Tag: Mortgage Industry

The Noise In The Mortgage Machine

Data from our Core Market Model highlights that in recent months the number of mortgage applications which are made, but which do not lead to a funded loan is on the rise. Back in 2015, the ratio was around 80%, but now it has dropped to around 50%.

There are a number of reasons why this is the case. First, lending criteria are tighter now, so more loans are rejected. As well as a reduction in acceptable sources of income and tighter analysis of costs, Loan To Value Ratios are lower and the interest rate buffer used for the underwriting assessments are higher.

Second, (and in response to the first), we are seeing more multiple applications to a portfolio of lenders in an attempt to get a single approved loan. These multiple applications are on the rise, and are facilitated by easier online processes and systems.

But we also found that once the lender has given a provisional approval, there is now a higher probability of the loan will proceed to funding, as this second chart shows.

This reflects better application processes across the system facilitated by electronic submission, tighter initial checks, before approval, and the still strong demand for loans.

The reasons for not completing also include loss of a potential purchase, and borrowers choosing not to transact.

What this means in practice is that many brokers and lenders will be chasing their own tails trying to get applications into the system – and they may not be aware that multiple applications are being made for the same potential borrower. All this takes time and effort of course, and costs.

But the good news is that once a provisional offer has been made and accepted there is now a greater probability of the loan being made.

The industry would therefore do well to put some more initial checks in place to test whether multiple applications are being made. This could potentially remove much of the noise – and hence cost –  from the system!

Why non-banks could be the new home for non-resident borrowers

From Mortgage Professional Australia.

Lenders eyeing up wealthy foreigners currently locked out of the banks and developing new processes to combat fraud

Non-resident lending could be set for a return as non-bank lenders become increasingly interested in the sector.

According to La Trobe Financial’s vice president Cory Bannister, “non-resident is a great example of a product that suits non-banks generally.” Speaking at MPA’s Non-Banks Roundtable last week, Bannister said that the low LVRs, low arrears and high net-worth associated with non-resident borrowers made them similar to prime clients.

The banks largely pulled out of non-bank lending in early 2016, citing fears of fraud. However, Bannister believes non-banks can operate safely: “we believe it requires manual assessment and that’s the single characteristic which meant the banks had to step out of that space.”

La Trobe, who have lent to non-residents on and off over the past year, have an international desk with bilingual staff which help ‘weed out’ fraudulent cases.

Growing niche in expat lending

Two other lenders at the panel were already lending to Australian expats: Better Mortgage Management and Homeloans Ltd.

Expats often struggle to find finance at the banks because they earn income abroad and in foreign currencies. BMM’s managing director Murray Cowan told the panel that “I think the expat sector may have been unfairly characterised as the same as non-residents and that might have created a bit of an opportunity for us there.”

Aaron Milburn, director of sales and distribution at Pepper Money, said that although Pepper doesn’t currently lend to non-residents “I wouldn’t discount it for the future.” He noted that Pepper’s international spread helped provide the infrastructure to do so.

Can non-banks handle non-residents?

Non-banks at the panel were concerned however that a return to non-resident lending could lead to a surge in business.

In fact, it could cause volumes to triple ‘overnight’, suggested Homeloans and RESIMAC general manager of third party distribution Daniel Carde. The panel broadly agreed that such a surge would be difficult to deal with. “No business is set up for triple volumes,” argued Liberty’s national sales manager John Mohnacheff “we can probably handle 5-10% variability”.

A note of caution was sounded by FirstMac founder Kim Cannon. “The RBA wants to stop [non-residents buying property]; they don’t want to cure it,” he told the panel. He warned that surge in non-residents getting financed by non-banks would be “treading on dangerous ground” with regulators.

Mortgage fintech looks to blockchain for home loans

From The Adviser.

The CEO and founder of an online mortgage platform has revealed that the fintech is looking into how it can utilise blockchain to make the home loan contract process more efficient.

Speaking at the Informa Credit Law Conference, Mandeep Sodhi, the CEO of HashChing, revealed that the platform was looking into the distributed ledger technology for mortgages.

