Mortgage Industry – Page 15 – Digital Finance Analytics (DFA) Blog

Brokers targeted in major litigation proceedings

Maurice Blackburn Lawyers has confirmed that it is preparing court proceedings against the major banks and brokers in regards to alleged breaches of the NCCP, according to The Adviser.

On Monday, media reports began circulating about rolling litigation being levelled at the major banks and brokers relating to alleged breaches of the National Consumer Credit Protection Act 2009 (NCCP Act).

The move follows on from questions asked by the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry over whether credit providers have adequate policies in place to ensure that they comply with “their obligations under the National Credit Act when offering broker-originated home loans to customers, insofar as those policies require them to make reasonable inquiries about the consumer’s requirements and objectives in relation to the credit contract, to make reasonable inquiries about the consumer’s financial situation, and to take reasonable steps to verify the consumer’s financial situation”.

Earlier this year, the royal commission was damning in its critique of the lenders’ policies when it came to ensuring customers can afford their home loans, with ANZ being called out for their “lack of processes in relation to the verification of a customer’s expenses”, and both Westpac and NAB revealing that there had been instances of their staff accepting falsified documentation for loans.

Further, Westpac recently admitted to breaches of responsible lending obligations when issuing home loans to customers and agreed to pay a $35 million civil penalty to resolve Federal Court proceedings.

While there has not been any systemic issues with arrears rates or housing affordability to date, Maurice Blackburn has suggested that the reliance on benchmarks, such as the Household Expenditure Measure, coupled with a softening property market and the “maturity of interest-only loans”, could “leave thousands in financial ruin, staring at the prospect of bankruptcy”.

Further, the law firm took aim at the mortgage broker market, relying on some controversial statistics from investment bank UBS regarding the third-party channel.

Court proceedings expected “in the coming months”

In a statement to The Adviser, Maurice Blackburn principal Josh Mennen confirmed that the law firm is pursuing legal action, stating: “A combination of banks’ relaxed lending standards and brokers’ involvement in loan sales has resulted in widespread debt over-commitment that threatens the stability of the broader economy. A survey of more than 900 home loans conducted by investment bank UBS found that around $500 billion worth of outstanding home loans are based on incorrect statements about incomes, assets, existing debts and/or expenses.

“This means 18 per cent of all outstanding Australian credit is based on inaccurate information, often caused by poor advice or misrepresentations by a mortgage broker eager to generate a sale commission.”

It should be noted that the figures quoted are in relation to a UBS report which asked borrowers about the accuracy of their home loan applications, and that representatives from several bodies — including ASIC — have called into question the weight of this response, arguing that “for many consumers the additional work and additional steps that banks and other lenders are taking to verify someone’s financial situation won’t be apparent to them”.

For example, ASIC’s Michael Saadat, senior executive leader for deposit takers, credit and insurers, said last year that “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”.

In his statement to The Adviser, Mr Mennen continued: “A staggering 30 per cent of loans surveyed had been issued based on understated living costs and around 15 per cent on understated other debts or overstated income.

“Add to the equation the fact that a huge proportion of mortgage loans issued over the past decade were ‘interest-only loans’. These loans have an initial period (usually five years) where only the interest on the loan is repaid. However, after the interest-only period ends and the principal is also paid down, the loan repayments can increase between 30–60 per cent.”

While the principal conceded that this “problem has been contained” by investors being able to sell their interest-only investment properties and therefore “often fortunate enough to sell the investment property at a gain or at least break even, clearing the mortgage without too much pain,” he suggested that the current environment in which interest rates are rising, while some property markets (such as Sydney and Melbourne) are declining, could be cause for concern.

“These factors, in combination with the maturity of interest-only loans, will further drive up distress sales in a stagnant or contracting market and may leave thousands in financial ruin, staring at the prospect of bankruptcy,” the lawyer said.

Realising a prediction from UBS analysts that the evidence of “mortgage mis-selling and irresponsible lending” found during the royal commission could result in the banks being subject to “very costly” class actions, Maurice Blackburn is now mounting legal cases against banks and/or brokers.

Mr Mennen said: “We believe that, as consumers losses are crystallised, many will have strong claims for compensation against their lender and/or mortgage broker for breaches of the National Consumer Credit Protection Act 2009 (NCCP Act) for failing to comply with responsible lending obligations including by not making reasonable inquiries and verifications about customers’ ability to repay the loan.

