Tag: Mortgage Industry

Mortgage industry could face massive class action

As we predicted, a massive class action lawsuit is being planned on behalf of “Australian bank customers that have entered into mortgage finance agreements with banks since 2012”.

If loans made were “unsuitable” as defined by the legislation, there is potential recourse. This could be a significant risk to the major players if it gains momentum.  But we think individuals must take some responsibility too!

As the AFR put it –

Lawyers’ representing up to 300,000 litigants are planning an $80 billion action against mortgage lenders, mortgage brokers and financial regulators in a class action that would dwarf previous actions.

…Roger Brown, a former Lloyds of London insurance broker, said he already has about 200,000 borrowers ready to join the action and has $75 million backing from UK and European investors.

“There has been a scam,” he said about mortgage lending to Australian property buyers. “But the train has hit the buffers and there needs to be recompense,” he said.

Law firm Chamberlains has been appointed to act in the planned class action lawsuit, which has been instructed by Roger Donald Brown of MortgageDeception.com in the action that aims to represent various Australian bank customers that are “incurring financial losses as a result of entering into mortgage loan contracts with banks since 2012”.

The law firm is currently calling on bank customers to join the class action, led by Stipe Vuleta, if they have “incurred financial losses due to irresponsible lending practices”.

The MortgageDeception site says:

Those who have entered into loans with banks to purchase residential properties since 2011 are about to encounter difficulties. Since 1995, banks in the United Kingdom, Ireland, Australia and New Zealand have been making massive and obscene profits from providing finance to property purchasers. These banks have cared little about the lending practices adopted by them, and reckless lending has brought about huge and unsustainable increases in property prices.

These lending practices are now leading to problems for both intending buyers and existing owners of property.

We believe that the banking industry and its regulators have intentionally turned a blind eye to the irresponsible lending that has been taking place.”

For Australian bank customers that have entered into mortgage finance agreements with banks since 2012, we have appointed the leading Canberra-based law firm of Chamberlains, www.chamberlains.com.au, to act in the planned class action lawsuit. The partner in charge is Mr Stipe Vuleta.

 

2 in 5 Aussies do not understand LMI

More than two in five prospective home buyers have admitted to not understanding Lenders Mortgage Insurance (LMI), according to new data.

This chimes with our research on the topic of LMI from our own surveys. In fact the confusion varies by type of buyer, and who is protected.  First Time Buyers are a particular concern. See our previous post “Is Lenders Mortgage Insurance a Good Thing“.

Mortgage Choice and CoreData’s new Evolving Great Australian Dream 2018 whitepaper found 42.1% of respondents said they were not sure what LMI was, yet a third (32%) said they would need to pay it in order to get into the property market.

“Our data found that a majority of home buyers are in the dark when it comes to Lenders Mortgage Insurance and what it entails,” Mortgage Choice Chief Executive Officer Susan Mitchell said.

“According to our survey, only 32.1% of prospective buyers accurately stated that LMI is designed to protect the lender if a borrower can’t repay their mortgage.

“Another 8.2% of respondents thought LMI protected the borrower, while 17.6% believed it protected both the borrower and the lender,” said Ms Mitchell.

The research found that 44.8% of women did not to understand what LMI was, compared to 37.35% of men.

Buyers aged 29 and under (47.3%) were the most likely not to know what LMI was, while the 50 to 59 age group (40.75) had the highest proportion of buyers who knew what LMI was.

On a state by state comparison, Victoria (46%) had the highest proportion of buyers who did not know what LMI was, followed by Queensland (40%) and Western Australia (39.6%). NSW buyers topped the states when it came to correctly defining LMI at 34.6%.

Ms Mitchell said it was concerning that such a large proportion of Australians had either a limited or no understanding of LMI and that mortgage brokers can play an educational role for borrowers.

“For many first home buyers, LMI is likely to be a cost they have to pay to get into the property market, particularly if they do not have a deposit that is at least 20% of the purchase price,” she said.

“The reality is that saving for a home deposit is a major challenge for first home buyers and this has been the result of strong price growth over the last few years.

