Tag: Mortgage Industry

YBR overhauls company, CEO to step down

Yellow Brick Road Holdings Limited has announced that it is to create a “much simpler business” by disposing of its head office wealth business functions and focusing on mortgages, which will see CEO Frank Ganis step down from his role. Via The Adviser.

In an update to the ASX, YBR revealed a new business strategy which would not include wealth advisory – but instead focus on mortgages, both through distribution and servicing, as its mortgage businesses “offer significant leverage to the market”.

Under the new structure, YBR would retain its franchise network (which currently consists of 115 branches and more than 140 accredited business writers) that has an underlying mortgage book of approximately $7.6 billion.

According to the company, the present value of the net trail commission receivable as of the end of the calendar year was around $15.7 million.

YBR will also retain Vow Financial aggregation, which reportedly has a network of 505 broker firms with more than 1,000 accredited brokers origination around $785 million in mortgage settlements per month.

The underlying mortgage book is reportedly around $39.8 billion with net trail commission receivable at $13.6 million.

The new YBR group will also retain its mortgage servicing arm, via the manufacture and servicing of mortgage originations through its existing Resi Mortgage Corporation business.

The Resi and Loan Avenue brands under this business have a current underlying mortgage book of around $1.8 billion and net trail receivable of $18.5 million, according to YBR.

The Resi sales team currently sources and services the mortgage distribution networks and mortgage funding entities and will reportedly undertake the credit function for the YBR group’s intended securitisation programme, when that comes to fruition.

This securitisation programme will be taken “in joint venture with a major US alternative asset manager” and intends to manufacture and fund mortgage products for YBR’s in-house and third-party distribution outlets.

According to YBR, the joint venture is “in the later stages of final due diligence and negotiation and documentation in this long and complex process with multiple parties”.

Speaking of the Resi business, YBR said: “This existing business allows us to more closely manage and track mortgage application and approval times and outcomes and assist in directing flow to the most appropriate funding sources and is an essential component of the mortgage value chain, particularly in the post Hayne Royal Commission period. It allows us to bring our distribution partners closer to the process of approving loans.”

Wealth business to be ‘disposed of, outsourced, or otherwise restructured’

In order to “concentrate its efforts” as a mortgage distribution, servicing and manufacturing group – and “reduce significantly the cost-to-income ratio of the business” – the YBR board has reportedly decided to commence a process to “dispose of,outsource or otherwise restructure the head office wealth business functions”.

This will therefore result in “a headcount reduction to the business overall”.

While YBR franchisees will still be able to distribute wealth products and give wealth advice to their existing and future clients, it is intended that this would be done under a separate Australian Financial Services Licence (AFSL) with one or more third parties.

“Going forward, the cost of maintaining YBR’s AFSL and associated compliance functions and liabilities would then no longer be borne by the YBR Group.

“The restructure of the wealth business is expected to significantly reduce our cost base allowing us to run a leaner and more cost-effective organisation,” the update reads.

However, YBR said that “there is no certainty that the securitisation initiative or the wealth restructure process will result in a definitive proposal or transaction, however YBR will continue to implement the operational improvements and the restructure of key operational roles.”

Given the changes, Group CEO Frank Ganis will step down from his role to take up a part-time position where he will “consult to the group on a number of initiatives, including “building [its] securitisation programme and funding partnerships, growing [its] brands, continue operational and customer service improvements, and industry advocacy”.

Executive chairman Mark Bouris will oversee the transition of the YBR Group to the “new, streamlined business structure”.

The move comes following a difficult year for the brokerage brand, with its unqualified audit-reviewed half-year report for the six months to 31 December 2018, reporting a net loss after tax (NLAT) of $34.15 million.

However, the company’s most recent financial results for the quarter ending 31 March 2019 (3Q19), recorded an operating cash surplus of $40,000, a $110,000 increase from a deficit of $70,000 in the previous quarter.

The increase was partly driven by a 5 per cent reduction in its operating cash outflows (excluding its branch and broker share of revenue), which declined from $8.4 million to $8 million.