“We are acting for many such customers and are preparing to commence court proceedings against major banks in the coming months.”

It is not yet known which brokers or broker groups, if any, will be targeted in the legal action.

However, the corporate regulator has reiterated its view that lenders should be held accountable for breaches of responsible lending obligations, irrespective of whether the loan was broker-originated.

In its most recent Enforcement Outcomes report, which outlines the action the financial services regulator has taken over the first half of the calendar year, the Australian Securities and Investments Commission (ASIC) stressed that lenders should not offload blame to third parties when a loan is found to be in breach of responsible lending obligations.

What Have The Big Beasts In The Mortgage Industry To Fear?

Hot on the heels of Slater & Gordon launch of the ‘Get Your Super Back’ campaign, today I discussed the current state of the mortgage industry with Roger Brown a prime mover in the class action being planned against both major lenders and banking regulators. Looks like November will be an important check point.

Red Alert Lending Data

APRA release their quarterly property exposure lending stats for ADI’s today. There are some interesting data points, and some concerning trends and loosening of standards recently. I will focus on the new loan flows in this post.

First the rise in loans outside serviceability continues to rise, now 6% of major banks are in this category a record, reflecting first tightening of lending standards, but second also their willingness to break their own rules! This should be ringing alarms bells. APRA?

Foreign Banks are writing the greater share (relative percentage) of 80-90% LVR loans. Other lenders tracking lower.

Foreign Banks are lending more 90+ LVR loans in relative percentage terms.

New investor loans are moving a little higher for Credit Unions and Major Banks, suggesting a growth in volumes.

The share of interest only loans dropped below 20% but is now rising a little, as lenders seek to grow their books.

APRA says:

ADIs’ residential term loans to households were $1.62 trillion as at 30 June 2018. This is an increase of $86.6 billion (5.6 per cent) on 30 June 2017. Of these:

owner-occupied loans were $1,076.4 billion (66.4 per cent), an increase of $76.7 billion (7.7 per cent) from 30 June 2017; and

investor loans were $544.0 billion (33.6 per cent), an increase of $9.9 billion (1.9 per cent) from 30 June 2017.

Note: ‘Other ADIs’ are excluded from all figures.

ADIs with greater than $1 billion of residential term loans held 98.9 per cent of all such loans as at 30 June 2018. These ADIs reported 5.9 million loans totalling $1.60 trillion. Of these:

the average loan size was approximately $272,000, compared to $261,000 as at 30 June 2017 and

$461.3 billion (28.8 per cent) were interest-only loans.

New housing loan approvals

ADIs with greater than $1 billion of residential term loans approved $378.1 billion of new loans in the year ending 30 June 2018. This is a decrease of $5.9 billion (1.5 per cent) on the year ending 30 June 2017. Of these new loan approvals:

owner-occupied loan approvals were $260.6 billion (68.9 per cent), an increase of $10.6 billion (4.3 per cent) from the year ending 30 June 2017;
investment loan approvals were $117.5 billion (31.1 per cent), a decrease of $16.6 billion (12.4 per cent) from the year ending 30 June 2017:
$51.1 billion (13.5 per cent) had a loan-to-valuation ratio (LVR) greater than 80 per cent and less than or equal to 90 per cent, a decrease of $3.4 billion (6.2 per cent) from the year ending 30 June 2017;
$25.8 billion (6.8 per cent) had a LVR greater than 90 per cent, a decrease of $3.6 billion (12.2 per cent) from the year ending 30 June 2017; and
$61.2 billion (16.2 per cent) were interest-only loans, a decrease of $74.4 billion (54.9 per cent) from the year ending 30 June 2017.

On The Mortgage Industry Front Line

I had the chance to discuss the current state of the mortgage industry with Founder and CEO of Hashching Mandeep Sodhi.

Our conversation covered the recent underwriting tightening, mortgage prisoners, how brokers are helping borrowers navigate the new rules, and the rise of digital channels.

Kogan To Sell Mortgages

Online retailer Kogan is expanding into the finance sector, with home loan’s first off the rank in 2019 via Kogan Money offering products through agreements with Pepper Money and Adelaide Bank. Kogan Money Home Loans will be the first of a suite of products and services set to be rolled out under the new brand.