“According to CoreLogic, the median dwelling value in Australia is $554,605, and for a first home buyer to avoid LMI, they would need to save $110,921 for a 20% deposit and they would still need to have additional funds to cover costs such as legal fees and stamp duty.

“That is quite large sum to save and it only increases if a buyer is looking in cities such as Sydney and Melbourne.

“While LMI on the surface seems like a fee to be avoided, it does have the benefit of helping a buyer purchase a home with a smaller deposit, thereby allowing them to get onto the property ladder sooner rather than later.

“A buyer can choose to delay their property purchase to save a sufficient deposit, but the reality is property prices have risen consistently and the longer they delay, the more likely they are to miss an opportunity.

“Ultimately, in the long run, LMI is a fairly small expense in the overall cost of purchasing a home.”

Ms Mitchell said first home buyers could avoid LMI altogether if they were able to receive some sort of financial boost or a have a guarantor on their loan.

“First home buyers can avoid LMI by having a parent or family member go guarantor on their home loan, which then allows them to purchase without a 20% deposit” she said.

“In the case of the latter, it is important to note that lenders may require that any monetary gift must be held in an account for at least three months before home loan approval. Also, a lender may still require a borrower to demonstrate that they have 5% genuine savings.”

Ms Mitchell said it was important for first home buyers to have a good understanding of the purchase process.

“If you’re a first home buyer, you should speak to a mortgage broker who can guide you through the process of purchasing a property, from getting the best rate as part of the home loan application, through to settlement.

“They can explain the various options and costs involved, including LMI, thereby ensuring that you can confidently achieve your goal of home ownership,” concluded Ms Mitchell.

“As property prices continue to relax there has never been a better time for first home buyers to purchase. Therefore, it’s essential they have a clear understanding of LMI so that they know how it affects their ability to get into the market.”

Non-banks winning prime mortgages as majors tighten

From The Adviser.

A credit crackdown among the big four banks has been a blessing for the non-ADI sector, with lenders seeing a significant boost in prime mortgage flows. We discussed this a few weeks back.

 

Credit has been tightening since 2014 and a raft of measures have been introduced to stem the flow of investor loans, interest-only mortgages and foreign buyers.

“A lot of that is narrowing what is prime credit for a bank,” Fitch Ratings’ head of APAC, Ben McCarthy, told the group’s 2018 Credit Insights Conference in Sydney on Wednesday.

“As the bank prime market gets smaller, things that were prime last year will end up in the non-bank space.

“Talking to some of the issuers just recently, some of them have commented on the potential outcomes for them as an individual lender. Non-banks are telling me that their volumes are increasing, but not in the areas that you might think. Interest-only volumes are falling and investor loans are relatively stable.”

Australia’s RMBS market is dominated by the non-banks, which rely on securitisation and warehouse funding to grow their books and continue lending.

In 2017, securitisation issuance was at its highest since the GFC. Last year saw $36.9 billion of RMBS issuance, of which $14.7 billion came from the non-banks. Only $8 billion of issuance was made up of non-conforming loans.

The strength of the non-bank sector has attracted US investors. Last year, KKR snapped up the Pepper Group, Blackrock purchased an 80 per cent stake in La Trobe Financial and private investment firm Cerberus Capital Management, L.P. acquired the APAC arm of Bluestone Mortgages.

With a bolstered balance sheet, Bluestone was recently able to edge closer to the prime mortgage space by introducing a new product and lopping 225 basis points off its rates.

Last month, the non-bank lender entered the near-prime space and made significant rate cuts to the Crystal Blue portfolio, which comprises full and alt doc products geared to support established self-employed borrowers (with greater than 24 months trading history) and PAYG borrowers with a clear credit history.

Speaking of the move, Royden D’Vaz, head of sales and marketing at Bluestone Mortgages, said: “The recent acquisition of the Bluestone’s Asia Pacific operations by Cerberus Capital Management has enabled a number of immediate opportunities to be realised — most notably the assessment of our full range of products and to ensure they fully address market demands.

“We’re now in an ideal position to aggressively sharpen our rates based on the new line of funding and pass on the considerable net benefit to brokers and end users alike.”

