Tag: Mortgage Industry

AFG Highlights First Time Buyers

AFG has released their mortgage index today including Q3 2017. The overall volume of lodgements fell again, though volumes are still higher than last year at this time.

This data provides additional insights into the market, with the caveat, it reflects transactions via the AFG channel only.

The mix between majors and non-majors remained similar to last quarter, when the non-majors share grew a little.

The volumes of first time buyers rose a little, whilst refinanced transactions fell a little.

 

The national First Home Owner Grant (FHOG) scheme funded by the states and territories has largely been hailed a success as it seeks to ease the hefty upfront costs for new entrants to the market. The effectiveness of the scheme however has been questioned of late and it appears this may have encouraged governments to act. “The Victorian state government has recently announced a number of changes to the scheme in that state and New South Wales is currently examining their options to help counter rising house prices in those states,” said AFG Interim CEO David Bailey.

AFG data shows positive signs amongst the FHB market with lodgments lifting back up to 10% for the first time since the first quarter of 2014.

“First home buyer numbers have been in the single digits for some time. It is good to see state governments looking to support those trying to get a foot on the property ladder. Time will tell if the proposed changes to the scheme go far enough to assist those looking to buy their first home in our two most populous states.”

APRA-imposed lender policy changes have had an impact on both the investor market and refinancers as many lenders lift interest rates for borrowers.

“Lenders have been told by the regulator to rein in their exposure to the investor market and APRA continues to monitor growth in lending to investors,” said Mr Bailey. “As a result many lenders have embarked upon a series of rate increases and a tightening of credit policy for investors to comply with APRA’s guidelines.

“This activity has seen investor loans drop from 34% to 32% across the quarter.”

Those looking to refinance have also been impacted, with that segment of the market dropping from 38% to 35% last quarter – its lowest level since the third quarter of 2015.

In overall lodgment numbers, AFG has reported a lift of 8% on Quarter 3 last year driven primarily by increasing activity of upgraders. “With a significant amount of changes being made to the appetites and pricing of lenders, help from a mortgage broker can be vital for consumers trying to navigate the dynamic market that is home lending,” said Mr Bailey.

“A result that should please the regulators is a drop in the loan to value ratio (LVR) in all states apart from South Australia where a marginal increase of 0.4% was evident. The national LVR is now down to 68.6%, the lowest level since the first quarter of 2013,” he concluded.

Financers deal out questionable loans for non-residents

From Australian Broker.

Evidence has emerged suggesting alternative lenders are offering commercial loans to non-residents for the purchase of residential property.

Loan documents obtained by Australian Broker through an anonymous source show commercial finance firm Prime Capital approving ‘working capital’ for the purchase of an inner city apartment in Brisbane.

The 12-month business loan for $315,000 was approved on 23 March for a property estimated to be worth $575,000. Despite this being a commercial loan, the borrower’s Australian Company Number (ACN) was only registered a day later.

Conditions for the loan include a “lower” interest rate of 10.95% per annum with a “higher” rate of 2% per month applying in the event of default.

Additional fees include a 2.2% establishment fee, a monthly loan management fee of 0.2%, a default fee of $635 per hour for time spent dealing with the default, and a 2.2% termination fee.

Avoiding the squeeze

This is an example of how alternative financiers may bypass tighter regulations on foreign lending as well as the guidelines in the National Consumer Credit Protection (NCCP) Act, the source said.

“Since last year, there has been a lot of tightening up on non-resident lending so basically these non-resident investors can’t borrow anymore. A lot of private lenders have come out and now basically ask buyers to change the purchase contract into a business.”

This involves creating an ACN or Australian Business Number (ABN) with the lender then providing ‘working capital’ to that business.

“This actually makes sense in a commercial deal because it’s working capital for you to purchase property. However, this is literally playing around with words. In the end, you’re still purchasing a residential unit for investment purposes.”

Risk at all costs

The excessive fees offered in the leaked loan contract were one concern, our source said, especially since they could be further increased in the event of default.

One condition of default in Prime Capital’s approved loan is using funds for a purpose other than working capital. However, whether this condition is met by purchasing residential property is a grey area, the source said.

“It depends on the angle that you take. From the company’s perspective, they are buying a property which can be deemed as working capital but from a transactional perspective, it’s borrowing to buy a residential unit.”

