Tag: Mortgage Industry

The Rise Of “Near Prime”

Following its expansion into the near-prime space, Bluestone, the non-bank lender has seen monthly application and settlement volumes double in less than six months, via Australian Broker.

July saw record applications and settlements for Bluestone in both Australia and New Zealand. The firm also reported a 96% increase in application volume and a 153% in settlements during the April-July period.

Near prime lending caters to borrowers who fall just short of qualifying for a prime loan. The firm sees massive opportunities in this as banks tightening lending criteria more and more borrowers, leaving more customers in this situation.

“It’s all well and good for us to move into near prime, but if we’re not keeping our DNA intact, that is, our high-touch service and the enthusiastic way we work with our brokers, it doesn’t hit the mark,” said Royden D’Vaz, Bluestone national head of sales and marketing.

“That’s why we’ve increased our staff numbers in our sales, lending and settlements teams to cater for the increased volumes, ” D’Vaz added.

In terms of market penetration, Bluestone notched a 55% increase in self-employed loans and a 115% increase in near prime loans for fiscal year 2017-2018.

“In addition to the growth in volumes, we have so many exciting things in the pipeline, with our team growing and a significant number of projects underway which will facilitate our growth into the future,” added Bluestone CEO, Campbell Smyth.

Bluestone’s move into near-prime follows its acquisition by U.S. private investment firm Cerberus Capital Management in February. The following month, Bluestone cut its interest rates by 75 to 105 basis points across its Crystal Blue products.

Estimating Future Home Lending Growth

One of my clients asked me to share my thoughts on the trajectory of future home loan growth, in the light of the current market dynamics. We run a series on this in our Core Market Model, and it is updated each time we get data from our surveys, APRA, ABS or RBA.

So I included the data from the ABS in terms of lending flows, factored in deep discounting and rate cuts from some lenders (like ANZ) and the ability of some lenders, like Macquarie, HSBC and some Credit Unions, to fly higher than the APRA imposed cap on investor loan growth.

In fact we run three scenarios, a base case, which we will discuss in a moment, an aggressive growth case, and a lower bounds case. We have assumed no move in the RBA cash rate over the next 18 months, a continued fall in the pressure on the BBSW rate, and some continued momentum from first time buyers.  We also factored in the ongoing shift from interest only loans to principal and interest loans, and appetite for finance from some household sectors, especially those seeking to refinance, including those seeking to assist their offspring to buy via the banks of Mum and Dad.  Our model has been tracking close to the RBA data in recent months, so we are pretty confident about the trends.  But it is only a projection, and it will be wrong!

The first chart shows the overall value of housing loan portfolios, split between owner occupied and investor loans. The astonishing momentum in investor lending up until mid 2017, when APRA’s new regulations kicked in, eases back, and the current growth in investor loans portfolios is pretty flat. In fact we expect a small rise in the months ahead, as some non-bank lenders have to compete harder with the APRA “approved” lenders who can go above the cap.  Remember though lenders still have tighter underwriting standards than before, so there is not going to be a massive resurgence in my view, at least until the Royal Commission reports.  Owner occupied loans will continue to lift, as first time buyers are still active, and attracted by the lower property prices.

Refinancing of existing loans does continue, though some are having difficulty finding a loan, as we discussed yesterday.

Turning to the percentage change, our base case is for a slow rise in investor lending and a slow fall in owner occupied loans, with an overall growth still well above inflation at between 5-6%.

This suggests that the lenders will need to compete hard for business which is available, continue with more rigorous loan assessments and manage tighter margins as a result.

As a result, we think property prices will continue to go lower through 2019, but does not as yet signal a crash.

This could all change if funding costs go higher, or the banks get slugged with more costs relating to poor practice, or even face criminal cases relating to charging fees for no service, or making unsuitable loans to borrowers.

As a result there is significantly more downside risk than upside gain at the moment.  Our worst case scenario actually sees the overall lending portfolio shrink. If this were to happen, then all bets are off, and we must expect significantly more property price falls through 2019. Actually we do not think, as some are saying, that the worst is over. Rather its just the end of the beginning!

 

Mortgage Index – June 2018 – The New Normal – AFG

While AFG reports only on loan flows through their platforms, their statistics provides an interesting perspective on the mortgage industry, and does underscore the changes in train. But it also highlights again loans are still being written, and lending growth continues (despite the record 190 debt to income ratio as reported by the RBA).