With many anticipating a significant slowdown in bank credit growth, driven by the evidence given during the Hayne royal commission, non-banks look well positioned to capture a greater slice of the prime and near-prime markets.

“Non-banks are becoming a bigger part of the market,” Fitch Ratings’ Mr McCarthy said. “That trend will increase.”

HashChing White Labels

Australian mortgage marketplace HashChing is launching its own branded home loans for the first time, claiming to offer some of the lowest rates in Australia, and one of the fastest approval times on the market available through the mortgage brokers.

They say this is an opportunity for Australians to access highly competitive deals that are independent of the big four and large financial institutions, whose shady lending practices have been recently exposed by the Royal Commission.

Mandeep Sodhi, CEO of HashChing, said that securing a competitive rate with the banks is a stressful experience for most Australian borrowers.

“Even a slight difference in an interest rate can cost the average homeowner thousands of dollars each year,” said Mr Sodhi.

“That’s why so many Australians access the market through a mortgage broker, but finding a broker that aligns with their interests can also be challenging. This is what motivated us to launch HashChing and what has motivated us to offer competitive home loans through our platform.”

The new home loan product, which can only be accessed by HashChing mortgage brokers, gives borrowers access to approval within an impressive 24 hours, one of the fastest approval times available to Australians through the mortgage brokers.

“Timing can be the difference between owning your own dream home or missing out on the opportunity of a lifetime. The big banks typically take 4 to 5 days to complete an approval process, so we’re confident we can offer a service in this area that they cannot compete with.

“On top of that, our core business is offering instant access to the top rated mortgage brokers in any area who do all the legwork at no cost to borrowers, meaning we now offer a front to back mortgage service with some of the most competitive deals on market.”

HashChing started to initially solve the pain point of finding a community rated local broker in the area. The move to offer home loans through the platform is part of the greater expansion plans for HashChing, which is currently raising $5 million through crowdfunding platform Equitise.

HashChing is independent of the big banks and has chosen to undertake crowdfunding as a means to raise money while staying independent of any ownership by the banks. The funds will help to improve and expand the company’s current business activities and enable it to continue looking for ways to improve on the home loan process and offer better rates to borrowers.

Mr Sodhi said: “One of the main reasons we chose equity crowdfunding was because we wanted to stay independent. Unlike many other online mortgage platforms who are backed by a lender, we are and will continue to stand separate from the banks. We want our customers to become shareholders in HashChing and help us deliver the simple and effective end-to-end home loan journey that Australia is currently lacking.

“We look for ‘win-win’ opportunities, whereby if our customers do well, we do too – and vice versa. One such opportunity is allowing customers to own a piece of HashChing and benefit from any success we have. We’ve built this business on the ability to put more money back into the pockets of homeowners and not the banks, and this crowdfunding opportunity extends that vision to give our loyal customers and everyday Australians an opportunity to invest in a fast-growing disruptive start-up that they believe in.”

HashChing is Australia’s first online marketplace allowing consumers to access great home loan deals without having to shop around. Completely free to consumers, HashChing connects customers directly with verified mortgage brokers who further negotiate better rates from lenders, saving valuable time and money.

Equitise is an online equity crowdfunding platform connecting start-ups and high growth businesses, with a broad range of investors. We help businesses grow and thrive in a simple, intuitive and social way by disrupting the investment marketplace and removing the traditional funding barriers and costs.

Fintech Athena Home Loans Direct Model Funded

From The Adviser.

A new fintech Athena Home Loans founded by two former NAB executives has received $15 million from major investors to facilitate its entry into the Australian mortgage market. This was reported in the AFR on Monday.

Cloud-based digital mortgage platform Athena Home Loans has closed a Series A raise of $15 million with investment backing from Macquarie Bank, Square Peg Capital, Apex Capital and Rice Warner.

Athena, founded by former NAB executives Nathan Walsh and Michael Starkey, pulled in a $3 million seed round in June 2017 and has now set its sights on disrupting the $1.7 trillion Australian mortgage market.