The improvement in YBR’s cash position was also reported against a backdrop of falling home lending volumes, with settlements declining by 20 per cent in 3Q19, from $3.1 billion to $2.5 billion.

The group stated that its lending performance was “impacted by regulatory factors and the royal commission into banking and financial services”.

Its decision to offload its wealth business follows a spate of similar divestments, with several major banks – including CBA and ANZ – announcing in the past year that they would offload their wealth businesses and run “more simplified” banking businesses.

Not All Post Codes Are Created Equal In Mortgage Applications

DFA has developed a risk scoring system, which combines information from lenders, and households to provide an indicator of the relative likelihood of an applicant successfully obtaining a mortgage, within a specific post code, and the relative weighting in terms of loan-to-value (LVR) and other factors which will be taken into account.

Additional factors will also include the mix between high-rise and low-rise development (some banks have blacklisted certain development types in some suburbs), and recent home price moves.

On the DFA Blacklist scale, the higher the score, the greater the difficulty in obtaining finance. In practice, this also reflects the relative risks of mortgage stress and default, and is also subject to an economic overlay in terms of relative economic performance and household finances. This was featured in an ABC piece last week. It is not predicative, rather it reflects current behaviour and past risk.

While individual household scores will vary, an average post code score above 15 represent higher than normal risk, meaning many lenders will require a larger deposit, or may prefer not to lend at all. The higher the score, the greater the difficulty in getting finance.

Since I have received many requests for more information, today we are releasing more complete mapping, which is up to the end of April 2019.

The maps are presented in native high resolution. The blue shades are low scoring post codes. Red shows highest scores.

Western Australia, as represented by the area around Perth is by far the most blacklisted region.

In comparison Sydney scores are lower, though with some hot spots.

Melbourne also shows a few hot spots.

Adelaide has some risk areas.

Brisbane and the Gold Coast are fairing quite well (but again, with some hot spots).

The Sunshine Coast is more problematical.

The ACT scored pretty low.

While Darwin was more problematic, reflecting the significant falls in values in recent years, and the economic conditions there.

To emphasise the point, individual lenders and borrowers circumstances will vary, but our analysis does highlight that not all post codes are born equally when it comes to mortgage applications.

ANZ 1H19 Result Points To Subdued Credit Growth, Intense Competition And Increased Compliance Costs

ANZ reported their 1H19 results today. Their “shrink to greatness strategy” did work to an extent, but their results were flattered by higher than expected Institutional performance, which offset the pressure on the Australian retail bank from lower mortgage growth and margins, and higher customer remediation costs. They are well capitalised, which is a good thing, given the higher and building mortgage delinquency. They foresee tough times ahead. Tricky times to be a banker.

The results are also muddied by the many business exits and restatements and a significant reduction in staff. But among the big four, they are probably the best placed, but will be hit if mortgage delinquency continues to rise (as we suspect they will) as the Australian economy stalls.

They announced a Statutory Profit after tax for the Half Year ended 31 March 2019 of $3.17 billion, down 5% on the prior comparable period.

Cash Profit for its continuing operations was $3.56 billion, up 2%. The return on equity was 12% compared with 11.9% 1H18, while the return on average assets fell 2 basis points from 0.79% in 1H18 to 0.77% 1H19.

Institutional delivered a higher than expected income (but that may not be sustainable), while other sectors were under more pressure. Institutional profit was up 33%.

Slower credit demand put pressure on the retail bank, through lower volume growth and reduced fee income. Australian revenue was down 6% as home loan repricing benefit was more than offset by higher funding, increased competition, discounts and regulatory changes.

Net interest margin (continuing operations), dropped 2 basis points from 2H18, impacted by funding and asset mix, and markets. Customer remediation added 2 basis points, weirdly. Management, in their briefing said that underlying NIM pressures will persist into 2H19.

ANZ’s programme of asset sales and restructure benefited the business, and staff (FTE) fell 5% from 41,580 1H18 to 39,359 1H19. Costs were cut as a result, reducing the cost of running the bank by approximately $300 million and they absorbed ~$550m inflation.

