Tag: Mortgage Industry

More Evidence of A Cooling Market

AFG released their latest data today, which shows the current trends, including lower absolute settlement volumes and values …

… and more loans going to the non-major lenders, as the big four hunker down. Whilst it is myopic, as it looks at volumes through their channels, it is a pretty good indicator of what is happening more widely.

Lower credit volumes will drive prices lower.

They of course emphasis the importance of brokers, as one might expect, given their position in the market:

The release today of the AFG Mortgage Index (ASX:AFG) highlights that the ongoing regulatory intervention into the sector is potentially stifling growth in mortgage applications. Further growth in non-major market share reinforces an increasing appetite for these lenders and highlights the vital role mortgage brokers play in enabling these lenders to compete.

AFG Chief Executive Officer David Bailey explained the results, “Whilst there is likely to be some small seasonal impact on numbers for the quarter, the Index highlights some marginal softening compared to the same period in 2017 with lodgements down just 1.8% on the prior period and just 0.8% on a rolling 12-month basis.

“Given the timing of public holidays and suggestions that Sydney house prices are coming off a little, the fact that there does not seem to be any growth is not surprising,” he said. The only market in the country which appears to be generating ongoing growth is Victoria.

“Western Australia, whilst initially showing signs of some green shoots earlier in the quarter appears to have softened. First home buyers are a known stimulant for an economy, so we hope that the recently announced increased GST allocation to WA will be used in part to stimulate this sector.
Interest Only home loans appear to have levelled off at around 20% over the past three quarters. “With some lenders indicating they again have an  appetite for this type of lending, we would probably call this the bottom for this segment of the market.

AFG’s data also shows the non-majors have continued to pick up market share to now be sitting at more than 36%.

“AFG has 45 lenders on its panel,” said Mr Bailey. “This distribution model creates competitive tension in the lending market which leads to increased consumer choice and, most importantly, improved loan pricing and service across the entire market which benefits all Australian borrowers.

Industry regulator ASIC concluded in its recent examination of the sector that mortgage broking promotes competition by playing a valuable role in providing a distribution channel for lenders, particularly smaller lenders, and exerting downward pressure on home loan pricing,” said Mr Bailey.

“The presence of the mortgage broking channel is one of the few drivers of competitive tension in the Australian lending market.

 

Home Prices and Lending To Fall? Perhaps Hard!

The good people at UBS has published further analysis of the mortgage market, arguing that the Royal Commission outcomes are likely to drive a further material tightening in mortgage underwriting. As a result they think households “borrowing power” could drop by ~35%, mainly thanks to changes to analysis of expenses, as the HEM benchmark, so much critised in the Inquiry, is revised.

Their starting point assumes a family of four has living expenses equal to the HEM ‘Basic’ benchmark of $32,400 p.a. (ie less than the Old Age Pension). This is broadly consistent with the Major banks’ lending practices through 2017.

As a result, the borrowing limits provided by the banks’ home loan calculators fell by ~35% (Loan-to-Income ratio fell from ~5-6x to ~3-4x).

This leads to a reduction in housing credit and a further potential fall in home prices.

This plays out similarly to our own scenarios, which we discussed a couple of weeks back, exploring the outcomes from a mild correction, to a crash. A 20% reduction in borrowing power has already hit, by the way, and this before the Royal Commission revelations.

This will have a significant impact on the banks, but a broader hit to the economy also.

 

The Looming Mortgage Liquidity Crisis

From The Mises Wire.

Every 10 years or so there is a banking crisis. We are due. However, the furthest thing from most people’s minds with the Trump boom is a banking/financial crisis, except for a few folks at the Brookings Institution, who just released a paper entitled “Liquidity Crisis in the Mortgage Market.”

You Suk Kim, of the Federal Reserve Board; Steven M. Laufer, who also labors on the Federal Reserve Board along with Karen Pence, plus, Richard Stanton of the University of California, Berkeley, and Nancy Wallace, also of University of California, Berkeley, to give away the punchline from their paper’s abstract, write, “We describe in this paper how nonbank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario.”

John and Joan Q. Public believe the 2018 mortgage business is like George Bailey’s Building & Loan in “It’s a Wonderful Life.” People deposit money, bankers lend it out, keeping the mortgage on their books. Easy Peasy.

