Tag: Credit Ratings

Confusion around credit reports rife among Aussie consumers

Australians are still confused about what goes into their credit report, despite it being an important record of their credit health, according to research by consumer education website, CreditSmart.

The CreditSmart survey found that nearly three quarters of Australians assume their credit score is included in their credit report. One in five mistakenly believe that marital status, income, insurance claims and even traffic fines form part of their credit report.

Commenting on the findings, Geri Cremin, Credit Reporting Expert at CreditSmart, said: “If you are applying for a credit card, a personal loan or even applying to change your mobile phone provider, your credit report can make or break your application.

Your credit report is a snapshot of your credit history and current credit health – so lenders do look at your credit report, and you should too.”  

“Your credit report is a way for lenders to see how you handle the credit you currently have and assess whether the credit you’re applying for is right for you. Better still, a good credit report might open the door to better deals.”

Who’s accessing your credit report?

How credit reports are used is also unclear to many Australians. The majority of consumers know their credit report can be checked when they apply for a home loan, however:

  • Less than 50% are aware that it can also be checked when taking out a new mobile phone contract or opening a new gas or electricity account.
  • Four in ten also wrongly believe their credit report is checked when applying to rent a property.
  • 30% believe that their credit report is checked when they take out home insurance.
  • 13% also think that a future employer checks their credit report when they apply for a job.

“By law, your credit report can only be accessed by others in limited circumstances. For example, your credit report can’t be accessed by a real estate agent when you apply to rent a house, an insurer when you apply for car or home insurance or by a potential employer when you apply for a job,” added Ms Cremin. 

Aussies love credit, but feel it’s getting harder to access

CreditSmart’s research showed that Australians are enthusiastic users of credit, with three quarters (76%) currently using some form of credit product.

Credit cards (56%), home loans (29%), vehicle finance (12%), Buy Now Pay Later services (12%) and personal loans (12%) were the most popular types of products used by Australian consumers who responded to the CreditSmart survey.

The survey also found that four in 10 Australians think it is harder to get credit now than it was 12 months ago. They say the reasons are:

  • lenders doing tighter credit checks (57%)
  • tougher regulation around credit (54%) and
  • lenders looking at bank statements and daily expenses more closely (41%)
  • declining property market (22%)

“As Australians feel credit is getting harder to access, it’s important to take charge of your individual credit health. A great first step is to check your credit report – understand what’s on it and get on top of your monthly repayments. Lenders look to your credit health to determine your attractiveness as a customer, so it is important to know where your credit health stands,” Ms Cremin said.

“We recommend checking your credit report annually and really treat it as an asset that will help you access the right credit if and when you need it.”

So, what is included in my credit report?

At a minimum, your credit report will include identifying information about you, such as your name, birth date, address and employment history.

More importantly, it includes:

  • A list of any applications you’ve made for credit over the last five years – regardless of whether your application was approved or not. This information is listed as an “enquiry” by the credit provider you applied to and it includes the type of credit you applied for.
  • A breakdown of your current credit accounts such as your home loan or credit card.
  • Up to 24 months of repayment history – which shows your monthly repayment behaviour on financial credit accounts (phone or utility companies do not report repayment history, so your telco and utility repayments won’t be on your credit report).
  • Any defaults listed by a credit provider on financial loans as well as telco and utility accounts. A default can occur if you miss your payment of at least $150 by at least 60 days. A default stays on your credit report for 5 years.

Aussies’ awareness of changes impacting credit health still a work in progress

Research from credit information website, CreditSmart.org.au, has revealed that one year on from the adoption of Comprehensive Credit Reporting (CCR), most Australian consumers are still unaware of the changes that are impacting their credit health, and may not know how it can impact their future credit applications.

The research found that in the last 12 months, only one in four consumers checked their credit report. More worryingly, consumers who are struggling with their credit health said they were just as likely to seek advice from credit repair or debt management services as they would from their lender or free financial counsellor.

“Consumers are still largely unaware of credit reporting, what information is contained in their credit report, and what that means about their borrowing behaviour and overall credit health,” said Mike Laing, CEO of the Australian Retail Credit Association (ARCA), which founded CreditSmart.