This means there is a risk that the borrowers in these schemes could eventually have their properties seized, he said.

“Obviously, the company has the right to take the property away from the borrower but they may not because they’ll lose business in the future. It may or may not be the case that they want to take the property – it’s a matter of what makes more money.”

Client confirmation

Prime Capital told Australian Broker of the challenges in the early application stages to confirm all details provided.

“We can confirm approvals are conditional, including being subject to items like valuation and any required clarification around use of funds/commercial purpose. It is a condition of our funding lines that our lawyers (Dentons and Kemp Strang) review all files before settlement to ensure compliance with our lending guidelines and all regulatory requirements,” they said in an emailed statement.

Regulated or unregulated?

If an unregulated commercial loan is written which should have fallen within the regulated residential mortgage space, there can be quite hefty fines as well as sanctions by the Australian Securities & Investments Commission (ASIC), Elise Ivory, partner at law firm Dentons, told Australian Broker.

“If they have an ACL and they’ve treated a loan as unregulated when they shouldn’t have, that could have implications for their licence.”

There are also implications for the borrower if it is determined they had defrauded the lender, Ivory said.

Determining whether a borrower is guilty of fraud is a difficult question that depends on a range of factors including who structured the loan, whether the lender or broker made recommendations or whether the borrower was acting alone.

Proper usage of funds

To ensure that funds are used for the purpose originally stated, lenders should note exactly where the loan proceeds are going on settlement, she said.

“Look at the cheques that are being drawn, look at the transfers that are being made – actually look at how the funds are being dispersed. That’s probably the best way to see what’s going on.”

A red flag for working capital being used to purchase residential property would be a cheque for the entire loan amount going to a third party the lender has never heard of, Ivory said.

“They would need to check why that party is being paid, who they are, what they have to do with the transaction. We normally recommend that any funds dispersed in excess of $10,000 must be investigated in terms of why that cheque is being paid to whomever it’s being paid to.”

“Lenders certainly can’t close their eyes to what the loan is actually being used for and pretend that just because they were told it was working capital for a company that this is exactly what is being done with it.”

Beware the newborn firm

Another big red flag is that if the company has only just been established prior to the loan, Ivory said, adding that further questions should be asked at this point.

“Why has the company just been set up? Has it been trading before? What is it going to be doing? If it was set up last week and suddenly it needs a large amount of money, the lender should understand what that money’s being used for.”

Major bank reveals lack of ‘clarity’ around aggregator oversight

From The Adviser.

A big four bank has acknowledged that data quality and public reporting could be further improved in the mortgage industry, revealing it ‘does not have clarity’ around some aggregator data.

Speaking last week at the final leg of the second series of the Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — NAB general manager for broker distribution Steve Kane touched on Finding 13 of the report, which notes that the regulator encountered “significant issues with the availability and quality of key data” from some participants.

According to the remuneration report, the lack of some data requested “affected [ASIC’s] ability to analyse the data for some of [its] core review objectives [and] raises concerns with the participants’ ability to monitor consumer outcomes in relation to their businesses”.

Some of the examples of the lack of data included an inability by a lender to “automatically track whether a particular loan was arranged by a particular individual broker or broker business”, which “increases the risk that lenders may be dealing with unlicensed persons” and “means that lenders have little visibility of patterns of poor loan performance connected to these individuals or businesses”.

At the NAB event, Mr Kane acknowledged that there was further work to be done in this area.

He said: “This is an interesting one. As a lender, we have lots of information on individual brokers and the loans they submit and we have lot of information about aggregators and their total portfolio… but we don’t have, for example, lots of information about any individual firms that operate (with many brokers under them) under that particular aggregator. That is just one example. So, we don’t have clarity around that.”

Mr Kane added that it is therefore “fair to say that the aggregators will be working much more closely with lenders around data” in the future.

The general manager for broker distribution went on to say that, through Proposal 6*, it was “clear that ASIC expected brokers to obviously adhere to NCCP, responsible lending and compliance issues around maintaining a licence, having your own ACL or being accredited under someone else’s’ ACL… [and that] the aggregators need to understand that brokers are actually compliant with all of those things… [and] actually be able to provide evidence of that and good consumer outcomes too”.