However the customer remediation programme is up to $926m ($657m post tax) since 1H17, $698m on Balance Sheet at 31 March 2019. They are currently resolving issues with more than 2.6m customers across retail a commercial lines.

The total provision charge for the half was $393 million, down 4% from this time last year. The Group Loss rate decreased marginally to 13bps for the half (from 14bps in the first half of 2018). New Impaired assets declined to $890 million, down 8% compared to this time last year with Gross Impaired Assets broadly flat over the same period.

Australian gross impairments have rise from a low of March 2018, offset by lower provisions from Institutional.

Mortgage arrears in Australia rose quite significantly, despite below system mortgage growth by ANZ. In their briefing, ANZ said its Australian mortgage book will shrink further 2H19, because their strategies which are aimed at improving momentum in this business will take time to flow through.

30 day and 90 delinquencies (missed payments) are rising, with property investors higher than owner occupied borrowers. 90+ day past due is at 100 basis point compared with 89 basis points prior, as well as the hike in 30+ day past due.

WA delinquency comprise 30% of 90 day plus delinquency, despite being just 13% of the portfolio, and 65% of losses come from WA. Whereas NSW/ACT makes up 32% of the portfolio but 23% of 90 day plus past due.

The NSW “dynamic LVR” includes 8.2% of loans above 90% (but note they say “valuations updated to February 2019 where available”, so this is understated in my view – what share of the portfolio is marked to market?. Given falling prices in NSW, more loans will drop into negative equity. And remember this is LOANS not HOUSEHOLDS. Losses in Australian mortgages housing was 4 basis points in 1H19, up from 2 basis points prior.

In the briefing, they attributed the rise in mortgage delinquencies to:

  • the shift from interest-only to principal and interest loans, demanding higher repayments
  • subdued wage growth putting more financial pressure on households
  • the trend in falling house prices
  • a longer cure time-frame, as delinquencies are now taking a longer time to cure thanks to extended property sale time-frames
  • the “denominator effect” of lower loan growth and shrinking mortgage book

None of this is going to change anytime soon.

Switching from IO to PI will continue.

ANZ’s Common Equity Tier 1 Capital Ratio increased to 11.5%, up 45 basis points (bps). Return on Equity increased 13 bps to 12.0% with Cash Earnings per Share up 5% to 124.8 cents.

The Group’s funding and liquidity position remained strong with the Liquidity Coverage Ratio at 137% and Net Stable Funding Ratio at 115%.

The Interim Dividend is 80 cents per share, fully franked. This equates to $2.27 billion to be paid to shareholders. The 3.7% reduction in shares due to the completion of the $3 billion buy-back assisted.

The CEO said :

Retail banking in Australia will remain under pressure for the foreseeable future with subdued credit growth, intense competition and increased compliance costs impacting earnings.

“New Zealand is performing well, however it is starting to share similar characteristics with the Australian market due to strong competition and a slowing Auckland housing market. The major concern in New Zealand remains the impact of the proposed capital changes on the broader economy.

“Institutional banking is performing well and positioned to provide positive earnings diversification, which will partially offset the headwinds in other parts of the Group

Under The Debt Volcano

I discuss how Ireland navigated their financial crisis a decade ago with Eddie Hobbs, the financial writer, adviser and. broadcaster, who lived through the crash and commented on the events in Ireland.

He wrote and presented a programme on state broadcaster RTE entitled Rip-Off Republic in 2005.

Specifically we discuss how Australia should be preparing…. now….

Eddie’s earlier show:

Live Cross On Today – The Property Downturn

I was asked to comment on the property downturn and those being impacted by extended contracts. The time allocated was reduced (the previous segment was a Trump impersonator…!!!) which tells you something about relative priorities.

This shows the set-up, the cross, and the packing up. Lots of waiting around.

Home loan activity falls to lowest in five years – AFG

AFG provides fresh evidence of the fragile state of Australia’s home loan market emerged today, with new figures revealing national lending activity has slumped to the lowest levels in five years.