“Our research has found that while awareness has actually increased 11% from last year, less than 1 in 3 consumers are aware that credit reporting has changed. Importantly however, awareness is higher among those with a real need to know – with one in two consumers who are planning to make a significant purchase in the next 12 months being aware of the changes,” added Mr Laing.

The rollout of comprehensive credit reporting has accelerated rapidly in Australia since last year, with more data shared than ever before. By September this year, comprehensive credit information for 80% of consumer loan accounts will be available.

“CCR allows lenders to share and view more detailed credit information about consumers to provide a clearer view of a consumers’ credit history. This is a positive move for consumers who have a strong history of making payments on time.” added Mr Laing.

Consumer awareness highest for users of riskier credit products

According to CreditSmart, credit cards make up the majority of accounts currently in the CCR system at around 87%, followed by mortgages at 9%.

Yet, people who hold these mainstream types of accounts are the least aware of the changes to credit reporting and may not be aware of the value it adds to their credit history, if they have a strong record of making payments on time.

It was also found that those consumers with products that are sometimes seen as riskier, such as leases for household goods (61%), cash loans (54%) and payday loans (79%), plus personal loans (55%), are all far more aware of the changes to credit reporting[1] This could indicate the users of those products have been given more information about the changes, or that they have taken more time to understand the changes.

Consumers using these riskier products also rated their credit health as significantly worse than users of home loans and credit cards.

Interestingly, Buy Now Pay Later (BNPL) users have relatively low awareness of credit reporting changes despite significant numbers rating their credit health as poor.[2]

Consumer awareness a work in progress

Awareness of credit reporting changes is not the same as understanding the detail behind their credit report, according to Mr Laing.

“It is easy to understand how consumers may become confused about what’s important when it comes to credit reporting and their credit health. There’s a lot of information out there and it’s important to bring it back to a simple, straightforward message.

“We want consumers to be aware of the importance of their credit history to their credit health – and how that history may impact their financial future. The steps are to understand how the credit reporting system has changed, to get your credit report to see your credit history and to manage the credit that you have responsibly” added Mr Laing. For more information on the changes to credit reporting and where to get your free credit reports you should go to www.creditsmart.org.au, which provides clear information on the credit reporting system to assist consumers to optimise their credit health.    

What The Ratings Agencies Are Saying

Ratings Agencies are a funny breed, and I am not going to enter the debate as to whether they are ahead of the curve – some will say their track record around the time of the GFC was appalling – and whether they are truly independent; but they are taken seriously by the markets, which reacts when they publish their reports. So today we look at Moody’s assessment of Australia, and Standard and Poor’s Mortgage Delinquency Reports.

So first, to Moody’s who confirmed their rating of Aaa and which puts Australia in an exclusive club alongside United States, Switzerland, Sweden, Norway, Denmark, Netherlands and New Zealand.

They just reviewed the rating (some other agencies still have a negative watch on Australia, meaning they are more concerned about the outlook, given our exposure to foreign trade and debt) and Moody’s concluded that thanks to good GDP numbers, relatively low (on an international basis) Government debt – at only 42% of GDP, though up from 26.5% five years ago and strong institutions (RBA and APRA), the rating is confirmed. The bonus income from higher resources prices also helped.

This rating is important because it directly translates to the cost of government debt, and is a signal to the international community of the economic strength of the country.

Now Moody’s did highlight some concerns about the Government needing to control spending in order to bring the budget back into balance as forecast, against a fraught political background – by which I assume they mean the independents in the Senate and their perchance for blocking the passage of legislation; and also the risks from high levels of household debt in a flat wage environment.  But they make the point that on a relative basis Australian Households are still enjoying a high per capital income ($50,334 in 2017) is in line with other Aaa economies, and this they say, offers capacity to absorb income shocks, and a base to support taxes as needed.

They suggest that household income growth will be lower than government forecasts, but they are still looking for GDP growth around 2.75%. They also suggest that Government spending will remain under pressure given the expected 6% rise in social welfare programmes including health and NDIS.

In terms of risks, they see two first is rising household debt, which they say exposes the economy and government finances. Second is Australia’s reliance on overseas funding, which may be impacted by changes in internal investor sentiment. Rate rises abroad might lift the cost of government and bank borrowing, adding extra pressure on the economy. But their judgement is, these risks are not sufficient to dent the prized Aaa ratings.