He added: “And they’re saying that the lenders need to do that as well…[they] need to ensure the aggregators have the proper information, proper record keeping, and proper understanding of the roles and responsibilities in relation to the legislation and good consumer outcomes.”

Public reporting regime

As well as improving oversight of brokers and broker businesses, ASIC has also proposed to Treasury that there be a new public reporting regime to “improve transparency in the mortgage broking market” (Proposal 5).

Specifically, this proposes that there be public reporting on:

(a) the actual value of remuneration received by aggregators and the potential value if all criteria for remuneration are satisfied;

(b) the average pricing of home loans that brokers obtain on behalf of consumers;

(c) the average pricing of home loans provided by lenders according to each distribution channel; and

(d) the distribution of loans by brokers between lenders to give consumers a better indication of the range of loans that brokers within the network offer.

Touching on this proposal, Mr Kane said that one such solution could be that brokers give their customers “information that says ‘I’ve settled 50 deals this year, I’ve used this number of banks, I’ve obtained this amount of finance and this has been the price on average I’ve achieved for the customer’. It could get down to this level, which is very important in terms of disclosure to the customers,” he said.

“This all goes to the governance of oversight perspective, which is really now starting to say: ‘Do we, as an industry, have a clear understanding of all of the consumer outcomes that brokers are providing to their customer? Do we have proper understanding of whether NCCP responsible lending is met at every instance for the customer? Do we have a robust process to identify when a broker has done wrong thing and therefore the accreditation has been removed from lenders and aggregators? Do we have a clear line of sight and understand what the process is for those people? Do we have a much stronger regime in relation to a register of all of these ‘bad apples’ and how do we go about doing that? How do we go about ensuring that the end consumers know that they are not to be dealing with those people?’”

Mr Kane concluded: “When it comes to governance and oversight, it really is about accountabilities and responsibilities and understanding that disclosure to the customer about all the facilities that are available to them.

“So,” he said, “you can see that there is going to be far more reporting available to the public around these things.”

“Governance and oversight will play a much bigger role and therefore there will be much more work an information sharing and much more collation of performance and outcomes for consumers.”

The Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — also revealed that the big four bank believes that Australian brokers could achieve up to 73 per cent market share if reaction to the ASIC remuneration review is “right”.

NAB’s executive general manager for broker partnerships, Anthony Waldron, told brokers that the industry reaction to the current consultation on the ASIC report could further boost the third-party share of the market by improving trust.

Mr Waldron said that there is an “opportunity” if “industry can react and get this right”.

He explained: “It’s the opportunity for more people to understand what brokers do, it’s the opportunity to build trust even further in what you do. And if we can do that then we won’t be talking about 53 or 54 per cent of mortgages going through the broker community, we will be talking about more like the numbers in the UK where it is already in the 72 or 73 per cent.”

*Proposal 6 of ASIC’s Review of broker remuneration states that the regulator expects lenders and aggregators to improve their oversight of brokers and broker businesses, for example by using a consistent process to identify each broker and broker business (such as the use of the Australian credit licensee or credit representative number where relevant, or a unique number provided by the aggregator).

Australia’s Limits on Interest-Only Mortgages Will Curb Riskier Lending

Moody’s says last Friday, the Australian Prudential Regulation Authority (APRA) announced new measures to restrict growth in riskier mortgage loans, including limiting the origination of interest-only mortgages, particularly those with high loan-to-value (LTV) ratios. On Monday, the Australian Securities Investments Commission (ASIC) announced that it will closely monitor lenders and mortgage brokers to ensure they are not inappropriately recommending more expensive interest-only loans to borrowers.

The new measures are credit positive for Australian banks, residential mortgage-backed securities (RMBS) and covered bonds because they will curb growth in riskier mortgage loans amid rising house prices and high household indebtedness. The measures include limiting the flow of new interest-only mortgages by banks to 30% of total new residential mortgage lending. Banks also will be required to have internal limits on the volume of interest-only lending at LTV ratios of more than 80% and ensure that there is strong justification for any interest-only loan with an LTV of 90% or more.

Interest-only loans accounted for 38% of total housing loan approvals in December 2016 and for more than 30% of total housing-loan approvals every month since June 2009 (see Exhibit 1). Housing investment loans, which are often interest-only loans, accounted for 35% of total housing loan approvals as of December 2016. In the RMBS sector, interest-only loans account for 35% of the mortgages backing the deals we rate.