Speaking to The Adviser, co-founder and CEO Nathan Walsh noted that Athena plans to bypass the banks, offering super fund-backed mortgages directly to borrowers through its cloud-based digital portal.

“We know that the big banks are very constrained by customer pain points that are caused by ageing technology in the manual, paper-based processes, and we know there’s a real opportunity to improve on that,” Mr Walsh said.

Chief operating officer Michael Starkey claimed that Athena’s super fund-backed investment model would also allow it to offer lower interest rates than its competitors.

“By investing in home loans directly with Athena, super funds can cut the spread between what mortgage borrowers pay and investors receive,” Mr Starkey said.

“In countries such as the Netherlands, where pension systems are similarly advanced, the impact of this model is already evident.”

Mr Walsh added: “The potential savings for a typical Australian family switching from the big four banks to Athena could be as much as $100,000 over the life of the average loan.”

Mr Walsh also noted that Athena aims to settle $100 million in home loans this year, which the CEO said equated to approximately 200 home loans.

The Athena chief went on to say that the online lender plans to ramp up its offerings once it is established in the marketplace.

“We see a big opportunity [for brokers] here,” Mr Walsh continued.

“Next year, [it’s] game on; we really see a big opportunity. It’s a big market and we’re very keen about giving all Australians access to a better deal on their home loan.”

No immediate plans for the broker channel

Mr Walsh revealed to The Adviser that while Athena has no immediate plans to originate home loans through the broker channel, it could be an option in the future.

“[We’re] a direct model, so consumers are going direct to [Athena] and opening accounts directly, but we do know that, clearly, mortgage brokers are an important part of the market and we’ll consider that in our roadmaps for the long term,” the CEO said.

“[We] are considering those options, so I think those are probably things for future discussions.

“At this stage, we’re really focusing on our launch, which is targeting our direct channel.”

Compliance with responsible lending obligations

Mr Walsh also insisted that Athena would ensure it’s complaint with responsible lending obligations, saying that a “huge part” of the build phase has been “the ongoing process of design, legal and compliance review, to really make sure that we’re stepping through each stage of that journey.”

The CEO said: “[We want to] make sure we’re providing those really important protections, but at the same time, managing the complexities so it is a process that borrowers feel comfortable using digital channels. And that’s a really big part of the design thinking that’s gone into building that.”

Square Peg co-founder joins Athena board

As part of Square Peg Capital’s investment, co-founder Paul Bassat is set to join the Athena board.

“We are thrilled to be joining Athena’s journey,” Mr Bassat said.

“This is a great example of the type of team we love to back — smart, driven and focused on solving an important problem.

“The win-win model that Athena offers to investors and borrowers has huge potential to disrupt the way home loans are originated, serviced and funded in Australia.”

Advantedge requires paper copy signatures in NSW

From The Adviser

NAB’s wholesale funder and distributor of white label home loans – Advantagedge –  has announced that, as of today, it will require NSW mortgagors to sign mortgage documents on paper.

They said that until relevant legislation regarding the need for wet signatures on mortgage documents is amended in NSW, it would send a paper copy of the mortgage documents to customers to be wet-signed and witnessed.

NAB-owned white label provider Advantedge has said that it is updating its digital mortgage process for NSW customers, and is now requesting that mortgage documents be wet-signed by customers and witnesses.

Formerly, Advantede could accept electronically submitted mortgage documents without a paper copy. However, from Monday, 7 May, it will require NSW-based customers to sign mortgage documents issued in NSW on paper and to be witnessed.

It has said that it will post (or send by encrypted email to print depending on customer preference) mortgage documents for customers to sign with a witness, and return to its settlement agents, MSA National.

Despite this, Advantedge will continue to issue NSW mortgage documents electronically so there will be no delays with settlement.

It added that should the mortgage documents be submitted electronically, Advantedge would still process these “as normal” but would also send a paper copy of the mortgage documents to customers to be wet-signed and witnessed.

Advantedge clarified that the following documents can still be sent and signed electronically:

  • Letter to Borrower(s)
  • Loan Contract
  • Loan and Settlement Authority
  • Direct Debit Request
  • Business Purpose Declaration
  • Loan Terms and Conditions Booklet
  • Credit Guide
  • Borrower’s Guide to Construction Loans
  • MSA National’s Estimated Costs Statement

NSW mortgage documents issued prior to Monday, 7 May 2018, will be accepted without a wet signature.