Whilst its myopic in one sense as it tracks business via AFG, it does provide further evidence of the slowing pace.

The AFG Mortgage Index and Competition Index released today showed lending volumes across Australia in the first three months of 2019 dropped 10 per cent on the previous quarter. Volumes in the March quarter were 15 per cent lower than the same period last year.

The 23,049 loans lodged during the quarter represented the lowest number in six years, while the $11.6 billion volume was the lowest quarterly figure since 2014.

AFG Chief Executive Officer David Bailey said “Today’s numbers provide stark evidence that the lending environment has significantly deteriorated. It’s a wake-up call for policymakers. The softening of the residential market across the country is a real concern, with Sydney and Melbourne driving the downturn and some states enduring a prolonged period of falling activity.

“Despite moves by regulators to encourage activity, investment lending remains at an all-time low of 26 per cent amid the well- documented concerns around property values, particularly on the eastern seaboard.

“Today’s data confirms we have reached a critical time in the housing market cycle and we would urge policy makers to tread carefully in any regulatory responses flowing from the Royal Commission. This is a time for considered policy formulation that considers the full potential impact on the lending market. It is clear, the broader implications for the Australian economy are huge if we get it wrong.

“The volume of loans written in WA for the quarter of just over $1.3 billion represents the lowest volume seen in WA since the inception of the AFG Mortgage Index. Whilst there has been some talk of WA moving into a brighter resources-led period of sunshine, it is clear the local economy needs broader stimulus.”

The tight lending market and falling house prices have contributed to a decline in NSW volumes of almost 20 per cent on the same quarter in 2018. Victoria is down 16 per cent over the same period.

All other states are also much lower than the same time last year. The only lift in volume over the quarter was seen in the Northern Territory, with an increase in the average loan size and a decrease in Loan to Value Ratios.

Following the relaxation of APRA-imposed caps on Interest Only (IO) lending, AFG noted a small lift in IO lending driven by the major lenders.

Four years ago, fuelled largely by strong investor demand, Interest Only loans accounted for around 60 per cent of all loans written. Now, with investor loans accounting for a quarter of new business, Interest Only loans account for just 19 per cent of lodgements.

The breakdown of mortgages between major lenders – the ‘big four’ banks and their affiliated brands – and non-majors highlights the crucial role mortgage brokers play in delivering competition to the home loan sector.

The AFG Index showed the market share of non-majors has now been locked in above 40 per cent for more than a year despite a marginal increase for the majors to 58.6 per cent of total lodgements.

Mr Bailey said “The value mortgage brokers deliver by facilitating a competitive lending environment is most starkly shown by the ongoing decline in the market share of the major banks, which peaked in Q3 of 2013 at 78.2 per cent. Outside of the mortgage broking channel, the majors have control and dominate the market. The distribution capability provided by mortgage brokers enables the country’s non-major lenders to compete.

“With the sole exception of First Home Buyers, who remain the last bastion of major bank lending, the growth in non-major lending has been broadly uniform across all other customer types.”

Major lenders are ahead on fixed-rate loans, with a steady increase across the quarter, leaving four out of five homebuyers that chose the certainty of fixing their interest rates doing so with a major lender.

Examination of the overall volumes going to the major bank reveals the big losers over the past six months have been ANZ and NAB. NAB’s share has halved over the past six months to now be as low as five per cent.

The Westpac stable of brands emerged as big winners, as has Bankwest – whose renewed focus on broker and customer service has paid strong dividends in Western Australia. Bankwest accounts for more than one in every five WA originations. Together with CBA, Bankwest has a stranglehold on more than 35 per cent of all loans written in the State.

More Mortgage Rate Tweaks

Three banks – two non-major and one ‘big four’ – have announced changes to their loan offerings, several of which cater to customers with a higher LVR, via Australian Broker.

Both Macquarie and ME Bank rolled out home loan rate changes for new customers, while ANZ has implemented changes to its interest-only lending criteria.