As the folks from Brookings point out, it’s not that easy in these dark days of financial engineering. George Bailey’s handshake, promise and maybe a few words on a document to be signed by the borrower which meant simply, “I’ll pay you back,” has become a financial instrument, to be traded and hypothecated by faceless financial bureaucrats, each one taking a sliver of profit off the top.

Everyone remembers the crash of 2008 and plenty explanations have been posited. What the writers for Brookings explain is,

The literature has been largely silent on the liquidity vulnerabilities of the short-term loans that funded nonbank mortgage origination in the pre-crisis period, as well as the liquidity pressures that are typical in mortgage servicing when defaults are high. These vulnerabilities in the mortgage market were also not the focus of regulatory attention in the aftermath of the crisis.

They continue,

Of particular importance, these liquidity vulnerabilities are still present in 2018, and arguably the potential for liquidity issues associated with mortgage servicing is even greater than pre-financial crisis. These liquidity issues have become more pressing because the nonbank sector is a larger part of the market than it was pre-crisis, especially for loans securitized in pools with guarantees by Ginnie Mae.

George Bailey and his little financial institution are nowhere to be found.

The authors quote former Ginnie Mae president Ted Tozer concerning the stress between Ginnie Mae and their nonbank counterparties.

… Today almost two thirds of Ginnie Mae guaranteed securities are issued by independent mortgage banks. And independent mortgage bankers are using some of the most sophisticated financial engineering that this industry has ever seen. We are also seeing greater dependence on credit lines, securitization involving multiple players, and more frequent trading of servicing rights and all of these things have created a new and challenging environment for Ginnie Mae. . . . In other words, the risk is a lot higher and business models of our issuers are a lot more complex. Add in sharply higher annual volumes, and these risks are amplified many times over. . . . Also, we have depended on sheer luck. Luck that the economy does not fall into recession and increase mortgage delinquencies. Luck that our independent mortgage bankers remain able to access their lines of credit. And luck that nothing critical falls through the cracks…

Tozer said these words in 2015. The mortgage engine is built for perfection: a thriving economy, with low interest rates, allowing everyone, from the mortgage borrowers to the credit line providers and securitizers to keep their promises.

However, the world is anything but perfect.

Nonbank mortgage providers essentially borrow short and lend long, using warehouse lines of credit from banks to fund mortgages. From 2012 to the third quarter of 2017, commitments on warehouse lines has increased 70 percent. Of course, if all goes well, a mortgage will be sold quickly into the secondary market (on average 15 days) and the line will be reduced.

The Brookings authors identify three vulnerabilities in the process.

1) margin calls due to aging risk (i.e., the time it takes the nonbank to sell the loans to a mortgage investor and repurchase the collateral) and/or mark-to-market devaluations, 2) roll-over risk and 3) covenant violations leading to cancellation of the lines.

These vulnerabilities are very real, should there be a sudden increase in interest rates or other significant change in the market that causes collateral values to drop. Most nonbank lenders have multiple warehouse lines. However, cross default provisions will trigger a scramble amongst warehouse lenders for a mortgage originator’s assets should it default on one of its lines.

The authors explain,

These sources of warehouse credit began to dry up rapidly in the run-up to the financial crisis as the slowdown in the securitization markets made it difficult for the nonbanks to move loan originations off the warehouse lines and the premiums paid for subprime warehoused loans evaporated. In 2006:Q4 there were 90 warehouse lenders in the U.S. with about $200 billion of outstanding committed warehouse lines; however, by 2008:Q2 there were only 40 warehouse lenders with outstanding committed lines of $20–25 billion, a decline exceeding 85%.34 By March of 2009, there were only 10 warehouse lenders in the U.S. In addition, runs on SIVs led to the collapse of this form of warehouse funding by the end of 2007 … and it has not returned as a funding source post-crisis.

Mortgage servicers have liquidity issues because they are required to continue making payments to investors, tax authorities, and insurers if mortgage borrowers quit making payments. Servicers are eventually reimbursed for these “servicing advances,” however, they need to finance the advances in the interim.