But, now square this with S&P Global Ratings RMBS Performance Watch to 31st March 2018.  They revised arrears data for February and March 2018 to reflect an originators’ revisions to arrears data for these months. As a result, the prime 30 day SPIN including noncapital market issuance was 1.37% in Q1 2018, up from 1.07% the previous quarter.

They say that loans more than 90 days in arrears were at a historically high level at the end of Q1, indicating that mortgage stress has increased for some borrowers.

In addition, the major banks which account for around 43% of total prime RMBS loans outstanding recorded the largest movement in arrears during Q1 and are now trending above the prime SPIN. On the other hand, nonbank financial institutions saw their loans more than 30 days in arrears fall to 0.50% in Q1 2018 from 0.60% in Q4 2017.

Arrears for nonconforming RMBS increased to 4.19% in Q1 2018 from 4.08% in Q4 2017. Some of this increase is off the back of a decline in outstanding loan balances. Arrears on investment loan arrears reached 1.19% in Q1. Owner-occupier loan arrears were 1.56% at the end of Q1.

Half of all interest-only loans in Australian RMBS transactions will reach their interest-only maturity date by 2019. We expect this transition to be more pronounced for investor loans, of which 46% have an interest-only period compared with 12% of owner-occupier loans underlying RMBS transactions.

Prepayment rates are declining. The average prepayment rate for March is 19.58% and they believe some borrowers could be facing refinancing difficulties in the face of tougher lending conditions. A slowdown in refinancing activity can precipitate a rise in arrears, particularly in the nonconforming sector because borrowers have fewer options available to manage their way out of financial difficulty.

Across the states, the Australian Capital Territory in Q1 2018 again had the lowest arrears of all the states and territories, at 0.68%. Western Australia meanwhile again recorded the nation’s highest arrears, at 2.71%. Arrears rose during Q1 in most parts of the country. South Australia recorded the biggest year-on-year improvement in arrears, with loans more than 30 days in arrears declining to 1.48% in Q1 2018 from 1.63% in Q1 2017.

Nine of the 10 worst-performing postcodes in Q1 2018 are in Queensland and Western Australia. These included Butler, and 6036, Byford 6122, both in Western Australia, Blenheim 4341 and Bungil 4455 in Queensland, Beechboro 6063, Kensington 6151 and Blythewood 6208 in Western Australia, Barkly 4825 in Queensland, Eaton in Western Australia and Beelbangera 2680 in New South Wales.

They called out some important risk factors around interest rate rises and debt servicing.

Household indebtedness in Australia is high, particularly by international standards. This does not provide much headroom if the economic situation deteriorates or when interest rates start rise. Low interest rates and improving employment conditions are keeping mortgage arrears low in the Australian mortgage sector, but Australian borrowers’ sensitivity to rate rises has increased. A rapid ratcheting up of interest rates, as occurred between September 2009 and October 2011, when rates went up by around 2 percentage points, would see arrears go beyond their previous peaks, given household indebtedness has continued to increase during the past five years.

Debt serviceability issues are exacerbated in more subdued economic climates when refinancing opportunities are limited, particularly for borrowers of a higher credit risk, because lenders invariably tighten their lending criteria. In this scenario, some borrowers will find it harder to manage their way out of their financial situation, leading to higher arrears and potential losses. In our opinion, self-employed borrowers, nonconforming borrowers, and borrowers with high LTV loans are more likely to face greater refinancing difficulties in more subdued economic climates.

Property prices affect the level of net losses in the event of borrower default. From an RMBS perspective, the strong appreciation in property prices has increased borrowers’ equity for well-seasoned loans, and this helps to minimize the level of losses in the event of a borrower default. While property price growth is slowing, most loans underlying Australian RMBS transactions are reasonably well insulated from a moderate decline in prices. Given the high seasoning of the Australian RMBS sector of around 64 months, most borrowers have built up a reasonable degree of equity, as evidenced by the sector’s weighted-average LTV ratio of 60%. This provides a buffer against a moderate property price decline. Higher LTV ratio loans are more exposed to a decline in property prices because they have not built up as much equity to absorb potential losses. Around 14 % of total RMBS loans have high LTV ratios of more than 80%.