We expect banks to raise interest rates on interest-only loans to reduce growth in this segment and support their net interest margin from ongoing price competition for lower-risk loans and stable deposits. When APRA introduced limits on housing investment loans in December 2014, banks responded by raising interest rates on such loans. In addition to the new limits on interest-only loans, APRA instructed banks to ensure that growth in housing investment loans remains “comfortably” below the 10% limit introduced in December 2014. APRA advised that banks will no longer have leeway to exceed this growth speed limit and that any breach will immediately prompt a review of the offending bank’s capital requirements. This contrasts with APRA’s original guidance, under which the 10% cap was not a hard limit.

APRA also announced that it would monitor the warehouse facilities that banks use to fund non-bank lenders. APRA does not regulate non-bank lenders, but monitoring the warehouse facilities will effectively allow the regulator to influence non-banks’ mortgage underwriting standards and promote the overall stability of the financial system. Non-bank lenders have increased housing investment lending since the introduction of the 10% limit on such loans (see Exhibit 1).

Although the APRA’s and ASIC’s measures add a layer of protection against a house price correction for banks, RMBS and covered bonds, it remains to be seen how effective these measures will be amid moderating house price appreciation, particularly when low interest rates continue to support housing demand. As Exhibit 2 shows, house prices have continued to rise, despite previous measures to slow the housing market.

APRA’s and ASIC’s latest measures and interest rate increases by banks on interest-only loans will slow demand for housing, but we continue to expect house prices in Australia to rise amid low interest rates. Although low interest rates will continue to support borrowers’ capacity to service their debt, rising house prices, in combination with high household leverage and low wage growth, remain risks for banks, RMBS and covered bonds.

The RBA on Housing and Debt

Remarks at tonights Reserve Bank Board Dinner by Philip Lowe, RBA Governor included the level of household debt and the housing market.

This is something we have been focused on for some time. The level of household debt in Australia is high and it is rising. Over the past year the value of housing-related debt outstanding increased by 6½ per cent. This compares with growth of around 3 per cent in aggregate household income. The result has been a further rise in the ratio of household debt to income, from an already high level.

In aggregate, households are coping reasonably well with the higher debt levels. Arrears rates remain low and many households have built up sizeable buffers in mortgage offset accounts. At the same time, though, slow growth in wages is making it harder for some households to pay down their debt. For many people, the high debt levels and low wage growth are a sobering combination.

In the housing market, conditions continue to vary considerably across the country. The Melbourne and Sydney markets are very strong and prices are increasing briskly. In contrast, conditions are more subdued in most other cities and, in some areas, most notably Perth, prices have declined. Nationally, growth in rents is the lowest for some decades.

So it’s a complex picture and there is not a single story that applies across the country. But, as is often the case in economics, it largely comes down to supply and demand. On the demand side, population growth in Australia – especially in our largest cities – picked up unexpectedly in the mid 2000s and it is only in the past couple of years that the rate of home building has responded. This imbalance was compounded by insufficient investment in the transport infrastructure needed to support our growing population. Nothing increases the supply of well-located land like good transport links. Underinvestment in this area is one of the factors that has pushed housing prices up. Put simply, the supply side simply did not keep pace with the stronger demand side. The result has been higher prices.

Not surprisingly, the rising prices have encouraged people to buy residential property as an investment in the hope of ongoing capital gains. With global interest rates so low, many investors have found it attractive to borrow money to invest in appreciating residential property. This has reinforced the upward pressure on prices.

This configuration of ongoing increases in indebtedness and rising housing prices has been discussed at length by the Council of Financial Regulators. This council, which I chair, brings together the heads of the RBA, APRA, ASIC and the Australian Treasury. The concern has not been that these developments have posed a risk to the stability of our financial system. Our banks are resilient and they are soundly capitalised. Instead, the concern has been that the longer the recent trends continued, the greater the risk to the future health of the Australian economy. Stretched balance sheets make for more volatility when things turn down.