This is what AFG said today:

Today’s quarterly AFG Mortgage Index figures (ASX:AFG) show it is ‘business as usual’ as a vibrant mortgage broking industry delivering choice and competition to the market continues to be embraced by Australian consumers.

Total mortgage lodgement numbers for the last quarter were up on the prior quarter to finish the 2018 financial year at 28,896. Lodgement volume for the quarter increased on the previous quarter to $14,589,632,848.

AFG Chief Executive Officer David Bailey said regulatory intervention in 2017 and tightened lending criteria appear to have established a structural change that may be the ‘new normal’ for the market.

“Investors are sitting steady at 28% of lodgements, first home buyers have been at 13% for the past four consecutive quarters,” said Mr Bailey. “Refinancers are at 22% and upgrader categories at 43% are also forming an established pattern.”

Mortgage holders are also taking advantage of low interest rates to pay down the principal with P&I loans sitting at 81%.

The popularity of fixed rates has fallen with a drop to 15.5% for the quarter recorded, down from 26.4% in the first quarter of FY18.

“A sign that regulators will welcome is the drop in Loan to Value Ratios across the states, with the national LVR now at 67.9%,” he said. “Another pleasing aspect of these figures is the fact that the gap between major and non-major lenders continues to shrink.

“Non-major growth across multiple categories – investors, refinancers and upgraders suggest consumer comfort with looking outside of the Big 4 for a lending proposition that meets their needs.

Interest rate, loan features, fees and lender criteria are all key features for a consumer evaluating their options. A mortgage broker is uniquely placed to be able to efficiently and fairly compare the alternatives available across major and non-major lenders. “As outlined in the ACCC Residential Mortgage Price Inquiry Interim Report 1, discounting by the major banks is lacking in transparency and the time and effort required for a consumer to obtain interest rate comparisons and negotiate for a discount is very difficult,” said Mr Bailey.

“The presence of the mortgage broking channel is one of the few drivers of competitive tension in the Australian lending market. A consumer dealing directly with a lender has limited negotiating power or knowledge of the interest rates and lending criteria offered by competitors. A mortgage broker with access to a panel of lenders drives competition between lenders to the benefit of all consumers, not just their own clients” he concluded.

Download full report here

Mortgage Choice Introduces New Remuneration Structure and Guidance

Mortgage Choice Limited says that the Board has approved a new broker remuneration framework which will provide franchisees with higher remuneration and reduced income volatility. The Company is confident the new model will enable franchisees to invest in their business while attracting new, high quality franchisees and loan writers to the network. This will provide a platform for growth and underpin the long term sustainability of Mortgage Choice.

Key features of the new model, which will be offered to all franchisees on an opt-in basis from August 2018, include:

  • increase in the average commission payout rate on residential lending from 65% to 74%;
  • unique hybrid trail commission structure which pays the best monthly outcome on either a flow or book basis; and
  • designed to reduce income volatility, providing better protection for franchisees in the event of a market downturn.

Susan Mitchell, CEO of Mortgage Choice, said all of the broker franchisees are likely to opt-in to the new model, as they will be better off financially.

“When we commenced discussions with franchisees, it was with a view to introducing a model that allowed them to earn more so they had the confidence to invest in their business, while still supporting them under a national brand with the services they value including IT, compliance, training, marketing and business planning. The hybrid trail commission structure we are introducing is unique. It rewards franchisees as they grow and provides better earnings certainty through periods of investment. We believe all franchisees will adopt the new model as it caters for businesses across the life cycle spectrum, from greenfield to more established brokers,” said Ms Mitchell.

To partially offset the impact of a higher average payout rate to franchisees, Mortgage Choice has initiated a program to improve operating efficiencies across its business. The Company is changing the way it delivers some of its core support services to franchisees as it moves to a more centralised, online and phone based model. It has commenced a program of implementing operational efficiencies across the business. This will result in an approximate 10% reduction in its operating expense base. Driving continual efficiency improvements will be a focus for the business over the next year.

The Company will continue to invest in its IT systems and expects to roll out its new broker platform in August, which will improve the customer experience and franchisee productivity.

“These changes are the product of extensive consultation with broker franchisees and the recognition we needed to rebalance our service provision with more competitive remuneration,” said Ms Mitchell. “Franchisees will have access to the same core services, just delivered in a more efficient way. At the same time, we are investing in a new Broker Platform that will improve broker productivity and enhance their service levels to customers.