When asked by The Adviser what HashChing was using blockchain for, Mr Sodhi said: “We have been exploring blockchain in the home loan contract, smart contract space and securitisation as well.

“It’s more in the future road map but mostly around how quickly can we exchange a contract, through smart contracts. But also, if you decide to come on with a loan product at a later stage (of course, we’ll distribute it through brokers only), but then, how quickly can you settle that loan as well and securitisation? That’s where blockchain plays a really important role, if you need a securitised [loans] done quickly.”

He concluded: “Start-ups are tapping into AI technology, through Amazon Alexa, Google. It’s where banks are lagging, but start-ups are moving fast. That’s what banks need to think about.”

Bank couldn’t beat broker rate

Looking back at the journey of HashChing, Mr Sodhi stated that the idea first came about in 2014, after he found that a major bank, at which he worked, could not match or beat a broker-secured home loan rate.

Speaking at the Informa Credit Law Conference, Mr Sodhi said that he had gotten his mortgage through the bank at a discounted employee rate, but later found that one of his friends had gotten a lower rate for his mortgage at the same bank.

He said: “I was a loyal banker looking for my first home loan and I reached out and said: ‘Hey, can I get my staff discount?’ And my bank said that they could give me the special staff discount rate.

“I told my friend, Atul Narang (the co-founder of HashChing), about securing this great rate on my home loan and asked him: ‘Why don’t you become a banking man?’ And he said: ‘Well, actually, I’ve secured a better rate than you, also at your bank.’ And that left a bad taste in my mouth. So, I took his letter to the bank and asked how he got a better rate and asked them to match it, or at least beat it, because it’s really embarrassing. And they said: ‘We can’t do that.’ When I asked why, they said it was because he had used a mortgage broker.

“Now, I didn’t think that mattered… I worked for the bank. But they said: ‘We can’t match mortgage brokers’ rates.’”

It was after this “frustrating experience” that Mr Sodhi said he tried to find the same rate on comparison sites and then through a broker, but still couldn’t (he reportedly didn’t use Mr Atul’s broker due to geographical barriers).

Mr Sodhi continued: “There are thousands of people searching for good home loan rates every day on home loan comparison sites, who are clueless, just like I was. And that’s when we decided to start HashChing — where the journey starts with a negotiated rate that the broker secures from the lender.”

He went on to tell delegates that the majority of fintech start-ups come to market because of “frustrations with the banking system”.

“They’ve seen this opportunity, tried to change it in banking, but have been shut down — and that happened to me as well, so we decided to take it on ourselves.”

Mr Sodhi said that the HashChing platform, which launched in 2015, now has 679 brokers on the platform helping 23,959 borrowers apply for more than $12 billion of loans through more than 60 lenders.

Regulator Activity Begins To Bite – AFG

AFG’s latest Mortgage Index results released today shows that major structural change in the Australian lending landscape is continuing. Whilst it is a view from their loan throughput, it underscores the market evolution, and that Victoria is the last bastion of the property sector.

“Today’s results paint a very different picture from this time last year,” said AFG CEO David Bailey.

“Regulator-led tightening of investor lending has led to a further drop in investor volume and they are now sitting at an all time low of 29% of the market.

The shift in lender appetite from investors to upgraders is also evident in average loan size. “The national average home loan is now sitting at an all time high of $491,000,” said Mr Bailey. “This increase can be explained by the fact that people generally spend more for their primary place of residence than they do for an investment property.

The number of people looking to refinance has dropped to 25%, whilst those keen to upgrade their living situation is increasing with upgraders now representing 41% of the market.

“This is also likely to be a reflection of the lack of lending options on the table for investors wanting to refinance, as lenders pull back from the investor market to meet regulator demands,” said Mr Bailey.

The major lenders’ share of the market is also down to a post-GFC low of 64.4% as borrowers continue to explore alternatives outside of the major bank owned brands.

“Looking at loan type, fixed rates are now at 26.3% of all loans which confirms many Australians are anticipating that the next interest rate move will be up” said Mr Bailey.

