We review the latest APRA data, consumer sentiment, and other burning issues.
https://www.apra.gov.au/publications/quarterly-authorised-deposit-taking-institution-statistics
Tag: Mortgage Industry
Mortgage Data To Jun 2019 (APRA) – Mutuals Alert!
APRA released their quarterly property exposures data to Jun 2019 today. We can see some of the moving parts in the Industry, though only at an aggregated levels.
At the top level we can see the impact of APRA first imposing restrictions on investment lending in 2015, and later in 2017 on interest only loans. The subsequent loosening of standards which APRA introduced has yet to hit the statistics.
We can see that mortgage lending growth did slow thanks to their measures, with total ADI mortgages at $1.67 trillion, comprising $547 billion of investor loans and $359 billion of interest only loans. This translates to 32.6% of loans being for investment purposes (still too high) and 21.4% of all mortgages being interest only. Not disclosed is the distribution of interest only loans between owner occupied and investment loans, but we can assume most are investment related.
We can pull out the same data for the four major banks. Here total loans are $1.33 trillion, with $452 billion being investment loans and $303 billion being interest only, giving a 34% share of investment loans and 22.8% of interest only loans, so they still have a larger share of investment loans and IO loans relative to the market. No bank level data is disclosed, though we know Westpac has a larger share of investment loans, and we assume interest only loans too.
We can then look at the new lending flows across the various lender types. The flow of new investment loans is running at 32% to June, and is rising (we expect it will be even higher next time as the APRA loosening is executed). As a result mutuals are writing a lower share of investment loans now.
The proportion of new loans via Brokers varies by lender category, with foreign banks sitting around 65%, compared with the 48% of major banks. Mutuals are seeing a fall, as competition from majors increases.
The proportion of new interest only loans is at around 17% for most lender types, with foreign banks writing less. Mutuals are writing more IO loans now.
Loans written outside serviceability has fallen across the industry, though major banks are still at 4.7%, and above the other lender types. Mutuals are writing more, as they attempt to gain share in the increasingly competitive market. There are higher risks in these loans.
Finally, we can look across the loan to value bands, at time of origination.
Major banks are writing around 7.4% of loans above 90%, compared to mutuals at 13% – once again showing mutuals having to break their rules more often to win business.
In the 80-90 bands, majors are at 16.1% and rising.
Nearly half of all loans written are around 50% of loan to value ratio – here the best deals are on offer, so refinancing is quite strong. There is little variation across the lender segments.
The lower LVR bands are around 26%, with other banks (including regionals) a little higher.
So this data suggests that mutuals are under pressure, the effect of the APRA tightening is obvious, the question now will be how this changes in the new “you set the risk” environment. It appears from our data lenders are more willing now, so we will be watching the serviceability and LVR metrics. But loan volumes remain constrained, which will limit potential excesses, at least for a time.
Are Mortgage Brokers Working For You? [Podcast]
We look at the latest ASIC report on Mortgage Brokers, and the exposure draft of the Best Interest Obligations due to come in next year.
What questions should you be asking your Mortgage Broker?
https://www.treasury.gov.au/consultation/c2019-403520
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AFG FY19 Profit Up 1.8%
Australian Finance Group (AFG) announced an annual underlying profit of $28.56 million up 1.8% for the 12 months to 30 June 2019. Significantly, for the first time, more than half of AFG’s gross margin was generated from outside of its mortgage broking aggregation business. The continued growth in these diversified earnings streams despite a softer Australian credit market. Residential settlements were down 11.5%.
Their own RMBS program passed the $2 billion under management on the back of growth of 50% over the prior year.
FY19 financial year highlights include:
- NPAT of $33.03 million
- AFG Home Loans (AFGHL) settlements of $3.15 billion, down 2.2%
- Combined residential and commercial loan book of $155.45 billion, up 6.9%
- Securities loan book of $2.06 billion
- A 30.4% investment in Thinktank contributing $1.5 million towards NPBT
- Settlements of $1.06 billion through AFG Securities business (up 108% on last year)
- Settlements of $129.7 million through their AFG Business platform which is up 30.9% on the previous six months
- Return on Equity of 33 per cent, in line with prior period.
AFG declared a final dividend of 5.9 cents per share fully franked, bringing total dividends for the year to 10.6 cents per share. This represents a dividend yield of 6.8 per cent, based on AFG’s share price at 30 June 2019.