Those issued after this date may still be submitted electronically but will need to be accompanied by a paper-signed and witnessed mortgage document.

Advantedge told The Adviser that, until relevant legislation regarding the need for wet signatures on mortgage documents is amended in NSW, it would send a paper copy of the mortgage documents to customers to be wet-signed and witnessed.

It added that this change only applied to Advantedge (and not NAB), as it involves the execution of mortgages.

Indeed, NAB announced just last week that it had launched DocuSign in the broker channel, allowing customers to sign their mortgage documents from anywhere and on any device.

NAB general manager of broker distribution Steve Kane said that this is another example of NAB’s ongoing commitment to improving the customer experience and to supporting brokers.

“By giving brokers the ability to have customers digitally sign their upfront documents, we are making the home loan process simpler, easier and more convenient,” Mr Kane said.

“We have eliminated the delays that can come with requiring a physical signature, for example, and we are confident this new tool will go a long way to help create a more streamlined process for brokers and for customers.”

Scrutiny, Regulation and the Looming Credit Crunch

This from the excellent James Mitchell at the Adviser.

I’ve said before that the next downturn will, ironically, be triggered by regulation. Recent developments show this could soon play out.

This we week we’ve seen ANZ chief Shayne Elliott and RBA governor Philip Lowe both admit that lending is becoming more difficult.

On Tuesday, Elliott said that tighter controls around customer living expenses — an issue given extensive coverage during the first week of the Hayne royal commission – would slow lending down.

Later that day, the RBA governor issued a similar warning following its decision to leave rates unchanged for the 21st consecutive month.

“It is also possible that lending standards in Australia will be tightened further in the context of the current high level of public scrutiny. We will continue to watch these issues carefully,” Mr Lowe said.

These comments follow APRA’s decision to remove the 10 per cent investor lending speed limit in favour of debt-to-income curbs.

Exactly what these will look like remains to be seen, but the banking regulator expects ADIs to develop their own portfolio limits on the proportion of new lending at “very high” debt-to-income levels.

The problem with things like forensic evidence of customer living expenses and tighter restrictions on mortgage lending is that they will reduce credit availability.

About 10 months ago I wrote that “mortgages are the second largest pool of assets in Australia after superannuation. Messing with that could have serious implications. Particularly at a time when property price growth is moderating.

“The risk is that measures designed to strengthen the system could inadvertently weaken economic growth, consumer sentiment and the propensity for Australians to continue spending.”

That observation was made following the 2017 budget, when it was revealed that APRA’s powers would extend to the non-banks.

Former Pepper CEO Patrick Tuttle told me that such action would “accelerate a credit crunch” and a sharp correction in house prices.

But the stakes are higher now and the risks to mortgage growth have intensified. Customer living expenses are at the centre of this, but I doubt common sense will prevail when it comes to regulation and tighter policies.

Over the last few weeks I’ve spoken to a number of mortgage brokers, head groups and lenders about this issue.

On the record, they see more granular data around living expenses as a positive development. Off the record, they can’t stand the idea and anticipate a significant drop in volume.

One broker put it to me plain and simple: when a person gets a mortgage, they change their living expenses accordingly. They stop spending on rent, reduce their entertainment budget and work harder for that job promotion. In other words, they adapt to their new financial position.

Australians have a solid track record of paying down their mortgages. Arrears rates range from 0.76 per cent (ACT) to 2.5 per cent (WA).

While there have been no systemic problems in the Australian mortgage market, the banking royal commission is doing a great job of promoting a financial services industry rife with misconduct and risky behaviour. Which it is, to some extent, but how risky are the mortgages currently being written?

Are the banks tightening their lending policies because of risks, or is it simply a PR play to appease the regulators and the royal commission?

Either way, we can expect a reduction in credit availability and brace ourselves for what the knock-on effects of that will be.