“The demand for the services of a mortgage broker is strong and we believe these initiatives will provide the platform for a sustainable business model for Mortgage Choice and a framework for franchisees to succeed by helping more Australians make better financial choices.”

Guidance

Mortgage Choice expects its cash NPAT for FY2018 to be between $23.2m and $23.4m after accounting for one-off costs associated with redundancies and the change in CEO. As a result of the changes being introduced, there will be a one-off, non-cash negative adjustment of approximately $30m to IFRS NPAT for FY2018 to reflect the higher level of franchisee share of future trail revenue. The Company’s full audited results will be released to the market on 21 August 2018.

Assuming settlements at the same level as FY2018 and taking into account the new remuneration model and operational changes being introduced across the business, Mortgage Choice expects FY2019 cash and IFRS NPAT to be approximately $16.5m.

ASIC permanently bans two former NAB employees for loan fraud

ASIC says an investigation into loan fraud has resulted in a permanent ban of former National Australia Bank employees, Danny Merheb and Samar Merjan (also known as Samar Awad) from engaging in credit activities and providing financial services.

NAB alerted ASIC to the misconduct of its former employees, alleging that bank staff in the greater western Sydney area were accepting false documents in support of loan applications.

Mr Merheb was found to have recklessly given NAB false payslips, letters of employment, bank statements and statutory declarations in respect of home loan applications. Ms Merjan was found to have knowingly and recklessly given NAB false payslips and letters of employment in respect of personal loan and credit card applications.

The false information and documentation submitted by Mr Merheb and Ms Merjan were primarily provided to them by a third person who had no association with NAB.

ASIC also found that:

  • Mr Merheb falsely attributed a loan as being referred to NAB by an introducer who was a friend in order for the friend to receive commissions dishonestly;
  • Ms Merjan assisted the third person in the creation of two false documents, which she subsequently provided to NAB in support of lending applications; and
  • Ms Merjan was twice offered cash by the third person to process lending applications.

ASIC’s investigation is continuing.

Background

Mr Merheb and Ms Merjan were permanently banned on 29 June 2018. They both have the right to lodge an application for review of ASIC’s decisions with the Administrative Appeals Tribunal.

On 16 November 2017, NAB announced a remediation program for home loan customers after an internal review, prompted by whistleblower reports it had received which found that some home loans may not have been established in accordance with NAB’s policies.

NAB identified that around 2,300 home loans since 2013 may have been submitted with inaccurate customer information and/or documentation, or incorrect information in relation to NAB’s Introducer Program.

CBA Withdraws from Low Doc Lending

CBA has announced that it will remove low documentation features on all new home loans and line of credit applications from 29 September, as the bank continues its ongoing move to ‘simplify’ the bank, via The Adviser.

The Commonwealth Bank of Australia (CBA) has told brokers that it is “simplifying” its product suite to ensure that it is “providing a suitable range of products that align with [its] customers’ needs”.

As such, from Saturday 29 September 2018, the big four bank will remove all low documentation features on new home loans and line of credit applications. Should a customer wish to top up an existing home loan or line of credit with the low doc feature, they must provide full financials for all new applications.

All new loans that have low doc feature, including Home Seeker applications, must reach formal approval by close of business on Friday 28 September 2018.

The bank has said that brokers who request an amendment to an application with a removed product or a low doc feature that has not yet reached formal approval by Saturday 29 September 2018 will need to discuss “another product option” with the customer to suit their needs.

Loans must be funded by close of business Friday 28 December 2018.

There are no changes for existing customers that have low doc loans.

The move marks a major change in the lending landscape, but in practice – CBA has not provided true ‘low doc’ loans for some time, requiring more documentation than most historical low doc loans required.

Indeed, this type of loan product makes up a minimal proportion of the bank’s portfolio.

As well as removing the low doc feature, the bank will also remove several home loan products, including:

One-year Guaranteed Rate
Seven-year Fixed Rate loans
12-month Discounted Variable Rate;
Rate Saver products
Three-year Special Rate Saver; and
No Fee Variable Rate

If a customer wants to top up a One-year Guaranteed Rate, Seven-Year Fixed Rate or a 12-month Discounted Rate Home Loan they must complete a switch to another available product that best suits their needs.