They conclude that arrears to trend higher if interest rates rise. Improving employment conditions and historically low interest rates will keep defaults low in the short to medium term, however. Economic headwinds such as softening property prices, rising interest rates, and tougher refinancing conditions will create cash-flow pressures for some borrowers.

 

So, two agencies with different perspectives. Personally, based on the data we have from our surveys, and as we discussed in our recent posts on both mortgage stress and household financial confidence, we suspect the SPIN data is closer to the mark – but bear in mind that RMBS mortgage pools are carefully selected, and many not contain higher risk loans. So even this may be understating the real state of play.

And in a way that nicely highlights the uncomfortable juxtaposition between the top level macroeconomic picture, and real life among Australian households.  The trouble is, the state of the latter is very likely to impinge on the former as mortgage debt grinds on. And this could certainly lead to more issues down the track

Property crash fears downgrade Australian banks

From The New Daily.

Fears of a property market crash have prompted S&P to downgrade the creditworthiness of almost all of Australia’s finance sector.

The global ratings agency issued a statement on Monday explaining its decision was founded on the “economic imbalances” caused by soaring private-sector debt and property prices.

“Consequently, we believe financial institutions operating in Australia now face an increased risk of a sharp correction in property prices and, if that were to occur, a significant rise in credit losses,” the agency wrote.

“With residential home loans securing about two-thirds of banks’ lending assets, the impact of such a scenario on financial institutions would be amplified by the Australian economy’s external weaknesses, in particular its persistent current account deficits and high level of external debt.”

The rating downgrades applied to 23 financial institutions, including AMP, Bank of Queensland, and the Bendigo and Adelaide Bank.

The notable exceptions were the ‘Big Four’ (AA-) and Macquarie (AA), which kept their ratings, but only because the agency presumed they would be bailed out by the government in the event of any catastrophe.

The downgrades follow a March report by OECD warning that soaring house prices and ever-rising household debt had exposed the Australian economy to “extreme vulnerability”.

The Paris-based organisation — the research arm of the world’s richest nations — said the Australian property market was showing “hints of a slowdown” that could trigger “a rout on prices and demand” that spreads to all other parts of the economy, cutting consumer spending and pushing up mortgage defaults.

House prices have increased in real terms by 250 per cent from the 1990s, the OECD said, with most of that increase occurring over the past few years, particularly hitting first-time buyers in Sydney.

At the same time, the nation’s ratio of household debt to GDP has hit a record high at 123 per cent, the third highest in the world, the OECD report found.

Meanwhile, in S&P’s downgrade, AMP Bank was cut from A+ to A, while Bank of Queensland and Bendigo and Adelaide Bank both went from A- to BBB+. All three went from a negative to stable outlook, meaning the agency does not foresee further cuts in the immediate future.

Credit ratings measure how likely an institution is to be able to repay its bond holders on time and in full. Ratings between AAA and BBB are investment grade, while BB to D are speculative grade.

An institution rated A- is considered to have a “strong capacity” to repay, but is “somewhat susceptible to adverse economic conditions and changes in circumstances”. BBB equates to an “adequate” capacity to repay.

The other affected institutions were:

  • Australian Central Credit Union
  • Auswide Bank
  • Community CPS Australia
  • Credit Union Australia
  • Defence Bank
  • Fisher & Paykel Finance
  • G&C Mutual Bank
  • Greater Bank
  • IMB
  • Liberty Financial
  • mecu
  • Members Equity (ME) Bank
  • MyState Bank
  • Newcastle Permanent
  • Police Bank
  • Qudos Mutual
  • QPCU
  • Rural Bank
  • Teachers Mutual

S&P joined the other two major ratings agencies last week in maintaining the Australian government’s AAA rating, but with a negative outlook.

Bendigo and Bank of Queensland Downgraded By S&P

The latest assessment from S&P is finely balanced, on one hand calling out the elevated risks emanating from rising household debt and risks of a property correction, whilst on the other suggesting that recent regulatory intervention should help to manage the adjustment.

But overall, risks are higher and their revised credit profiles reflect this with more than 20 entities downgraded. Whilst the majors rating has not changed – reflecting the implicit government guarantee that their “too-big-to-fail” status gives them, and Suncorp remains at its current A+/Stable rating; both Bendgio Bank and Bank of Queensland took a downgrade to BBB+/Stable.