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For example, servicers were stressed last year when hurricane victims were allowed payment forbearance by Ginnie Mae and the GSEs. Fortunately, the servicers were geographically diversified enough to manage through the strain.

Again, everything is dandy if borrowers make their payments. However, as Mike “Mish” Shedlock explains,

Nonbanks are vulnerable to macroeconomic shocks, rising interest rates, home price declines and job losses, often with a bare minimum down payment.

This is happening while debt-to-income DTI ratios are on the rise (Fannie Mae increased its DTI ceiling from 45 percent to 50 percent last July 29) and median FICO scores are dropping.

This is hardly surprising given homes are not affordable.

The crash clock is ticking.

Deja Vu All Over Again? Subprime MBS Demand “Oversubscribed” And S&P Says Risk Is “Contained”

From Zero Hedge.

The stock market is at record highs and people with FICO scores as low as 500 are once again happily obtaining mortgages. Not only that, but these mortgages are once again being securitized and are in demand by yield chasers.

All of the elements that are necessary for the 2008 subprime crisis to repeat itself are starting to fall back into place. Aside from the fact that we have inflated bubbles across basically all asset classes for the most part, not the least of which is evident in the stock market, the Financial Times reported today that not only are subprime mortgage backed securities becoming prominent again, but that the chase for yield was what fueling demand:

Issuance of securities backed by riskier US mortgages roughly doubled in the first quarter from a year earlier, as investors lapped up assets blamed for bringing the global financial system to the brink of collapse a decade ago. Home loans to people with scratches and dents in their credit histories dwindled to almost nothing in the aftermath of the crisis, as litigation-weary lenders retreated to patch up their balance sheets.

But over the past couple of years a group of specialist firms has begun to bring the loans back, navigating a dense web of new rules drawn up to protect borrowers and investors in the $9.3tn US home-loan market. Last year saw issuance of $4.1bn of securities backed by loans that would have been called “subprime” before the last financial crisis, according to figures from Inside Mortgage Finance, with the pace picking up in the latter half of the year. The momentum has continued into 2018, with deals worth $1.3bn in the first quarter — twice the $666m issued in the same period a year earlier.

Our central banks have done such a great job of getting us out of our last crisis that the recovery has prompted a mortgage originators and real estate investors to basically do the same exact thing that they were doing 2006 to 2007. After all, mortgage levels are already almost back to 2008 levels.

If that wasn’t disturbing enough, the hedge fund partner that FT quotes in the article says that the subprime market has “a lot of room to grow“ as if it were some type of new emerging market generating productivity, and not just a carbon copy repeat of exactly what happen nearly 10 years ago.

“The market is . . . starting from such a small base that it has a lot of room to grow,” said Jamshed Engineer, a partner at Axonic Capital, a New York hedge fund with more than $2bn in assets under management.

“[Investors] are definitely chasing yields. Whenever these deals come out, for the most part, they are oversubscribed.”

The Financial Times article tries to couch the fact that all hell could be breaking loose yet again at some point soon by citing Dodd Frank reforms that we reported in March are already past the Senate. The key provisions of the rollback are:

  • Relaxes a host of reporting requirements for small – medium banks, and to a smaller extent, large banks
  • Eliminates a reporting requirement introduced by Dodd-Frank designed to avoid discriminatory lending
  • Relaxes stress testing requirements intended to show how banks would survive another financial crisis
  • Raises the threshold for banks which are not subject to enhanced liquidity requirements, stress tests, and enhanced risk management, from $50 billion to $250 billion – exempting several institutions which could pose systemic risks down the road.
  • Allows megabanks such as Citi to count municipal bonds as “highly liquid assets” that could be used towards the “liquidity coverage ratio,” – assets which can be quickly liquidated during a crisis.
  • Calls for a report on the risks and benefits of algorithmic trading within 18 months

Despite the fact that the FT states that 500 FICO scores are getting approved for mortgages, S&P, one of the willfully ignorant and blind rating agencies that missed the subprime crisis thinks that everything is going to be fine:

“The risk is contained, in our view,” said Mr Saha.

For the way that our Federal Reserve has addressed the problems of 2007 or 2008, these are the end results that they deserve, but the American people ultimately do not.