First home buyers are enjoying their third consecutive quarter in double digits since the beginning of 2014. “National market share for first home buyers has lifted to 13% across the last quarter, helped in part by new stamp duty concessions kicking in on July 1 for this segment of the market in Victoria and New South Wales.”

Victoria continues to set the pace with lodgement volumes in that state up 27% on the first quarter of last year whilst every other state has lost momentum to varying degrees. The strength of the Victorian home market is also evidenced in the average loan size for that state, which is 5% higher than it was at the same time last year.

“Overall, volumes are up on the previous two quarters, however, compared to the same time last year they are flat. This translates into the view that regulator-led changes are being felt everywhere except Victoria,” concluded Mr Bailey.

FBAA calls out UBS conclusion as ‘assumptions’

From The Adviser.

The Finance Brokers Association of Australia has excoriated UBS for releasing reports “based on assumptions and not data”.

Source: UBS

Earlier this week, banking analysts at UBS released a banking sector update that suggested a third of borrowers with interest-only (IO) loans “do not know or understand that they have taken out an IO mortgage”.

According to the results, 23.9 per cent (by value) of respondents stated that they were on an IO mortgage.

UBS analysts were reportedly surprised by this finding, as it was much below APRA’s figure that stated 35.3 per cent of loan approvals in the year to June were for IO loans.

However, the analysts suggested that instead of its figures/APRA’s figures being at fault, the disparity was down to the ignorance of borrowers.

The report concluded: “While we initially suspected that this was a sample error… We believe a more plausible explanation is that around one-third of IO customers do not know or understand that they have taken out an IO mortgage.”

While the analysts acknowledged that this could appear “farfetched”, they went on to say that the conclusion “needs to be considered in the context of the lack of financial literacy in Australia”.

It’s this conclusion that many, including the executive director of the FBAA, have taken exception to.

Speaking to The Adviser, FBAA executive director Peter White said that the conclusion was “the biggest load of nonsense on the planet”.

He said: “There is no analytical data to support what they’re saying. Their comments are that this is what they believe is the response; they are assuming that people don’t know that they have an interest-only loan. So, the conclusion is based on assumptions, not data.

“When you look at the process that a borrower goes through, it’s impossible for them not to know that they are on interest-only. From the conversation they have with their broker or lender, leading into the paperwork, the quote, credit guide, the loan documentation, communications from the broker or lender, the loan contract, the key fact sheets for their home loan — all of that spells out what kind of loan they have and what kind of repayments they will be making. “

He continued: “There are so many documents that people get over and above just the conversation that is had, that it is impossible for somebody not to know that they have an interest-only facility.”

Mr White did acknowledge that while borrowers may not know the “nuances” of their loan structures, he also did not expect borrowers on principal & interest loans to know all the nuances of their loan either.

“But the reality is that they know they are paying off part interest and part principal and how that works. And the reality is that those with interest-only know they are paying off the interest.”

Ties to ASIC remuneration review

The head of the FBAA went on to decry the trend of data not being taken in context or taken to some considerable degree.

He highlighted that some of the findings and proposals of the ASIC review into broker remuneration was another case where the data “didn’t go to the end of the lending journey”.

Adding that he believed ASIC “did a good job” and that its data research was “extensive”, Mr White suggested that some of the conclusions were “based on assumptions of what the data meant.”

He gave the example of the finding that brokers write higher loan-to-value ratio loans, and were responsible for loans with larger loan sizes.

“They assume that’s perceived to be a bad outcome driven by commission (but, of course, we know that this isn’t commission chasing). But, more importantly, they didn’t ask the borrower whether they thought it was a bad outcome.

“So, while [their conclusion] is one possible result of the data, it’s not the only one.

“Likewise, with the UBS report, they said that they believe that this result came from people not understanding that they are on interest-only. But there is no evidence. That’s absolutely ludicrous. To me, it puts a big question mark over the competencies of the people named as conducting this research.”