More evidence of the distribution of financial services enabled by digital.

The company’s active customer base is now 1,388,000, up by 433,000 or 45.3% and last month they posted a 277% rise in full year profit to $14.11 million, up more than $10 million from last year’s $3.74 million, driven by the pure play online retailer’s portfolio strategy. The result came as revenue jumped by $122.79 million or 42.4% to $412.31 million.

According to their announcement:

Kogan Money will focus on simplifying credit and financial services for all Australians and making them more affordable through digital efficiency.

Under the agreement with the two lenders, Adelaide Bank will make available competitively priced conforming or prime home loans. Pepper will make available competitive near prime, non-conforming or specialist, home loan.

Details such as the level of interest rates have not yet been released, but are expected much closer to the launch date.

David Shafer, executive director of Kogan.com, said the partnerships will help Australian homeowners.

Kogan is excited to partner with Adelaide Bank and Pepper to enable us to offer Aussies a range of competitively priced home loans available online.

Adelaide Bank has a long history of partnering with innovative brands and business that bring greater choice and diversity to consumers.

Pepper is the leader in alternative lending in Australia and, since 2001, has been helping Aussies who may not tick all the traditional boxes for home loans to get financing.

With well over a million active customers, Kogan.com is proud to be able to form partnerships like these that form a genuine win-win-win for both Adelaide Bank and Pepper, for Kogan’s shareholders, and most importantly, for Kogan.com customers.

Adelaide Bank’s head of strategic partnerships, Damian Percy, said, Kogan.com is a leader in the online retail space and Adelaide Bank has a long tradition of partnering with like-minded businesses to bring greater choice and competition to the Australian home loan market.

Together we believe we can make a real difference to the emerging community of Australian online shoppers by delivering simple, great value housing solutions through Kogan Money.

Mario Rehayem, CEO Australia at Pepper Money, said, Pepper Money is delighted to be partnering with Kogan.com on the Kogan Money Home loans opportunity.

They are a company who clearly anticipates their customer needs and looks for innovative ways to solve them.

Through our experience and depth of product offerings, we look forward to helping more of their customers succeed in finding the home loan finance they need.

Investment Lending Crashes

APRA has released their monthly banking stats to the end of July 2018 today. As expected from our survey data, gross investment mortgage lending balances fell last month. Expect more ahead.

Total loans outstanding for all residential property – owner occupied and investment rose by 0.24% to $1.64 trillion, which would be an annual rate of 2.9%. Within that lending for owner occupation rose by 0.38% to $1.09 trillion while lending for investment loans fell 0.25% to $557.4 billion. As a result the proportion of loans for investment purposes fell to 33.9%, the lowest for years.

The monthly movements underscore the changes, (and remember the August 2017 drop was a blip created by loan reclassification at CBA from their residential books).

The monthly portfolio movements by lender really tell the story, with investor loan balances at Westpac, CBA and ANZ all falling, while NAB grew just a tad. Macquarie, HSBC. Bendigo Bank and Bank of Queensland grew their books, highlighting a shift towards some of the smaller lenders. Suncorp balances fell a little too.

The overall portfolios by lender continue to show CBA the largest owner occupied lender, and Westpac the largest investor lender.

Analysis of the 12 month portfolio movements also reveals the some of the smaller players, and Macquarie have grown their portfolios faster than the majors, and Westpac had the strongest growth among the big four. Market growth continues to fall, at 0.85%.

The tighter credit conditions are now biting – finally – which explains the recent spate of ultra-low rates on offer to lower risk new borrowers and those seeking to refinance who fall within the new criteria. But many are excluded, prisoners of higher rates as they do not fall within these now tighter (and rightly so) guidelines.

There will be howls of pain from the sector and calls to relax lending standards to “save” the economy, but these must be resisted at all costs. We must not return to the over lax lending of past days as this will simply build even bigger risks later. Time I fear to face the music.

Anyone now game enough to forecast a rise in home prices? I suspect not. We will see what the RBA data tells us about the non-bank sector, their data just came out. We will post on this soon….

I will be watching for a slowing in owner occupied growth, as confidence and sentiment ebbs away.

RN Does The Refinance Problem

It’s being described as a “mortgage mirage”. It’s an offer from the bank that looks too good to be true and, as it turns out, for many it is; via ABC.

