Tag: Mortgage Industry

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

Norway Maintains Stricter Oslo-specific Mortgage Regulations

Household debt in Australia is around 190%, which is high by any standard, but Norway wins the award for the most indebted households at 224% and this is a structural risk for Norway’s Banks. So its interesting to compare the measures taken there with Australian regulation, which appears to be several years behind the pace….

Last Tuesday, the Norwegian Ministry of Finance extended until 31 December 2019 its strict regulations on mortgage underwriting standards, introduced in January 2017 and scheduled to expire on 30 June 2018. In addition, the ministry decided to maintain the stricter Oslo-specific measures regarding loan-to-value (LTV) ratios on secondary homes of 60%, rejecting the Norwegian Financial Services Authority’s (FSA) March 2018 proposal to remove the Oslo-specific measures.

Extending these measures past their scheduled expiration will dampen house price inflation and contain borrower leverage, a structural risk for Norway’s banks, both credit positive says Moody’s.

The proposal maintains the maximum LTV for home equity credit lines at 60%, the 85% LTV cap on mortgages, and the limit on borrowers’ aggregate debt at 5x gross annual income. It caps the portion of mortgages that do not comply with the national applicable LTV ratio limit at 10%. However, the ministry decided against the FSA’s suggestion of eliminating the existing LTV limit of 60% for secondary homes located in Oslo as well as applying nationwide the Oslo-specific cap on the portion of mortgages non-compliant with the LTV ratio of 8% (see exhibit). By maintaining the 8% cap on the portion of non-compliant mortgages only in Oslo and not extending it nationwide, the ministry has reduced the possibility that exceptions to the LTV rule for national lending would become concentrated in Oslo, a credit positive for cover pools that have concentrations in Oslo loans.

Norwegian banks are retail focused, with mortgages accounting for almost 50% of their total lending. The extension of the regulation until December 2019 is a step toward improving mortgage underwriting standards by containing borrower leverage. Household debt reached a record 224% of disposable income in December 2017, far above that of other Nordic countries, and we expect it to remain close to those levels over the next 12-18 months. Substantial household debt remains a structural risk for Norway’s banks. However, a preliminary analysis by Norway’s central bank has shown that the introduction of a maximum debt-to-income ratio requirement in 2017 has resulted in lower debt growth, particularly in municipalities with a high share of highly leveraged homebuyers.

The ministry’s extension of the regulation will also support the quality of mortgage loans in the cover pools of Norwegian covered bonds by suppressing LTV ratios and reducing the risk of cover pool losses as a result of borrower defaults and falling house prices. Requirements on loan amortization also support reduction of LTV ratios in more seasoned loans, although many cover pools continue to have material levels of interest-only loans and flexi loans that have delayed amortisation provisions.

Maintaining Oslo-specific measures in combination with our expectation of interest rate hikes will limit retail credit growth in the Oslo metropolitan area, particularly as it relates to investment properties and highly leveraged individuals. We expect DNB Bank ASA, which has the largest share of Oslo’s retail market, to be most affected by the extension.

During 2018, house prices have grown 4.5% after falling 4.2% in 2017 from a peak in March 2017. However, the extension of stricter underwriting measures along with our expectation of higher interest rates after seven years of cuts and the completed construction of a large number of new dwellings by this fall will likely restrain house price inflation over the next 12-18 months.

NAB to change remuneration arrangements for frontline bankers

NAB says it will change the remuneration structure for more than 4000 frontline staff nationwide from 1 October 2018.

Bankers who work in NAB’s branches and consumer call centres will be moved from their current incentives arrangements to NAB’s Group Short Term Incentive (STI) Plan. This change is in line with NAB’s commitment in April last year to implementing the recommended reforms of the Retail Banking Remuneration Review (Sedgwick Report).

NAB Executive General Manager of Performance and Reward, Lynda Dean, said these changes demonstrate NAB’s continued focus on its customers.

“We want our customers to be confident that, every time they deal with us, they are receiving a strong customer experience, and products and services that suit their individual needs,” Ms Dean said.

Under the NAB Group STI Plan, NAB employees are rewarded based on a balanced scorecard of customer advocacy, compliance with risk, process/quality improvements, and financial performance.

“We believe that how our people demonstrate NAB’s values as they do their job is just as important as the job itself – that’s why we’re moving all frontline bankers to the Group STI Plan.”

“This change is one of many things NAB is doing to make banking better for our customers, and to help bring to life our vision to be Australia and New Zealand’s most respected bank,” Ms Dean said.

This change means NAB’s reward structures are compliant with the reforms that independent expert Stephen Sedgwick AO recommended be introduced by 2020.

It follows a number of changes NAB has already made to its employee remuneration structure over the last 18 months, including:

  • In 2016, NAB moved away from performance-based, fixed pay increases for customer service and support staff. These staff receive a standard pay rise of 3 per cent per year, under the 2016 NAB Enterprise Agreement.
  • As part of the 2016 NAB Enterprise Agreement, product sales targets are no longer considered when determining pay increases for Group 3 and 4 employees, who include many branch managers and business bankers.
  • On 1 October 2017, NAB made changes to the remuneration structure for over 700 retail branch managers, assistant branch managers, and sales team leaders in consumer call centres – moving these employees from product-based incentives to the Group STI Plan.

“We have moved away from product-based rewards, to using a balanced scorecard approach for our staff – measuring and rewarding the ‘how’, not just the ‘what’,” Ms Dean said.

“Over the coming 12 months, we will continue to review our practices to ensure they align to delivering great customer outcomes.”

Introducing NAB Home Lending Specialists

NAB has also created a new role for bankers – NAB Home Lending Specialists – who will be specially trained to offer customers expert advice in home lending.

“We are investing in our people so that they have the capabilities, skills, and training to provide a simpler, faster, and better customer experience,” Ms Dean said.

NAB’s Home Lending Specialists will complete a Certificate IV in Financial Services, and undertake a tailored training program. Their remuneration structure from 1 October 2018 is also in line with the Sedgwick recommendations.