An early repayment adjustment and an administrative fee may apply on the One-year Guaranteed Rate and Seven-year Fixed Rate when completing a switch.

Top-up applications for Rate Saver, Three-Year Special Rate Saver and No Fee Home Loans will still be available.

A CBA spokesperson said: “At the Commonwealth Bank, we constantly review and monitor our suite of home loan products and services to ensure we are maintaining our prudent lending standards and meeting our customers’ financial needs.

“From September onwards, we will be streamlining our suite of products to deliver our customers a simplified and competitive range of home loan solutions.”

Highlighting that the bank’s product suite offers “attractive” standard variable rate and fixed rate options, while its extra home loan products offer customers “low interest rates, no monthly fees, and no establishment fees”.

“Whatever our customers’ needs, our network of brokers or home lending specialists can help them find a flexible mortgage and guide them through the entire home buying journey, providing support every step of the way,” they said.

RBA Credit Aggregates May 2018

The RBA released their credit aggregates to end May 2018 – the ying, to APRA’s yang…  This is a market level view, including belated and partial data from the non-bank sector, so its always a larger set of numbers than the APRA ADI set, which we discussed previously.

The RBA data shows that total housing lending rose 0.37% from last month, up $6.6 billion to $1.76 trillion. Within that, owner occupied housing rose 0.55% or  $6.5 billion, and investment lending rose just 0.02% or $220 million. Personal credit fell again, and business lending fell 0.3% down $2.5 billion to $917 billion, all seasonally adjusted.

Investment lending made up 33.5% of all housing loans, down from 33.7% the previous month, and continues to slide, as expected. However the drop in business credit meant the proportion of commercial lending fell to 32.4% of all lending.

The monthly growth trends show the fall in business lending, and the fall-off in investor lending, all seasonally adjusted, which in the current environment may well be writing the volumes down too far.

The 12 month rolling trend shows owner occupied housing still running at 7.9%, well above inflation and wage growth, while investor lending has a read of 2%, which is the lowest see since the RBA series started to be published in  1991. Have no doubt, investor lending is fading.

Personal credit dropped an annualised 1.3%, the largest fall since the fall out from GFC in 2009. Business lending was around 3.8% annualised and slid a little.

Finally, the non-bank contribution to lending growth can be imputed by subtracting the APRA ADI data from the RBA market data. This is an inexact science because of timing and coverage issues across the data.  But it tells an interesting story, with non-bank growth rates sitting at around 20% for owner occupied loans and around 18% for investor loans, on a twelve month rolling basis. So we can see where some of the slack in the system is being taken up as non-banks flex their muscles. Regulation of this sector is a concern, as Moody’s highlighted recently.  APRA has this responsibility, but how actively they are looking at this segment of the market, when data is so hard to acquire is a moot point.  My guess is they are light on.

Non-bank lenders’ rapid growth poses risks — report

The rapid growth of non-bank lenders reflects the positive quality of their loan books and residential mortgage-backed securities (RMBS) – but growth should happen in a sustainable way, according to Moody’s Investors Service; via MPA.

Moody’s vice president and senior analyst John Paul Truijens said in a statement that although “investment and interest-only mortgages have historically been riskier than owner-occupier principal and interest mortgages, they are less risky than the non-conforming or alternative documentation loans that most non-bank lenders have traditionally focused on”.

The conclusions are found in Moody’s recently released study, “Financial institutions and RMBS – Australia: Growth opportunities not without risks as non-bank lenders push into investment and interest-only mortgages”. The report was written by Truijens and another Moody’s vice president and senior analyst, Daniel Yu.

The report stressed that the push into investment and interest-only lending has further captured the interest of private equity investors. And this has led to three acquisitions of non-bank lenders in the last nine months.

“If the current rapid growth rate were to be sustained over a prolonged period or even rise, or if non-bank lenders were to push into the riskier segments of the investment and interest-only mortgage markets to maintain growth, this would pose risks,” Truijens and Yu said.

According to them, non-bank lenders may need to rapidly expand their underwriting teams, and this could compromise the quality of their staff experience and risk controls.

If the banks return to pursue strong investments and interest-only lending, increased competition would make it difficult for non-bank lenders to sustain their rapid growth and this could push them to the riskier segments of the mortgage market.