AFG Chief Executive Officer David Bailey said “AFG’s entry into the SME market through both its AFG Business platform and its investment in Thinktank is gaining momentum. We fully expect growth from both AFG Securities and AFG Commercial to provide additional contributions to earnings over the coming 12 months.
“We will continue to explore ways to improve customer experiences and improve the day to day efficiency of our brokers. We will continue our ongoing investment in technology and compliance as we believe innovative technology remains a critical area of focus as we transform the way AFG and our brokers improve the delivery of service and positive lending outcomes to Australian borrowers.
Connective merger
On 12 August 2019, AFG announced it had entered into a binding conditional implementation deed to merge with Connective Group Pty Ltd. The combined group will create a significant national mortgage distribution network, with more than 6,575 brokers and combined mortgage settlements of $76 billion in FY19. The $120 million transaction is expected to be EPS accretive (pre-synergies) in the first full financial year post integration.
“The merger demonstrates our ambitions in growing the business,” said Mr Bailey. “Whilst we remain confident about the value AFG stands to generate from our existing ongoing growth plans, we felt successfully participating in the competitive sale process absolutely aligned to our strategy. The prospect of complementing our existing business with the cultural fit and shared customer-focused philosophy of Connective represents a compelling opportunity for AFG shareholders, particularly where we can do so on an earnings accretive basis.
“The proposed transaction offers exposure to an alternative mortgage broker aggregation model with strong ongoing brand recognition whilst also providing access to a broader distribution channel. Upon completion, we anticipate Connective brokers will have access to AFG’s securitisation program and the opportunity to grow both asset finance and commercial lending through the combined network. Expanded distribution channels and broader diversification of products provide greater choice and value for both brokers and consumers.”
The transaction remains conditional upon a court validating the transaction as not being unlawful or able to be set aside, Connective shareholder approval, Australian Competition and Consumer Commission approval and, if required, AFG shareholder approval. If the conditions are satisfied, AFG anticipates completion of the merger in the second half of FY20.
Industry outlook
Looking ahead, AFG remains optimistic about the residential lending market and the important role brokers play in the home lending market. “The federal election outcome has removed much of the policy ambiguity clouding the industry and mapped out a pathway to deliver regulatory certainty for the business. With the full impact of the stimulus from the RBA and APRA’s amendments to serviceability assessments still to play out, from an AFG perspective the challenging lending landscape reinforces the company’s value proposition and ensures mortgage brokers remain the dominant channel for home loans.
“We will remain proactive in increasing awareness of the value brokers provide in delivering choice and competition to the nation’s home loan market,” said Mr Bailey. “Nevertheless, we fully expect regulatory and compliance requirements will increasingly be a factor for the Australian financial services industry over the short to medium term and the mortgage broking industry will need to adapt to the new environment.
“AFG’s customer-first approach and agile operating model presents enormous opportunities for our business and we enter financial year 2020 confident of another successful year as we deliver on our long-term strategy,” he concluded.
Clarification on APRA’s data on average housing loan figures
As we recently highlighted APRA only looks at loan data not household mortgage data in their analysis. They have now confirmed this again in a piece in their newly released APRA insight 01 2019.
As I have argued before, this myopic view of mortgage land helps to explains the excesses we have seen in the sector, and the lack of effective supervision.
The Quarterly Authorised Deposit-taking Institution Property Exposures (QPEX) statistical publication provides bank, credit union and building society aggregate statistics on commercial property exposures, residential property exposures and new residential loan approvals. The QPEX publication is published each quarter on APRA’s website.
In the most recent QPEX publication – March 2019 (issued in June 2019), APRA’s data (as seen in Chart 1) highlighted negative growth in housing lending over 2018. Between the year ending 31 March 2019 and 31 March 2018, there was a decrease of:
- 7.2 per cent in owner-occupied new housing loan approvals, and
- 14.9 per cent in new housing investment loans.
While there has been a decrease in housing loan approvals, the average loan size has continued to grow (as seen in Chart 2).
APRA Insight Chart 1 Clarification Article
APRA Insight Chart 2 Clarification article
Since the last QPEX (December 2018) was published, some commentators have misinterpreted APRA’s data in their analysis of the average balance of housing loans. They have assumed that an increase in the number of housing loans (as seen in Chart 2) meant an increase in the number of borrowers with a housing loan. This misinterpretation has resulted in a suggestion that the average balance of housing loans represents the level of indebtedness of Australian households. This conclusion cannot be drawn from the data.