Mr White concluded: “UBS are not lenders in this space, so they’re making commentary outside of their knowledge and skill set and coming up with the wrong answers. They aren’t doing themselves any favours.

“Consumers are not idiots. They do understand what they are doing. They are well informed.”

 

Mortgage Tightening – The Property Imperative Weekly 30 Sept 2017

Mortgage Lending is slowing and banks are tightening their underwriting standards still further, so what does this tell us about the trajectory of home prices, and the risks currently in the system?

Welcome to the Property Imperative weekly to 30th September 2017. Watch the video, or read the transcript.

We start our review of the week’s finance and property news with the latest lending data from the regulators.

According to the RBA, overall housing credit rose 0.5% in August, and 6.6% for the year. Personal credit fell again, down 0.2%, and 1.1% on a 12-month basis. Business credit also rose 0.5%, or 4.5% on annual basis. Owner occupied lending was up $17.5 billion (0.68%) and investment lending was up $0.8 billion (0.14%). Credit for housing (owner occupied and investor) still grew as a proportion of all lending. The RBA said the switching between owner-occupier and investment lending is now $58 billion from July 2015, of which $1.7 billion occurred last month. These changes are incorporated in their growth rates.

On the other hand, data on the banks from APRA tells a different story. Overall the value of their mortgage portfolio fell 0.11% to $1.57 trillion. Within that owner occupied lending rose 0.1% to $1.02 trillion while investment lending fell 0.54% to $550 billion. As a result, the proportion of loans for investment purposes fell to 34.9%.

This explains all the discounts and special offers we have been tracking in the past few weeks, as banks become more desperate to grow their books in a falling market. Portfolio movements across the banks were quite marked, with Westpac and NAB growing their investment lending, while CBA and ANZ cutting theirs, but this may include loans switched between category. Remember that if banks are able to switch loans to owner occupied categories, they create more capacity to lend for investment purposes.  Putting the two data-sets together, we also conclude that the non-bank sector is also taking up some of the slack.

Our mortgage stress data got a good run this week, with the AFR featuring our analysis of Affluent Stress. More than 30,000 households in the nation’s wealthiest suburbs are facing financial stress, with hundreds risking default over the next 12 months because of soaring debts and static incomes. This includes blue ribbon post codes like Brighton and Glen Iris in Victoria, Mosman and Vaucluse in NSW and Nedlands and Claremont in WA.

The RBA is worrying about household debt, from a financial stability perspective, according to Assistant Governor Michele Bullock.  She said households have really high debt – mainly mortgages, as a result of low interest rates and rising house prices, and especially interest only loans. “High levels of debt does leave households vulnerable to shocks.” She said. The debt to income ratio is rising (150%), but for some it is much higher. We will release our September Stress update this coming week.

Debt continues to remain an issue. For example, new data from the Australian Financial Security Authority shows that in 2016–17, the most common non-business related causes of debtors entering personal insolvencies was the excessive use of credit (8,870 debtors), followed by unemployment or loss of income (8,035 debtors) and then domestic discord or relationship breakdown (3,222 debtors). However, employment related issues figured first in WA and SA.

It is also worth saying the Bank of England has now signalled that the UK cash rate will rise, and this follows recent statements from the FED in the same vein. It is increasingly clear these moves to lift rates will raise international funding costs to banks and put more pressure on the RBA to follow suit.

Meantime, lenders continue to tighten their underwriting standards.

ANZ announced that it will be implementing new restrictions on some loans for residential apartments, units and flats in Brisbane and Perth. Now there will be a maximum 80 per cent loan-to-value ratio for owner-occupier and investment loans for all apartments in certain inner-city post codes. We think these changes reflect concerns about elevated risks, due to oversupply and price falls. ANZ’s policy changes apply to all apartments in affected postcodes, including off-the-plan and non-standard small residential properties valued at less than $3 million. Granny flats though are excluded.

More generally, ANZ also issued a Customer Interview Guide with specific which topics brokers should discuss with home and investment loan borrowers. “We expect brokers to use a customer interview guide (CIG) to record customer conversations as a minimum moving forward,” noted ANZ “while it is not required to submit the CIG with the application, it should be made available when requested as a part of the qualitative file reviews.”