Given this, over the past couple of years there has been a concerted effort by APRA to encourage lenders to strengthen their lending standards. This followed deterioration in these standards a few years ago. Also, at the end of 2014, when growth in investor lending was accelerating, APRA announced that it would pay very close attention to lenders whose investor loan portfolios were growing faster than 10 per cent. It did so with the full support of the RBA. This guidance helped pull the whole system back and has made a positive contribution to overall financial stability. So too has ASIC’s focus on responsible lending. These measures constrained some higher-risk lending and reinforced the message to lenders that they need to take a system-wide focus in their risk assessments.

Notwithstanding this, given recent trends and the heightened risk environment, APRA announced some further measures last Friday. Again, it did this with the full support of the Council of Financial Regulators.

There are two parts of APRA’s announcements that I would like to draw your attention to.

The first is the need for lenders to have a very strong focus on serviceability assessments. Despite the focus on this area over recent times, too many loans are still made where the borrower has the skinniest of income buffers after interest payments. In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong. So APRA quite rightly has said that lenders can expect a strong supervisory focus on loans with a very low net income surplus.

The second area is interest-only lending. Over the past year, close to 40 per cent of the housing loans made in Australia have not required the scheduled repayment of even one dollar of principal at least in the first years of the life of the loan; only interest payments are required. This is unusual by international standards. In some countries, repayment of at least some principal is required on all housing loans for the entire life of the loan. In other countries, interest-only loans are available only if the borrower has already contributed a fair degree of equity. So this is one area where Australia stands out. We are not unique in this area, but we are unusual.

There are a couple of factors that help explain the popularity of interest-only loans in Australia. One is the flexible nature of Australian mortgages. Many people with interest-only loans make significant payments into offset accounts rather than explicitly paying down principal. This flexibility, which is of value to many people, isn’t available in most countries. A second factor is the taxation arrangements that apply to investment in residential property in Australia.

Last week APRA stated that it expected that new interest-only loans should account for no more than 30 per cent of the flow of new loans. It also stated that institutions should place strict limits on interest-only loans with high loan-to-valuation ratios.

Like the earlier ‘speed limits’ on investor lending, these new requirements should help the whole system pull back to a more sustainable position. A reduced reliance on interest-only loans in Australia would be a positive development and would help improve our resilience. With interest rates so low, now is a good time for us to move in this direction. Hopefully, the changes might encourage a few more people to think about the merit of taking out very large interest-only loans when interest rates are near historical lows.

So the RBA welcomes these latest changes.

It is important, though, that we are all realistic about what these and other prudential measures can achieve. As I said before, the underlying driver in our housing market is the balance between supply and demand. The availability of credit is undoubtedly a factor that can amplify demand, but it is not the root cause. This assessment is consistent with the observation that housing market dynamics currently differ significantly across the country, despite Australia having nationwide financial institutions and the level of interest rates being the same across the country. It is hard to escape the conclusion that we need to address the supply side if we are to avoid ever-rising housing costs relative to our incomes and to avoid the attendant incentive to borrow that is created by rising housing prices.

The various prudential measures do not address the underlying supply-demand issues. But they can reduce the risk from the financial side of the housing market while the underlying issues are addressed. These prudential measures help lessen the amplification of the cycle we get from borrowing and reduce the risk of developments on the financial side weakening the resilience that our economy has exhibited for many years. Ideally, this would be achieved by financial institutions acting themselves, without the need for prudential guidance. But sometimes prudential guidance can help the whole system adjust.

The calibration of this guidance is not precise or straightforward so we need to keep matters under review. The Council of Financial Regulators will continue to assess how the system responds to the various measures so far. It would consider further measures if needed. As I have said, though, in the end addressing the supply side of the housing market is likely to prove a more durable way of dealing with the concerns that people have about debt and housing prices than detailed supervisory guidance.

So that is enough on debt and housing.

Housing affordability takes a $2000 hit in just three months

From The NewDaily.

First home buyers will be forced to save an extra $2000 towards a deposit just to keep up with the last three months of price growth, according to CoreLogic data exclusive to The New Daily.

The median house price in the eight capital cities is now $613,200, CoreLogic estimated, based on sales in the March quarter.

At the end of last year, this figure was $592,807, which means in just three months, as hopeful buyers saved madly, the goalposts shifted 3.4 per cent further away. And that’s only for a modest 10 per cent deposit.

All up, a young couple now needs about $61,300 for a 10 per cent deposit on a median-priced house in the city. In Sydney, it’s a staggering $88,000.