“About 40 per cent of people who tried to refinance were unable to do so,” Digital Finance Analytics principal Martin North said. “If you go back a year it was 5 per cent.”

Data from DFA and investment bank UBS show there has been a spike in the number of failed mortgage refinancing applications.

The reason this is occurring is that, while those applicants cleared the bar for their original loans, that bar has now become a lot higher, following years of banking reform and the fallout from the banking royal commission.

So, now, they simply don’t qualify for the same amount of debt they once did.

“When people took out the loans there was a lot of widespread fudging of the numbers,” chief investment officer with funds management firm, Forager Funds, Steve Johnson said.

“People were getting loans on the basis of a four person family having $30,000 a year of living costs living in Sydney.

“And it’s quite clearly impossible to live in Sydney on that much money a year.

“The biggest issue is that people have borrowed too much money relative to their income and that is a very difficult problem to unwind.”

But, Mr Johnson said, it is not just the banks that have messed up.

Thousands of Australians are either stuck with their current bank or need to move to a “shadow lender” due to tighter lending rules.
“I think the banks have done a lot of unconscionable things, and I think credit has been far too easy to come by, but there is also an element of personal responsibility here in terms of people saying, ‘well, the bank offered to lend me $1.5 million but I don’t really think that is a sensible amount of money for me to borrow’.”

Mr North has calculated there are now close to one million Australians on the edge of mortgage stress – defined by Digital Finance Analytics as borrowers who are going further into debt or eating into savings because their expenses are greater than their income.

Given that, it’s understandable that when the big four banks advertise discounted mortgage rates, financially stressed-out households flock to the banks to bag a better deal.

“And then they’re stuck, because suddenly they find that that wonderfully alluring low rate that’s being hung out to them is inaccessible,” Mr North said.

He calls these borrowers “mortgage prisoners” because they go home empty-handed, trapped in a financial squeeze.

Royal commission behind loan approval lull

While Forager Funds’ Steve Johnson sympathises with these borrowers, he said he is not in the least bit surprised there has been a recent spike in the number of loan refinancing rejections.

“It’s a perfectly natural consequence of more conservative lending standards,” he observed.

“You just can’t have one of those things without the other.”
Mr Johnson said the banking royal commission is behind the loan approval lull.

“It has accelerated it, and made it a lot more dramatic than it otherwise would have been,” he argued.

But it seems the royal commission has also inspired aggressive sales tactics and interest rate discounting from the banks – for the right customers.

“The banks are seeking out low risk, low LVR [loan to value ratio] borrowers, and are trying to hook them” Mr North said.

“Because without them they are pretty much out of profits.”

Big four play down 40 per cent figure

CBA, NAB and ANZ confirmed to RN Breakfast they had reached out to new customers with lower rates.

But how many of the moths drawn to this low interest rate light have been burned in the process by having their applications rejected?

CBA and NAB say they don’t have any data on that, but questioned the accuracy of Mr North’s figures.

ANZ did appear to have such a database and said: “We have seen a small increase in the number of unsuccessful applications for internal refinance since March, but it is much lower than the 40 per cent figure that has been referred to.”

Westpac responded to the ABC by saying that, “No matter the market appetite, we take our responsible lending obligations seriously, ensuring good outcomes for customers”.

Mr North said he sympathised with borrowers who have become ineligible for lower rate loans.

“The typical saving could be up to $150 a month,” he observed.

“They see this mirage of a lower rate opportunity and then it’s snatched away from them when they don’t actually meet the standards.”

Concerns for the rest of the economy

Mr Johnson wanted to use the new data to highlight how serious Australia’s record level of personal debt has become.

“We are in a position now where all those people owe extraordinary amounts of money to the bank and it’s not an easy situation to unwind or extract ourselves from,” he said.

Independent banking analyst Brett Le Mesurier warned there are also important implications for the economy. “There are certainly signs of deterioration,” he said.

“I suspect the issue is not so much their ability to service those loans, it’s more the other spending they don’t make anymore and the broader impact that has on the economy.

“I therefore expect that to push downward pressure on economic growth.”

As for the extent of Australian home loan stress?

The nation’s biggest lender said it simply isn’t an issue.