CBA launched an interest-only simulator to help brokers show customers the differences between IO and P&I repayments and a new compulsory Customer Acknowledgement form to be submitted with all home loan applications that have interest-only payments to ensure that IO payments meet customer needs. CBA said that brokers must complete the simulator for all customers who are considering IO payments irrespective of whether the customer chooses to proceed with them. These requirements will be mandatory for all brokers and will become effective on Monday, 9 October.

Suncorp announced it is introducing new pricing methodology for interest only home lending. Variable interest rates on existing owner-occupier interest only rates will increase by 0.10% p.a and variable interest rates on all investor interest only rates will increase 0.38% p.a., effective 1 November, 2017.

But what about property demand and supply?

The ABS said Australia’s population grew by 1.6% during the year ended 31 March 2017. Natural increase and Net Overseas contributed 36.6% and 59.6% respectively. In fact, all states and territories recorded positive population growth in the year ended 31 March 2017, but Victoria recorded the highest growth rate at 2.4%. and The Northern Territory recorded the lowest growth rate at 0.1%. Significantly, Victoria, the state with the highest growth rate is currently seeing the strongest auction clearance rates, strong demand, and home price growth. This is not a surprise, given the high migration and this may put a floor on potential property price falls.

On the other hand, we also see an imbalance between those seeking to Trade up and those looking to Trade down, according to our research. Those trading up are driven by expectations of greater capital growth (42%), for more space (27%), life-style change (14%) and job change (11%). Those seeking to trade down are driven by the desire to release capital for retirement (37%), to move to a place which is more convenient (either location, or for easier maintenance) (31%), or a desire to switch to, or invest in an investment property (18%).  In the past we saw a relative balance between those seeking to trade up and those seeking to trade down, but this is now changing.

Intention to transact, highlights that relatively more down traders are expecting to transact in the next year, compared with up traders. Given that there around 1.2 million Down Traders and around 800,000 Up Traders, we think there will be more seeking to sell, than buyers able to buy. As a result, this will provide a further drag on future price growth, especially in the middle and upper segments of the markets, where first time buyers are less likely to transact. This simple demand/supply curve provides another reason why prices may soon pass their peaks. Up Traders have more reason to delay, while Down Traders are seeking to extract capital, and as a result they have more of a burning platform.

Finally, auction clearance rates were still quite firm, despite the fact that property price growth continues to ease and time on market indicators suggest a shift in the supply and demand drivers, especially in Sydney.

So, overall, banks are on one hand still wanting to grow their home loan portfolios (as it remains the main profit driver), but lending momentum is slowing, and underwriting standards are being tightened further, at a time when home price growth is slowing.

This leaves many households with loans now outside current lending criteria, households who are already feeling the pain of low income growth as costs rise. More households are falling into mortgage stress, and this will put further downward pressure on prices and demand.

So we think the risks in the mortgage market are extending further, and the problem is that recent moves to ease momentum have come too late to assist those with large loans relative to income. As a result, when rates rise, as they will, the pain will only increase further.

And that’s the Property Imperative weekly to 30th September 2017.

RBA Says Housing Credit Still Growing

The latest RBA data on credit, to August 2017 tells a somewhat different story to the APRA data we discussed already. There were clearly adjustments in the system [CBA in particular?]  and the non-bank sector is picking up some of the slack.

Overall housing credit rose 0.5% in August, and 6.6% year-ended August 2017. Personal credit fell again, down 0.2%, and 1.1% on a 12 month basis. Business credit also rose 0.5%, or 4.5% on annual basis. But overall lending for housing is still growing.

Here are the month on month (seasonally adjusted) movements. Owner occupied lending up $17.5 billion (0.68%), investment lending up $0.8 billion (0.14%), personal credit down $0.4 billion (-0.24%) and business lending up $4.2 billion or 0.47%.

As a result, the proportion of credit for housing (owner occupied and investor) still grew as a proportion of all lending.