Moody’s still believes non-bank lenders are generally suited to underwrite and risk-price investment and interest-only loans. But borrowers’ financial situations need to be scrutinised even more for these mortgages than for owner-occupier principal and interest loans. The experience of non-bank lenders in underwriting non-conforming loans enables them to demonstrate such scrutiny.

Risks are further lessened by the legislative amendments made in February 2018 that now allow APRA to regulate non-bank lenders.

Funding of non-bank lenders is not guaranteed, according to Moody’s. These lenders depend on “bank funding via warehouse facilities for the initial organisation of loans and RMBS investors for RMBS issuance”. Both funding sources depend on market confidence and economic conditions.

Non-bank lenders are increasingly getting into the investment and interest-only loan market after APRA released a series of measures in 2014 that limit banks from offering such loans. Non-banks accounted for almost 35% of investment loans originated in 2017, up from around 15% in 2014. Their share of interest-only mortgages was around 25%. However, the report said the non-bank mortgage sector still remains relatively small in Australia despite massive growth, accounting for just under 4% of the $1.7trn mortgage market.

Mortgage Credit Growth Accelerates In May

APRA has released their monthly banking statistics to end May 2018. After last months drop, we were waiting to see whether the loosening announced by APRA would show up, and yes,  this month there was a rise in both the growth of owner occupied and investment lending!

Total portfolio balances rose by 0.38% to $1.63 trillion, which would translate to be a 4.6% annualised growth rate, well above inflation and wages growth if this rate continued. Thus household debt still grows ever larger (a ratio of 188.6 household debt to income according to the RBA, last December), despite being at record and risky levels.

Within that, owner occupied loans rose 0.52% in the month to $1.08 trillion, up $5.5 billion while investment lending rose just 0.13% to $555 billion, up $712 million.  Or in annualised terms, owner occupied loans are growing at 6.2% while investment loans are growing at 1.5%.  Investment loans now make up 34.06% of all loans, which is still very high but falling.

Turning to the individual lenders, there is little to be seen at the total portfolio level, with CBA leading the owner occupied lending, and Westpac the investment side of the ledger.

However, the individual portfolios within the lenders are more interesting, with Westpac still leading the way in investment lending portfolio growth, alongside Macquarie and NAB. However CBA and ANZ both saw their investor portfolio balances fall, while still expanding their owner occupied portfolios. Bank of Queensland dropped their balances in both owner occupied and investment lending this month.  Clearly different strategies are in play.

Later we will get the RBA numbers, and we will see what the total market trends look like. We suspect non-banks will be growing faster than ADIs.

But overall, this appears to show a willingness to continue to let debt run higher to support home prices, so we are still on the same debt exposed path, should interest rates rise further, as is likely, as we discussed recently.  Sound of can being kicked down the road once again!

 

Credit squeeze hits elite brokers as lenders scrutinise expenses

As banks continue to tighten their home lending policies in response to regulatory pressure and the negative press surrounding the royal commission, Australia’s top brokers are finding it increasingly difficult to help their clients; via The Adviser.

ANZ has become the latest lender to tweak its credit policy for home loan borrowers. Late on Friday, the major bank notified aggregators that it has made changes to minimum living expense values.

It is now common for lenders to ask for 29 fields of expenses when assessing a mortgage application. Some banks that previously required no bank statements from applicants are now asking for up to six months’ worth of transaction account information to verify living expenses.

In many instances where banks find that an applicant’s living expenses for a certain item are higher than declared, brokers must go back over their client’s records to explain “one-off” expenses to the lender, such as a renovation cost or an overseas holiday. This process is creating significant delays in the settlement process.

Some of the industry’s most successful brokers have told The Adviser that the environment has become extremely tough, but most believe the credit squeeze will be short-lived.

“As a broker running a business that settles over $200 million a year, we don’t normally get declined by lenders,” one award-winning broker told The Adviser. “But I’m getting declined now.”

Refinancing has become particularly difficult in the current climate, with many borrowers failing to switch to a different lender and a better rate.

Last week, The Adviser ran an editorial that highlighted how Australia, like the UK, is beginning to see a number of “mortgage prisoners” shackled to home loans as a result of tighter credit policies and increased regulation.

One broker told The Adviser that he has started repricing loans for clients through their existing bank when they are unable to refinance.

“I’m doing a lot of that. I go back to the lender and negotiate a better rate. There is nothing in it for me in terms of remuneration, but the customer is getting a better deal,” the broker said