Mortgage Brokers Are Getting Picky

AFG has released their latest Competition index, based on flows through their systems. Myopic it may be, but it does give us another reference point on the market. Major bank share of new loans drifted lower, but also with significant shifts between lenders. The non-majors’ market share is now at 35.97%

AFG General Manager Broker & Residential, Mark Hewitt explained the results: “The gap between the first placed major lender, Westpac at 14.21% of the market and third placed ANZ at 12.32%, is the closest it has been for some time.

“As AFG has stated many times, a consumer dealing directly with a lender has limited negotiating power or knowledge of the interest rates and lending criteria offered by competitors. This has been further validated by the findings of the interim ACCC Residential Mortgage Price Inquiry. The presence of the mortgage broking channel is one of the few drivers of competitive tension in the Australian lending market.

“Whilst the majors’ market share lifted a couple of percentage points across the quarter, rising from 62.51% in November 2017 to 64.03% at the end of February, three of the four majors went backwards.

“ANZ dropped from 14.93% in November 2017 to 12.32% at the close of the last quarter. CBA’s share of the market dropped from 14.99% to 13.63%, and their subsidiary Bankwest dropped from 3.74% to 3.35%. NAB also recorded a drop, from 8.57% in November 2017 to finish the last quarter at 7.67% of the market.

“Only the Westpac group of brands, Westpac, St George, Bank of Melbourne and BankSA grew, with their market share lifting from 20.28% in November 2017 to 27.05% at the close of the last quarter,” he said.

“Interestingly, the Westpac group’s major gain came in the area of fixed rate loans with their share of that product type increasing from 23.63% to 44.24% of the market.

In a sign the majors are again open for business for investors, their share of that segment of the market has lifted from 64.82% in November 2017 to finish February at 66.78%.

The non-majors’ market share is now at 35.97%. “Amongst the non-majors AMP recorded an increase in market share and lifted from 2.27% to 4.62% and Homeloans recorded an increase from 0.14% to 0.33%.

Trail commissions may lead to “poor customer outcomes,” – CBA

A senior manager of the Commonwealth Bank (CBA) has admitted that upfront and trailing commissions for mortgage brokers can lead to poor customer outcomes, as reported in the Australian Broker.

During his 15 March testimony before the Royal Commission, executive general manager of home buying Daniel Huggins said the commission structure is linked to the size of the loan. The longer loan takes to pay off, the larger the trailing commission will be. “[T]hat can lead to a conflict – well, there is a conflict between – between the customer, you know, and – and the broker,” he added.

Huggins confirmed to Senior Counsel Assisting Rowena Orr that brokers can maximise their income by getting the largest possible loan approved to extend over the longest period of time for the customer to repay.

The bank knew about this as early as February 2017, according to a confidential letter by outgoing CBA CEO Ian Narev to Stephen Sedgwick, who was the independent reviewer for the Retail Banking Remuneration Review back then. Orr presented the confidential letter during the hearing.

“We agree with the reviewer’s observations that while brokers provide a service that many potential mortgagees value, the use of loan size linked with upfront and trailing commissions for third parties can potentially lead to poor customer outcomes,” said Narev in the letter.

“We would support elevated controls and measures on incentives relates to mortgages that are consistent with their importance and the nature of the guidance that is provided,” Narev added. These initiatives include delinking of incentives from the value of the loan across the industry, and the potential extension of regulations such as future and financial advice to mortgages in retail banking.

Another CBA submission attached to Narev’s letter said that broker loans are reliably associated with higher leverage compared to those applied through proprietary channels. “[E]ven for customers with an identical estimate of ex ante risk, loans through the broker channel have higher leverage… [and] loans written through the broker channel have a higher incidents of interest only repayments,” it added.

Huggins agreed with Orr that CBA’s submission lends some support to the case for discontinuing the practice of volume-based commissions for third parties. But he said there are a range of considerations that the bank would have to make.

“There is a first mover problem, in that the person who moved first would likely lose a lot of volume. The second problem is you create a conflict if one person, or half of the people move, and the other half don’t,” Huggins said.

According to Huggins, CBA has not stopped paying volume based commissions to brokers. He also confirmed the lender has not taken any steps towards ceasing its practice.

