed insufficient.

The second key area is lenders’ knowledge of a borrower’s financial commitments and total indebtedness. Loan-to-income ratios (LTI) provides a measure of the extent to which borrowers are leveraged, but are obviously limited because they do not capture the borrower’s total debt level. Many other countries have used credit scores and positive credit reporting for some time as a means of sharing information and conducting comprehensive credit assessments. In Australia, other financial commitments remain something of a blind spot for lenders. However, the Government’s recent announcement of mandatory comprehensive credit reporting beginning from next year will facilitate a switch from LTI to debt-to-income (DTI) metrics, and strengthen credit assessments and risk management. This will undoubtedly be a positive development for the quality of credit decisions.

New non-ADI lender rules

We are working within a system in which well north of 90 per cent of housing finance is currently provided by APRA-regulated lenders. So the measures that we have taken impact the vast majority of mortgage lending in Australia. But when the flow of credit encounters regulation, it’s like flowing water encountering a barrier: one tries to find a way around the other. We therefore haven’t been blind to the fact that the more we lift the quality and/or reduce the quantity of lending in the regulated sector, the more that it provides opportunity for non-APRA regulated lenders to fill any unsated demand. We need to be mindful that, while from a financial safety (microprudential) perspective credit portfolios of individual regulated lenders will be improving, from a financial stability (macroprudential) perspective the risk may just be moving elsewhere. Moreover, it could be concentrating risk in the parts of the system that are less transparent or receive less regulatory scrutiny – often short-handed as the ‘shadow banking’ sector.

There have been two main responses to this risk in recent times:

  • First, we have been looking at whether bank funding of housing loans via warehousing facilities is facilitating risks that would be materially higher than banks would naturally want to write for themselves. In other words, we want to make sure lenders have not been pushing risk out the front door, only to bring it in again via the back. Warehouse exposures are relatively small, but we have observed that there is quite a high tolerance for investor and interest-only loans within warehouses – in some cases, documented eligibility criteria allow for as high as 60 per cent of the pool in each of these categories. Across the industry, non-ADI lenders utilising ADI warehouses would seem to have, on average, slightly higher risk profiles in their portfolios, but there are clearly some individual non ADIs lenders with lending portfolios that are dominated by the sorts of lending that we have been disincentivising ADIs from taking on.
  • Secondly, the Government has introduced legislation into Parliament that would provide us with a new power to use should we think the aggregate impact of non-ADI lenders is materially contributing to risks of instability in the Australian financial system.

I would like to say a few words about this power, since I know it has generated quite a bit of interest amongst many in this room. The first point I would make is to stress that we see it very much as a reserve power. There is a clear threshold to be met before any rules could be applied to non-ADI lenders: that (i) APRA considers that the lending by non-ADI lenders contributes to risks of instability in the Australian financial system and, (ii) APRA considers that it is necessary, in order to address those risks, to make rules covering the lending of non-ADI lenders.

That means that, most of the time, the power to impose rules will lie dormant: non-ADI lenders will go about their business as they have always done, unconstrained by any APRA rules. Importantly, non-ADI lenders will not be subject to any day-to-day prudential oversight by APRA. For those of you uncomfortable at the thought of APRA supervising non-ADIs, let me assure you the feeling is mutual. We are not seeking to expand our supervisory remit and, beyond collecting information that allows us to track aggregate trends in lending activity, we will not be undertaking any supervision of individual lenders. Indeed, we are keen to distance ourselves from any perception we are responsible for the activities of any individual non-ADI lender, or for protecting their investors. To be absolutely clear, we have no intention of taking on that role. For investors in non-ADI lenders, market discipline and caveat emptor remain the primary regulating influences. Our focus is very much on the aggregate.

The ASF’s submission on the proposed legislation noted that any judgement on the extent of material risks to financial stability is fraught with difficulty. I wholeheartedly agree. There is no single measure of financial stability: it is necessarily a matter of judgement, taking into account a wide range of factors. But we will undoubtedly be better placed to make good judgements if we have good data. So the new legislation does impose a new set of ongoing requirements for those businesses that exceed the size threshold to be registered under the Financial Sector (Collection of Data) Act 2001 (FSCODA), and hence provide data to APRA to help us track overall lending trends. We are giving thought to what that data might entail, and will consult with the industry before any new requirements are introduced. But as per the ASF’s submission, we will mainly be seeking to observe the volume and nature of lending that is occurring, and not the traditional prudential metrics that we collect from ADIs.

The ASF’s submission also noted that the new legislation might create some uncertainty in the minds of investors as to the regulatory framework applying to non-ADI lenders. I cannot dispute that might be the case, although clarifying that non-ADIs will not be prudentially supervised and that APRA’s rule-making is a reserve power should alleviate some of those concerns. But equally, given international perceptions of Australia’s housing market, reinforcing the understanding of international investors that the Australian authorities have a wide range of tools at their disposal to support financial stability, should the need arise, certainly offers benefits as well.

As to what would happen if we got to a point where we thought the introduction of non-ADI rules might be needed, it is important to note that, as with data collections, we would need to undertake a consultation process, engaging with affected lenders on what we proposed to do in response to the risks we perceived to exist.

Let me finish on this issue by noting that, as things stand today, we do not foresee the need for any new non-ADI lender rules to be introduced the moment the legislation is passed. Our immediate priority will be to consider how to identify the right entities to collect data from, and the data we want to collect. We look forward to a constructive engagement with the industry on those matters