“Just when we thought the banks were finding the kitchen a little too hot, we have seen ANZ and ME Bank move to encourage borrowers at the higher end of the LVR scale,” said Canstar’s group executive of financial services, Steve Mickenbecker.

At Macquarie, for both P&I and interest only repayment, owner occupier fixed rate loans will decrease by 0.09% and 0.20% and investment fixed rate loans will decrease by 0.05% and 0.10% for 1-, 2- and 3-year loans.

At ME Bank, owner occupier variable rate loans with principal repayments, for an LVR of more than 90%, will decrease by 0.80%. Investment variable rate loans with P&I repayments, for an LVR of 80% to 90%, will decrease by 0.27%.

This means that ME Bank’s P&I home loan will decrease from 5.26% to 4.46%, potentially saving borrowers tens of thousands in interest over the life of a longer-term loan.

“The reduction for owner occupiers at the very low deposit end of the market sounds bullish, but the reduction leaves ME mid range in the market,” said Mickenbecker.

The changes at both non-major banks went into effect on 15 March 2019.

ANZ announced that, as of 25 March 2019, the interest-only loan term will increase to 10 years, up from five. Additionally, interest-only loans will have a maximum LVR of 90%, up from the current 80% LVR.

According to Mickenbecker, through raising the LVR by 10%, ANZ is responding to its “over-reaction to the APRA tightening and is now moving to restore market share in the slow investor market.”

He continued, “Lengthening the interest only period will provide attractive differentiation in the market, but also give housing prices and wages time to recover before repayments have to increase to accommodate principal reductions. This should also improve customer retention rates.”

ANZ’s IO Loan Changes Have Risk Written All Over

ANZ have announced a new flavour of interest only loans.  They said that from 25th March 2019 they will increase the maximum Loan to Value Ratio of Interest Only Loans from 80% to 90%, and increase the maximum term from 5 years to 10 years.

These loans will be marketed only for high-income professionals with stable jobs. And timing means people could transact before the election in May (probably) and so lock in tax benefits relating to negative gearing, which Labor are going to remove for existing property purchased after a certain data, TBA.

ANZ says their response to APRA’s responsible Lending guidelines from 2017 was to manage down the growth of IO loans. But they have decided to increase their focus on the investor market, wiliest ensuring they remain in line with  the APRA requirements.

Just to remind ANZ, the key APRA points are :

  1. Take 80% of rental streams as income to allow for vacancy rates
  2. Assess the risk on a principal and interest rate loan basis
  3. Ensure the borrower has firm plans to repay the capital
  4. Ensure adequate validation of income and expenditure
  5. Ignore any tax breaks or benefits, so asses on a pre-tax basis.

ANZ says these changes will apply to new loans, either fixed or variable interest rate.

The LVR limit is inclusive of the Lenders Mortgage Insurance Premium

For Owner Occupier Home Loan products: Interest Only term cannot exceed a maximum 5 years per application OR 5 years in total since the last full credit critical application.

For Residential Investment Home Loan products: Interest Only term cannot exceed a maximum 10 years per application OR 10 years in total since the last full credit critical application.

For servicing, the customer is assessed based on their ability to repay the loan over 20 years P&I.  And we understand these new loans are assessed at a minimum floor rate of 8.25%, which is a very high hurdle to cross.

These are not available to Owner Occupied Borrowers.

Two comments, first this is to be expected, as ANZ has seen their mortgage portfolio growth drop away, and they are desperate to write business. They are trying to target a specific customer segment, and some who are currently facing a loan reset may be rescued.

But then, our modelling suggests only a very small cohort who might be eligible, and we expect other lenders to react, so they will lift competition for that small segment.

Talking of reaction, we think APRA should step in to ban loans of this duration, but they probably won’t, and the RBA might even welcome the move behind the scenes as generating a rise in credit.

But frankly, this is just one more of those unnatural acts I keep talking about from actors who are trying to keep the property bubble alive. But potential investors should realise that prices are likely to keep falling, rental streams are diminishing, especially in Sydney, and a repayment plan over 20 years, will require higher monthly repayments down the track. This has high risk written all over it!