If they’re saving for a 20 per cent deposit, which many banks now prefer, they’ll need $176,000 for a median-priced Sydney home – up $8200 in three months.

house-price-growth-depositIf prices stood still from today, a couple saving for a 10 per cent deposit in a capital city would need to put away roughly $1200 a month for the next four years, presuming they earned 2.5 per cent interest, compounded monthly.

And this doesn’t include lenders mortgage insurance (LMI), which Australian banks have made compulsory for all borrowers with deposits below 20 per cent. Gone are the days of 0 per cent deposit loans unless you have a guarantor.

A median-priced house in a capital would require roughly an extra $13,500 in LMI, which the couple would presumably ask to be ‘capitalised’ into their loan – meaning they would pay an extra $67 per month on their repayments.

To avoid LMI entirely, first-time buyers would need to save a 20 per cent deposit of $122,640, based on CoreLogic’s median capital house price. That’s $4000 more than three months ago.

And then there’s stamp duty and the litany of other upfront costs that home buyers face. Stamp duty alone could add an extra $23,000 to a median-priced home.

As these figures show, a guarantor is probably the only way for many buyers to get into the market. Many institutions will lend 100 per cent or even 110 per cent of the home value if first-time buyers have a guarantor.

There is plenty of controversy over whether or not houses are more or less affordable than ever. For example, Jamie Alcock, an academic at The University of Sydney, wrote in The Conversation last week that mortgages are now more affordable, as record-low interest rates are nowhere near the 17 per cent highs of the 1990s.

Even if that’s true, the CoreLogic figures, coupled with the tighter lending requirements of the banks, prove that house price growth is making it harder for deposit savers to keep up.

And as Professor Alcock warned, when interest rates do inevitably rise, today’s ‘comfortable’ borrowers will become tomorrow’s highly stressed repayers.

ASIC announces further measures to promote responsible lending in the home loan sector

ASIC today announced a targeted industry surveillance to examine whether lenders and mortgage brokers are inappropriately recommending more expensive interest-only loans. With many lenders, including major lenders, charging higher interest rates for interest-only loans compared with principal-and-interest loans, lenders and brokers must ensure that consumers are not provided with unsuitable interest-only loans.

Building on earlier work on home lending standards, ASIC is also announcing that eight major lenders will provide remediation to consumers who suffer financial difficulty as a result of shortcomings in past lending practices.

Interest-only loans

ASIC will shortly commence a surveillance to identify lenders and mortgage brokers who are recommending high numbers of more expensive interest-only loans. Data will be gathered using ASIC’s compulsory information-gathering powers from large banks, other banks, mutual banks and non-bank lenders.

In an environment where many interest-only loans are now clearly more expensive than principal-and-interest loans, lenders and mortgage brokers must carefully consider the implications of providing borrowers with interest-only loans. While interest-only loans may be a reasonable option for some borrowers, for the vast majority of owner-occupiers in particular, an interest-only loan will not make sense.

Past lending practices

In 2015, ASIC conducted a review of how lenders provide interest-only home loans. ASIC found that lenders were not properly inquiring into a consumer’s actual living expenses when assessing their capacity to make repayments. ASIC’s review led to industry-wide improvements by lenders: see 15-220MR Lenders to improve standards following interest-only loan review.

As part of today’s announcement, eight lenders examined by ASIC have improved their practices for enquiring about expenses to determine the consumer’s financial situation and capacity to make repayments. Rather than obtaining a single monthly living expense figure and then relying on a benchmark figure to assess suitability, borrowers’ actual figures for different categories of living expenses (e.g. food, transport, insurance, entertainment) will now be obtained. This will provide lenders with a better understanding of consumers’ expenses.

In addition to typical hardship processes, lenders will individually review cases where consumers suffer financial difficulty in repaying their home loans, and determine whether they have been impacted by shortcomings in past lending practices. Where appropriate, consumers will be provided with tailored remediation, which may include refunds of fees or interest.

As interest rates are currently at record lows, and were falling in the lead up to 2015 and during 2016, ASIC does not expect lenders to identify high numbers of consumers who are now experiencing financial difficulty due to past lending decisions. Nevertheless, these additional actions will ensure that consumers are not disadvantaged.

To ensure that these remediation programs are operating effectively, ASIC is requiring lenders to audit their processes.