The Commonwealth Bank said it has seen a slight uptick in 90-day home loan arrears.

But, as noted in its recent results, the uptick in arrears rates reflected “pockets of stress as some households experienced difficulties with rising essential costs and limited income growth”.

ABC News Does The Refinance Problem

A brief segment today where I discussed our latest analysis, and expectations or the market ahead. Going down…!

ASIC publishes a review of reverse mortgage lending

ASIC’s review of the reverse mortgage industry highlights that some taking a reverse mortgage could face financial difficulty later in life. This despite the fact that borrowers can never owe the bank more than the value of their property, and can remain in their home until they pass away or decide to move out

Thus, while this type of finance may assist older home owners (70% aged 55-85 own their own home), they face the dual risks of compounding effects on the original loan value as interest is rolled up…

… and significant risks should home prices fall, leading to loss of all or most capital. 63% of borrowers may end up with less equity than the average upfront cost of aged care for one person by the time they reach 84.

Plus there is limited competition, as just 2 credit licensees wrote 80% of the dollar value of new loans from 2013 to 2017.

A review by ASIC has found that reverse mortgages are allowing older Australians to achieve their immediate financial goals – improving their lifestyles in retirement – but longer-term challenges exist.

For older Australians who own their home with few other assets, a reverse mortgage can allow them to draw on the wealth locked up in their homes, while they continue to live in their property.

ASIC reviewed data on 17,000 reverse mortgages, 111 consumer loan files, lender policies, procedures, and complaints. We also commissioned in-depth interviews with 30 borrowers and consulted over 30 industry and consumer stakeholders.

The review found borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact their ability to afford their possible future needs. Lenders have a clear role to play here and need to do more: for nearly all of the loan files we reviewed, the borrower’s long term needs or financial objectives were not adequately documented.

Importantly, under legal protections in place since 2012, borrowers can never owe the bank more than the value of their property, and can remain in their home until they pass away or decide to move out. However, depending on when a borrower obtains their loan, how much they borrow, and economic conditions (property prices and interest rates), they may not have enough equity remaining in the home for longer term needs (e.g. aged care).

ASIC Deputy Chair Peter Kell said “Reverse mortgage products can help many Australians achieve a better quality of life in retirement.”

“But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form.”

ASIC’s report also finds that there is an opportunity for lenders to reduce the risk of elder abuse. Under the new Code of Banking Practice, recently approved by ASIC, banks will be required to take extra care with customers who may be vulnerable, including those who are experiencing elder abuse.

Consumers also had limited choices for finding a reverse mortgage. Several providers withdrew from the market after the global financial crisis. From 2013 to 2017, two credit licensees provided 80% of the dollar value of new loans from 2013 to 2017.

Background

Reverse mortgages are a credit product that allows older Australians to borrow using the equity in their home. The loan does not need to be repaid until a later time, typically when the borrower has vacated the property or passed away. They are a more expensive form of credit compared to standard variable owner occupier home loans; the interest rates are typically 2% higher and, as there are no repayments required, interest compounds.

Consumer demand for reverse mortgages has grown gradually since the global financial crisis, with the total exposure of ADIs to reverse mortgages increasing from $1.3 billion in March 2008 to $2.5 billion by December 2017.

ASIC commenced a review of lending practices and consumer outcomes in the reverse mortgage market to proactively examine issues that might emerge for older Australians.

As part of this review, we evaluated the effectiveness of enhanced responsible lending obligations for reverse mortgages which were introduced five years ago into the National Consumer Credit Protection Act 2009 (National Credit Act).

This review examined five brands, who collectively lent 99% of the dollar value of approved reverse mortgage loans in 2013-17. These brands were: Bankwest, Commonwealth Bank, Heartland Seniors Finance, Macquarie Bank and Westpac (comprising St George Bank, the Bank of Melbourne and BankSA). As of late 2017, Macquarie Bank and Westpac are no longer providing new reverse mortgages.

This project forms part of ASIC’s broader work for older Australians to help bring about positive changes for these consumers in credit and financial services: see REP 537 Building seniors’ financial capability report 2017 and REP 550 ASIC’s work for older Australians.

ASIC’s MoneySmart website has information for consumers about reverse mortgages. Consumers can also use MoneySmart’s reverse mortgage calculator to see how a reverse mortgage can impact the equity in their home.