The consequence for these regionals is that funding costs just went up (and probably by more than a 6 basis point tax on the majors would have given in relative benefit). They have high customer deposits, but again the regional bank playing field is tilting against them when it comes to long term funding.

The majors would be downgraded if Australia is:

Our outlooks on the long-term issuer credit ratings on the four major Australian banks remain negative reflecting our view that pressure remains on the Australian government’s likely support for these banks. We expect to lower our issuer credit ratings on these major banks and their core subsidiaries if we lowered our long-term local currency sovereign rating on the Commonwealth of Australia (AAA/Negative/A-1+) or if we reclassified our assessment of the Australian government’s supportiveness toward systemically important private sector banks to supportive from highly supportive.

Why credit rating agencies’ economic advice shouldn’t be trusted

From The Conversation.

The Australian government is using warnings from rating agencies like Standard & Poor’s Global Ratings (S&P), which placed Australia on a negative watch during the election, to make the case for passing budget measures. In reality, S&P (and the other two agencies in the credit rating industry) has no moral or technical authority to make such a warning.

Balance-Pic

S&P warned that Canberra needed to take “forceful” fiscal action to address “material” budget deficits, which is unlikely in the near future, or face losing its AAA rating.

However, rating agencies shouldn’t be entrusted with this sort of power. As a matter of fact, it is not clear at all why the rating agencies, S&P included, are still in business. These agencies were instrumental in bringing about the global financial crisis, but have survived because of the lack of political will and because the ratings are required by law as a regulatory requirement.

The reputation of the credit rating agencies has been tarnished not only by the global financial crisis but, before that, by the Enron scandal, the Asian financial crisis and the financial collapse of New York City in the mid-1970s. The agencies’ track record shows failure to detect frequent near-defaults, defaults and financial disasters, as well as failure to downgrade troubled firms until just before (or even after) the declaration of bankruptcy. In fact, the credit rating agencies follow the market, so the market alerts the agencies of trouble, and not vice versa.

During the global financial crisis, hundreds of billions of dollars’ worth of triple-A-rated mortgage-backed securities were abruptly downgraded from triple-A to “junk” (the lowest possible rating) within two years of the issue of the original rating. About 73% (over $800 billion worth) of all mortgage-backed securities that one credit rating agency (Moody’s) had rated triple-A in 2006 were downgraded to junk status two years later. In the US, the Financial Crisis Inquiry Commission puts a big chunk of the blame for the global financial crisis on the agencies, while European Union officials blame agencies for contributing to the advent of the European sovereign debt crisis.

The failure of the rating agencies can be attributed to negligence and incompetence. Starting with negligence, there is every indication that the credit rating agencies did not check the soundness of their ratings because customers were willing or forced to buy it. Negligence means that the rating agencies were in a position to make sound judgement but did not make the effort to do a thorough job. Given the bullishness prevailing in the run-up to the crisis, the agencies chose instead to receive big pay for a lousy job.

The agencies did not have the expertise to do the job the agencies were entrusted to do, particularly when it came to the evaluation of risk embedded in structured products. In his testimony to the Financial Crisis Inquiry Commission, Gary Witt (formerly of Moody’s CDO unit) said that Moody’s didn’t have a good model on which to estimate correlations between mortgage-backed securities, so they “made them up”.

Credit rating agencies promoted inferior products knowing the quality of these products. The credit rating agencies knew that the risk was great or that the securities were not really AAA, yet they passed them as AAA.

While the credit rating agencies may be perceived as “willing victims” of investment bankers and the issuers of securities, there is also evidence to suggest that the transparency, quality and integrity of the agencies’ other practices and processes were substantially lowered. This was in order to support the extraordinary growth of the agencies’ structured finance operations. In effect, the agencies deliberately overlooked the possibility that rating may have been unwarrantedly high.

For all of these reasons the rating agencies must not be taken seriously. The agencies are more stringent in rating countries than in rating private-sector firms, because they do not receive fees for rating countries, which is the “public relations” part of business. Credit rating agencies have every right to compete on a level playing field, but these agencies shouldn’t have oligopolistic power and should be forced to operate under the investor-pays model to avoid conflict of interest.

Author: Imad Moosa, Professor, Finance, RMIT University