The QPEX publication reports data from the ADI’s perspective (e.g. the value of loans and number of loan accounts on the ADI’s books) rather than the borrower’s perspective. The data is a simple average calculated as the total balance of all housing loans divided by the total number of housing loans extended by ADIs. In practice, a customer may have multiple housing loans, which means that the average balance of housing loans cannot be used to determine the average housing debt of each borrower. When APRA supervises an ADI, we do not consider the average loan size to be a reliable indicator of risk; rather the data is just one of many inputs to identify potential changes to the overall structure and size of loans.
APRA requires ADIs’ to maintain high lending standards to ensure they are effectively managing risk when issuing new housing loans to borrowers. When a borrower applies for a housing loan, APRA requires the ADI to assess the borrower’s ability to repay the loan, taking into account the borrower’s other debt commitments and everyday expenses. We set out our expectations for ADIs on lending standards in Prudential Practice Guide APG 223 Residential Mortgage Lending.
The article was first published in APRA Insight – Issue 1 2019.
Are The Mortgage Lending Taps About To Open? [Podcast]
Are The Mortgage Lending Taps About To Open?
HEM Westpac Win
The Federal Court has dismissed ASIC’s responsible lending case against Westpac and ordered the regulator to pay the bank’s costs. Via ABC.
I will make a separate post on the implications of this finding, in the light of ASIC stated intent to change the responsible lending laws, and the current hearings underway.
ASIC had alleged that Westpac breached responsible lending laws on up to 262,000 home loan approvals made using an automated process that relied on the Household Expenditure Measure benchmark, rather than using each applicant’s individually assessed living costs.
In September last year, Westpac agreed to pay a $35 million settlement to ASIC and admit that it breached responsible lending laws.
However, in November Justice Nye Perram sensationally rejected the settlement, finding that it was ambiguous and that the parties did not actually agree on what the responsible lending laws required and, therefore, how many loans were in breach and what the penalty should be.
Today, Justice Perram dismissed ASIC’s case against the bank, awarding costs against the regulator and leaving it negotiating with Westpac over the legal bill in reaching the failed settlement.
In the rejected settlement, Westpac had admitted its automated loan approval system used the Household Expenditure Measure (HEM) — a relatively low estimate of basic living expenses — to calculate potential borrowers’ living costs.
The bank used the HEM instead of actually evaluating the customers’ declared living expenses, and admitted this practice breached the National Consumer Credit Protection Act in certain circumstances.
However, there was an irreconcilable difference of opinion between ASIC and Westpac over when use of the HEM breached the law.
Out of 261,987 loans approved using the HEM benchmark, 211,937 involved customers declaring expenses that were lower than the HEM — that is, below the typical household’s spending on basic goods and services, and in the bottom 25 per cent of household spending on less essential items.
In these cases, use of the HEM actually reduced the amount of money the customer could borrow compared to what they declared.
In the roughly 50,000 cases where declared living expenses were higher than the HEM, use of the benchmark increased the loan amount the customer could receive.
However, in about 45,000 of these cases, both ASIC and Westpac agreed the use of the customers’ actual expenses rather than the HEM would have had no impact on whether they were deemed suitable for the loan.
That left 5,041 loans approved using the HEM that may not have been if actual declared expenses were used — they would have been referred to manual credit assessment instead.
This meant some of those customers might have been approved for home loans they potentially could not afford to repay without financial hardship.
In rejecting the settlement, Justice Perram said neither party could explain what would have happened after that manual loan assessment process, whether any of these 5,041 loans were actually unsuitable and whether any significant harm had been done to any or all of those customers
RBNZ Reveals Submissions on the New Proposed Mortgage Bond Standard
The New Zealand Reserve Bank has today published a summary of submissions on its consultation proposing a new mortgage bond standard aimed at supporting confidence and liquidity in New Zealand’s financial markets.
Submissions on the new proposed mortgage bond standard are broadly supportive of the introduction of a high grade residential mortgage backed securities framework for New Zealand – known as Residential Mortgage Obligations (RMO).
The new standard aims to reduce contingency risks for the Reserve Bank as a lender of last resort, ensuring financial intermediaries supply sufficient high quality and liquid assets. The standard also aims to provide issuers and investors with an additional funding and investment instrument, supporting the development of deeper markets.