Another $1.7 billion of loans were reclassified in the month. This will give an impression of greater slowing investment loan growth as a result.

Following the introduction of an interest rate differential between housing loans to investors and owner-occupiers in mid-2015, a number of borrowers have changed the purpose of their existing loan; the net value of switching of loan purpose from investor to owner-occupier is estimated to have been $58 billion over the period of July 2015 to August 2017, of which $1.7 billion occurred in August 2017. These changes are reflected in the level of owner-occupier and investor credit outstanding. However, growth rates for these series have been adjusted to remove the effect of loan purpose changes.

Bank Mortgage Lending Falls

The latest data from APRA, the monthly banking stats to August 2017 shows the first overall fall in the value of mortgage loans held by the banks, for some time, so the macroprudential intervention can be said to be working – finally – perhaps! Or it could be more about the continued loan reclassification?

Overall the value of mortgage portfolio fell 0.11% to $1.57 trillion. Within that owner occupied lending rose 0.1% to $1.02 trillion while investment lending fell 0.54% to $550 billion. As a result, the proportion of loans for investment purposes fell to 34.93%.

This explains all the discounts and special offers we have been tracking in the past few weeks, as banks become more desperate to grow their books in a falling market.

Here are the monthly growth trends.

Portfolio movements across the banks were quite marked. There may be further switches, but we wont know until the RBA data comes out, and then only at an aggregate level. We suspect CBA did some switching…

The loan shares still show Westpac the largest lender on investor mortgages and CBA leading the pack on owner occupied loans.

All the majors are below the 10% investor loan speed limit.

So the question will be, have the non-bank sector picked up the slack? In fact the RBA says $1.7 billion of loans were switched in the month. This probably explains only some of the net fall.

 

Borrowers in the dark over rising rates

From The Advisor.

A mortgage market analyst has said that he is “astonished” that banks don’t tell borrowers how much their repayments will be if rates were to rise.

More than half of borrowers have no clue what impact a 2 per cent rate rise will have on their home loan, according to Digital Finance Analytics principal Martin North.

“One of the things I’m amazed about is lenders don’t actually tell people what their repayments will be if rates were to rise by 2 or 3 per cent — in other words, back to normal levels,” Mr North told The Adviser.

“They do the calculations because of serviceability buffers, but that is not disclosed to consumers,” the principal said, adding that borrowers have very little “feel” of how their mortgages will behave in a rising interest rate environment.

“My research suggests that only half of them have a budget and know what they are spending. If you ask them what the effect of a 2 per cent rate rise will be on their mortgage, more than half have no idea.”

Mr North’s comments come amid growing speculation that the Reserve Bank will begin lifting the cash rate from next year. High levels of household debt are a chief concern for the RBA as it looks to tighten monetary policy.

Last week, Reserve Bank governor Philip Lowe warned that in the current environment, “household spending could be quite sensitive to increases in interest rates”.

DFA’s Martin North explained that on a $100,000 mortgage, a 25 basis point rate rise equates to about $30 more a month on mortgage repayments.

“On a million-dollar mortgage, you can see that even a small interest rate rise is a huge cash cost each month.”

His comments come as new figures show that a concerning number of property investors are unaware of how they will be effected by lending changes.

The 2017 PIPA Annual Investor Sentiment Survey, released this week, found evidence of mortgage stress among investors moving from interest-only (IO) to principal and interest (P&I) mortgages.

PIPA chair Ben Kingsley said that there are a few worrying figures that reflect a level of uncertainty among investors when it comes to finance.

“We did see some evidence of lending fatigue in terms of investors that have been forced to stop borrowing,” Mr Kingsley told The Adviser.

While the majority of investors with interest-only (IO) loans said that they won’t struggle to meet the new principal and interest (P&I) repayments once their current IO period expired, 12 per cent said that they would.

“I was a little bit worried that 12 per cent said if their loans switched to P&I they would struggle,” Mr Kingsley said.

“What was even more interesting to me was that 20 per cent were unsure. I would like to think that many investors should know what is important to them.”