More Digital Disruption Hits The Mortgage Industry

Another new player has entered the contested mortgage origination sector. Just launched is Loanbid  which says it empowers borrowers with access, choice, and competition to secure a loan from one website.

Using an auction model, borrowers enter their details and requirements once. Lenders and brokers can then assess the information and enter a virtual auction to win the loan with their one time best bids. The platform currently has 18 lenders on its panel, including many of the usual suspects.

All offers are shown to applicants via dashboard and are ranked according to the total cost of the loan. Email alerts are also part of the process. The applicant is not committed to taking a loan, and Loanbid does not offer any advice.

The platform does not charge customers an upfront fee or take trail commissions from lenders. If the loan is settled, Loanbid receives a referral fee from the successful lender or broker. So they are essentially “clipping the ticket.”

Borrowers are only identified by a reference number, so remain anonymous throughout the process. Loan proposals are independently and individually assessed without any impact on their credit rating.  Normal loan verification is then undertaken by the successful lender or broker.

Via Australian Broker

“Borrowers need to wait for just 48 hours for the lenders and brokers to come back to them with a loan best suited to their needs and financial situation, with the borrower to choose the right loan,” said Loanbid partner Paul Dwyer, formerly a banker at St George.

“We will put the power of choice back in the hands of borrowers, who can potentially access thousands of loans based on the information they provide through an obligation-free bidding process,” said Dwyer.

“We have been fastidious in deciding on our partners on the platform, to give our borrowers the best opportunity to ensure they get the right loan for their requirements and lifestyle,” said former NAB banker Darren Roach, a partner at Loanbid.

 

New Wave Of Cheap Interest Only Loans Hits

The story so far. Banks were lending up to 40%+ of mortgages with interest only loans, some even more.

The regulator eventually put a 30% cap on these loans and the volume has fallen well below the limit. Some banks almost stopped writing IO loans.

Source: APRA

They also repriced their IO book by up to 100 basis points, so creating a windfall profit. This is subject to an ACCC investigation to report soon.

The RBA and APRA both warn of the higher risks on IO loans, especially on investment properties, in a down turn.

APRA has confirmed the “temporary” 30% cap will stay for now, although the 10% growth cap in investment loans is now redundant, thanks to better underwriting standards.

Banks have now started to ramp up their selling of new IO loans, to customers who fit within current underwriting standards and are offering significant discounts.  Borrowers will be encouraged to churn to this lower rate.

This from Your Mortgage.

CBA will cut fixed interest rates for property investors across one-, two-, three-, and four-year terms. The cuts, which range from 0.05 percentage points to 0.5 percentage points, apply to both interest-only investor loans and principal-and-interest investor loans.

CBA is also cutting some of its fixed rates for owner-occupiers, including a reduction on owner-occupied principal-and-interest fixed-rate loans by 0.1% over terms of one to two years, landing at 3.89% for borrowers on package deals.

Key rival Westpac also unveiled a suite of fixed-rate changes on Friday, including some cuts to fixed-rate interest-only mortgages, another area where banks have been forced to apply the brakes. The Sydney-based bank also hiked rates across various fixed terms for owner-occupiers.

Westpac will increase fixed-rate owner-occupied home-loan interest rates by 0.1 percentage points for loans of one-, two-, four-, and five-year terms. Across three-year terms, the bank will leave rates unchanged at 4.19%.

Both banks’ rate changes will only impact customers who are taking out new fixed-rate loans, leaving existing mortgages untouched.

CBA’s aggressive pursuit of property investors comes after it said in its most recent half-year results that its loan book was growing more slowly than allowed by the regulators. Credit growth has slowed across the board and house prices in Sydney and Melbourne have begun to soften.

And this from the AFR:

Major lenders are expected to follow the Commonwealth Bank of Australia’s latest round of interest-only mortgage cuts after losing market share because of massively over-estimating the impact of lending caps on their loan books, despite regulatory fears about rising debt and prices, according to analysts.

“Expect others to follow,” said Steve Mickenbecker, group executive for financial services at Canstar, which monitors rates and charges for financial service products, about the CBA’s recent cuts.