Non Bank Mortgage Lending Accelerates

The RBA have released their credit aggregates to March 2018.  Looking at the month on month movements, total owner occupied lending rose 0.6%, or $6.89 billion to $1,157.8 billion and investor mortgage lending rose 0.17% or $1.03 billion to $590.2 billion.  So overall mortgage lending rose 0.46% in the month, up $7.92 billion (all seasonally adjusted) to $1.75 trillion. A record.

Personal credit fell 0.12%, down $0.18 to $152 billion. Business credit rose 0.88%, or $7.99 billion to  $913 billion.

The trends show that the share of investment loans fell a little on the total portfolio to 33.8%, while business lending was 32.5% of all lending, up just a little.

The 12 month average growth rates show that owner occupied loans rose 8.1%, while investment loans grew 2.5%. Business rose 4.2%, and personal credit fell again. Overall growth rates of credit for housing slide just a little to 6.1%. This is 3 times the rate of inflation and wage growth! Household debt therefore is still rising.

The noisy monthly data highlights how volatile the business lending trends are.

They also reported that the switching between investor and owner occupied loans continues to run at similar levels, after the hiatus in 2015.

Now, we can also make comparisons between the total loan pool, and those loans written by the banks (ADS’s) by combining the APRA bank data and the RBA data. There are a few catches, and the ABS suggests that not all the non-banks are captured.

But set that aside, we have plotted the relative value of the mortgage pools at the total level, and the ADI level (not seasonally adjusted). The trend shows around 7% of lending is non-bank, up from 5.7% in 2017.  In value terms this equates to  $124 billion, up from $90 billion in 2016.

Another way to show the data is to look at the rolling 12 month growth trend. This shows that non-bank lending has been growing at up to 30% and significantly higher than the market at 5.94%.

This is highly relevant given Bluestone’s recent announcement and Peppers recent $1 billion securitisation issue.

So this is all playing out as expected. As the majors throttle back on new mortgage lending under tighter controls, the non-bank sector continues to pick up the slack. This is a concern as the regulatory environment for these lenders is weaker, with both ASIC and APRA now involved, ASIC from a responsible lending perspective and APRA from new supervision on the non-bank sector, despite their failure in the core banking sector. So we expect to see significant non-bank lending growth, ahead, which will stoke the current massively high household debts even higher.

The total loan mortgage growth is still significantly higher than income growth. This is not sustainable, and will lift mortgage stress higher again – our new data will be out in a few days.

Mortgage Growth Still Continues

Lets be clear, all this talk about mortgage tightening has only had marginal impact on overall mortgage lending growth, judging by the APRA monthly stats, released today to end March 2018.  These of course do not include the non-bank sector which we think has been quite active – and the RBA data, out later today, will help to triangulate this.

Anyhow, according to the APRA stats the ADI mortgage book rose 0.46% over the month, to $1.62 trillion, up $7.9 billion in the month. Within that owner occupied loans were worth $1.06 trillion, up 0.63% compared with last month, and investment loans rose 0.15% to $554.8 billion.  Investment loans were  34.3% of all loans. The annual growth rate on the book would equate to 5.6% which is still well above inflation and wage growth (~2%) which means that in absolute terms household debt is still rising.

The monthly trends show the relative movements nicely with owner occupied loans still above investment loans, and just a slight fall in growth rates, but nothing to write home about. Investor lending was up a little.

We continue to see significant variations across lenders as to how they have managed their portfolio growth, with Westpac continuing to stand out (that’s the bank which UBS suggested last week had issues with their portfolio, was a risk!), while CBA and ANZ appear to be reducing their Investor Loan book.  Macquarie is also growing their book, as is Bendigo and Adelaide Bank.

Overall loan shares are pretty static, with CBA the largest owner occupied lender and Westpac the biggest investor loan provider (and recently we found out that 50% of their loans were interest only).

Whilst APRA has removed the 10% speed limit, we will continue to to report the annual movements by lender. A number of the smaller players are still growing quite fast.

We still think the over reliance on mortgage debt to grow the economy will create significant problems ahead.  We need to see credit start to shrink, because incomes won’t catch up anytime soon.