Assistant Governor and General Manager of Economics, Financial Markets and Banking Christian Hawkesby said he was pleased with the range and depth of feedback received during the consultation process.
“The consultation process has been successful in delivering improvements to the initial concept for a new mortgage bond standard to support financial intermediation, liquidity management and funding in New Zealand’s markets.”
The feedback from issuers, investors and other market participants has been constructive and it will help inform the Reserve Bank’s final policy decision which is expected to be published by the end of 2019.
The Reserve Bank has decided
to update repo-eligibility conditions for RMBS in
the transition to the final RMO policy. This includes a new approval process
and requirement for a more detailed RMBS reporting template.
More information:
AFG and Connective announce merger
Australian Finance Group Ltd (ASX:AFG) has entered into a binding conditional implementation deed to merge with the mortgage aggregation business of Connective Group Pty Ltd. Connective has a network of over 3,600 brokers across five states with a panel of more than 50 lenders. The combined group will create a significant national mortgage distribution network, with more than 6,575 brokers and combined mortgage settlements of $76 billion in FY19.
Under the transaction, Connective Group Pty Ltd will receive $60 million in cash and 30,886,441 AFG shares valuing the acquisition at $120 million, with AFG to primarily fund the cash component through a new corporate debt facility. The transaction is expected to be EPS accretive (pre-synergies) in the first full financial year post integration and AFG is currently expected to maintain a dividend payout ratio of between 60 and 80 per cent.
AFG Chairman Mr Tony Gill said: “The merged business will have a significant national footprint in Australia’s $1.8 trillion home loan market. The delivery of competition and choice to the Australian lending market is at the core of our strategy. The expanded distribution channel and broader diversification of products the combined group can supply will provide greater choice for both brokers and consumers”.
AFG Chief Executive Officer David Bailey said: “AFG’s ongoing successful execution of our earnings diversification strategy in recent years has the business set up for strong cash flow generation and well positioned for growth. The prospect of complementing AFG’s existing business with the cultural fit and similar customer-focused philosophy of the Connective business is compelling.
“Competition is at the heart of both businesses with the non-major lenders representing 48 per cent of residential mortgage lodgements through AFG’s network in July 2019. Greater geographical portfolio diversification positions the merged group to further enhance choice and competition for consumers in all markets across Australia. Together with AFG’s existing growth plans, the opportunity presented by the sale process undertaken by Connective was absolutely aligned to our strategy.
“With extensive experience in the mortgage broking industry and proven management expertise, respected senior executives Glenn Lees and Mark Haron will continue to run Connective’s business and will retain a significant shareholding in the merged group. I look forward to working with Glenn, Mark, the Connective team and their network of brokers to create a driving force in competition in the Australian lending market.”
Connective CEO Glenn Lees said: “The coming together of the Connective and AFG teams is a natural fit. We share a strong set of values with the priority to always work on behalf of our brokers. I am incredibly proud of the business and, alongside the team, I look forward to continuing to drive the success of our brokers who positively impact the lives of thousands of Australian home buyers every year.
The transaction remains conditional upon a court validating the transaction as not being unlawful or able to be set aside (a non-customary condition), Connective Group Pty Ltd shareholder approval, approval from the Australian Competition and Consumer Commission and AFG Shareholder approval (if required), as well as other conditions typical of a transaction of this nature.
Mr Bailey said the transaction represents an opportunity for all AFG shareholders to benefit from the diversification and flexibility of the combined group.
“Connective brokers will have access to AFG’s securitisation program and the combined network also offers the opportunity to grow scale in both asset finance and commercial lending. Connective brings a contrasting revenue model based on fixed membership fees and offers services across residential, commercial and asset finance, as well as its own range of white label home loan products under the Connective Home Loans brand.”
“This should result in more lender and product opportunities for brokers, which in turn means more choice for their customers. This is particularly important for the self-employed and SME sectors of the market that are presently under banked.”
“When we also consider the possibilities for both cost and revenue synergies together with the leverage of the distribution potential, the transaction becomes one we are delighted with. We will continue to update the market as we reach key milestones in the process.”
On completion of the transaction, Mr Lees, a founding shareholder of Connective, will be offered the opportunity to join the board of AFG.
Further details of the key terms of the transaction are set out in the schedule.
AFG will keep the market informed of progress of satisfaction of the conditions precedent to the transaction in accordance with its ASX continuous disclosure obligations.