Big four lenders started losing market share to smaller lenders and regulation-lite non-bank financial institutions when they slammed on the brakes to meet Australian Prudential Regulation Authority’s 30 per cent cap on interest-only loans.

CBA’s CEO-elect, Matt Comyn, recently flagged plans to rebuild interest-only market share after over-shooting the regulatory 30 per cent target and ending in the low 20s.

Well under lending caps

The bank’s mortgage growth in the 12 months to December 31 was about 5 per cent, compared with about 6 per cent system growth and more than 11 per cent for non-bank financial institutions (NBFI).

From Mortgage Professional Australia.

Meanwhile, Westpac-owned St George cut its two-year fixed-rate investment property loan marginally by -0.04% to 4.60%, and Aussie Home Loans cut its one-year fixed IQ Basic Investment Loan by -0.25% to 4.24%.

Other smaller lenders, such as ING, Mortgage House, and Virgin Money have also dropped some interest-only rates over the previous month.

… the story continues….

Mortgage Lending Sags In January

The latest APRA Monthly Banking Statistics to January 2018 tells an interesting tale. Total loans from ADI’s rose by $6.1 billion in the month, up 0.4%.  Within that loans for owner occupation rose 0.57%, up $5.96 billion to $1.05 trillion, while loans for investment purposes rose 0.04% or $210 million. 34.4% of loans in the portfolio are for investment purposes. So the rotation away from investment loans continues, and overall lending momentum is slowing a little  (but still represents an annual growth rate of nearly 5%, still well above inflation or income at 1.9%!)

Our trend tracker shows the movements quite well. (August 2017 contained a large adjustment.

Looking at the lender portfolio, we see some significant divergence in strategy.  Westpac is still driving investment loans the hardest, while CBA and ANZ portfolios have falling in total value, with lower new acquisitions and switching. Bank of Queensland and Macquarie are also lifting investment lending.

The market shares are not moving that much overall, with CBA still the largest OO lender, and Westpac the largest Investor lender.

Looking at investor portfolio movements for the past year, again significant variations with some smaller players still above the 10% speed limit, but the majors all well below (and some in negative territory).

We will report on the RBA data later on, which gives us an overall market view.

AFG 1H18 Results up 11%

Australian Finance Group (AFG) has today released half yearly results for 2018 with underlying NPAT in H1 FY2018 of $14.4m, up 11% on H1 FY2017, and a reported NPAT in H1 FY2018 of $16.7m.

Residential settlements were up 6% to $18.6b (interesting compared with Mortgage Choice’s 6% fall!) and their combined residential and commercial loan book is $140.8 billion with growth of 11% over H1 FY2017.

Settlements were strongest in NSW, then VIC. But growth in VIC was significantly stronger and it may overtake NSW ahead.  AFG Home Loans (AFGHL) continued to deliver positive financial growth and settlements grew 31% to $1.62 billion.  Lodgements were up 7%, servicing more than 17,000 customers.

The AFGHL loan book has reached $6.5 billion, an increase of 40% on the same period last year. AFGHL now represents 8.7% of overall AFG Residential settlements – up from 7.8% in FY17

Strong organic growth and cash flow generation of the business has allowed AFG to pay a Special Dividend of 12 cents per share.

AFG Securities completed a successful $350m Residential Mortgage Backed Securities (RMBS) issue in October 2017, which underlined the performance of the AFG Securities business.

AFG’s commercial business experienced loan book growth in all states despite softer settlements.

The overall commercial loan book grew by 14% to $7.2 billion. This growth has been driven by a 6% increase in sub-$5m commercial mortgage settlements and a 26% increase in asset finance.

Settlements slipped in NSW, but grew in VIC.

AFG Business has a current panel of five core lenders aimed at the small to medium enterprise (SME) market. Further business lending lines will be added as the platform is rolled out to more brokers looking to diversify their offering.

AFG had over 2,900 active brokers at 31 December 2017, further extending AFG’s national distribution network providing quality lending solutions and service to consumers. Growth continues to be strong in NSW and Victoria, offset by weaker conditions in other states.

The return on equity was 33% and they announced an interim dividend of 4.7c per share fully franked plus a special dividend of 12c per share fully franked