 

 

Lax lending by banks could see our debt problem come crashing down

Via ABC Online.

Under the National Consumer Credit Protection Act 2009, credit providers are required to lend responsibly.

This means that before lending, the credit provider must assess the suitability of a loan for a borrower, which involves an assessment of the borrower’s capacity to repay the loan as well as an assessment of the extent to which the loan will meet the objectives and requirements of the borrower.

A failure to undertake these assessments before lending will amount to a breach of the act, which should result in sanctions ranging from enforceable undertakings to the cancellation of a credit provider’s credit licence.

There is clearly a need for a robust and well-enforced responsible lending regime to curtail undesirable market practices and prevent increased financial stress on households in Australia.

The evidence that has come out of the Financial Services Royal Commission must lead to a serious re-assessment of the efficacy of the responsible lending regime, particularly in relation to its enforcement by ASIC. It also calls into question the efficacy of the prudential regulator, APRA.

It is now clear that the major banks have based many lending decisions on flawed information, leading to what have been labelled “liar loans”.

ANZ bank, in its submissions to the royal commission, acknowledged a lack of evidence that it had made genuine enquiries into customers’ living expenses.

William Rankin who was responsible for ANZ’s home loan portfolio stated that from October 2016 to September 2017 ANZ sold $67 billion in home loans and that 56 per cent of those ($38 billion) came from mortgage brokers.

Damningly, Mr Rankin confirmed that ANZ did not take steps to verify the information provided by brokers regarding customers’ expenses.

Gym owner among NAB ‘introducers’

In its submission to the inquiry, CBA acknowledged inaccuracies in calculations, insufficient documentation and verification, and deficiencies in controls around manual loan approval processing.

Daniel Huggins, who supervises the home buying division at CBA, gave evidence that while the bank had explicitly documented its recognition that volume based commissions to brokers (as opposed to flat fee payments) encouraged poor quality loans and poor customer outcomes, the bank had continued with volume based commissions and in fact “de-accredited” brokers who did not refer a sufficient volume of loans.

He also stated that CBA continued to rely on the customer information provided by mortgage brokers, notwithstanding an explicit acknowledgment by CBS that customer information provided by brokers could not be relied upon.

Anthony Waldron, the executive general manager for broker partnerships at NAB, gave evidence regarding NAB’s “introducer program”, which included a number of shocking admissions.

The program involved introducers who were not necessarily carrying on lending businesses (one introducer ran a gymnasium), who formed relationships with bankers employed by NAB.

Both bankers and introducers benefitted from the loan referrals (through bonuses and commissions), and introducers were required to meet minimum loan referral thresholds.

Mr Waldron acknowledged that the program led to unsuitable loans, false documentation, dishonest application of customers’ signatures on consent forms and misstatements of information in loan documentation.

He agreed that the bankers were more concerned with sales than keeping customers and the bank safe.

ASIC and APRA should be doing more

Westpac had acknowledged in its submission that it was the subject of ASIC enforcement action in relation to breach of the responsible lending obligations, for failure to properly assess whether borrowers could meet their repayment obligations before entering into home loan contracts.

Westpac had also acknowledged that in 2016 some of its authorised home lending bankers were not correctly verifying customer income and expenses.

There is now no doubt that the financial regulators, ASIC and APRA, should be doing more to ensure prudent lending standards by credit providers in Australia.

The prospective harm that could result to Australian households from elevated levels of indebtedness, and the adverse flow-on effects to the Australian economy, cannot be ignored.

The evidence at the royal commission has confirmed a current tendency of lenders to reduce lending standards to increase credit activity and profitability, but it will all come crashing down soon if it is allowed to continue.

For an increasing number of households, even small increases in the loan interest rates, a decline in real estate values, or a reduction in working hours or conditions may have grave consequences.

There are also more significant risks for borrowers which include unemployment, the removal of government benefits, rapid and significant increases in loan interest rates, a recession, a housing or equity market crash, or a financial crisis.

Therese Wilson is an associate professor at Griffith law School; Gill North is a professor at Deakin University Law School

Full Disclosure: Gill North is also a Principal at Digital Finance Analytics!