ASIC Deputy Chairman Peter Kell said, ‘Home loans are the biggest financial commitment most people will ever make. In assessing whether borrowers can meet loan repayments without substantial hardship in the short and longer term, it is important that lenders can collect and rely on information which provides an accurate view of the consumer’s financial situation. This is especially the case when interest rates are at record low levels’.

‘Lenders and mortgage brokers must also ensure that consumers are being provided with the home loan product that meets their needs. Lenders and mortgage brokers need to think twice before recommending that a consumer obtain a more expensive interest-only loan’.

Background

In 2015, ASIC reviewed interest-only loans provided by 11 home lenders, and issued REP 445 Review of interest-only home loans (Refer: REP 445) in 2015, which made a number of recommendations for home lenders to comply with their responsible lending obligations (Refer:15-297MR).

In REP 445, ASIC gave guidance on how lenders can make proper inquiries into a borrower’s actual expenses.

ASIC’s monitoring of lenders’ home lending practices continues. ASIC will carry out further reviews to ensure that industry standards are improved where necessary. ASIC will also take enforcement action as appropriate.

Any consumer with concerns about their ability to make home loan repayments should contact their lender in the first instance. Consumers can also access free external dispute resolution, through either the Financial Ombudsman Service (FOS) or Credit and Investments Ombudsman (CIO).

The eight lenders are:

  • Australia and New Zealand Banking Group Limited
  • Bendigo and Adelaide Bank Limited
  • Commonwealth Bank of Australia
  • Firstmac Limited
  • ING Bank (Australia) Limited
  • Macquarie Bank Limited
  • National Australia Bank Limited
  • Pepper Group Limited.

ASIC has also provided guidance to industry in Regulatory Guide 209 Credit licensing: Responsible lending conduct (Refer: RG 209).

Responsible lending is a key priority for ASIC in its regulation of the consumer credit industry. The changes made by the eight reviewed lenders continue a number of developments and outcomes involving responsible lending:

  • Treasury releases ASIC’s Review of Mortgage Broker Remuneration.
  • ASIC filed civil penalty proceedings against Westpac in the Federal Court on 1 March 2017 for alleged breaches of the National Consumer Credit Protection Act 2009 (refer: 17-048MR).
  • Cairns-based car yard lender, Channic Pty Ltd, and broker, Cash Brokers Pty Ltd, breached consumer credit laws (refer: 16-335MR). Part of the court’s judgement was that the broker did not meet all of the necessary responsible lending obligations before providing credit assistance because he did not consider the borrower’s insurance expenses, which was required under the credit contract and represented a significant portion of the borrower’s income.
  • ANZ paid a $212,500 penalty for breaching responsible lending laws when offering overdrafts (refer: 16-063MR).
  • Payday lender Nimble to refund $1.5 million following ASIC probe (Refer: 16-089MR).
  • BMW Finance pays $391,000 penalty for breaching responsible lending and repossession laws  (refer: 16-019MR).
  • Westpac pays $1 million following ASIC’s concerns about credit card limit increase practices (refer: 16-009MR).
  • Bank of Queensland Limited improved its lending practices following ASIC’s concerns about the way it assessed applications for home loans (Refer: 15-125MR).
  • The Cash Store Pty Ltd and Assistive Finance Australia Pty Ltd failed to comply with their responsible lending obligations. The Federal Court awarded record civil penalties (refer: 15-032MR).
  • Wide Bay Australia Ltd (now Auswide Bank Ltd) made changes to their responsible lending policy as a result of ASIC’s intervention (refer: 15-013MR).

Housing Credit Climbs In February

The February 2017 data from the RBA today shows that overall credit grew 0.3% in the month, with housing up 0.6% to an annual 6.4% whilst personal credit and business lending both fell.

On a 12 month annualised basis, lending for investment housing grew the fastest at 6.7%, whilst owner occupied lending grew by 6.2% and there was a fall in business lending, down to 3.7%.

The monthly series showed that investor lending grew faster (0.6%) than lending for owner occupation (0.5%). Business lending took a dive and other personal credit was lower.

Turning to the month on month movements, (not RBA adjusted), owner occupied housing grew faster than investment lending.  In the month, owner occupied loans grew $9.3 billion whilst investment loans grew $2.6 billion, seasonally adjusted.

Finally, here is the total value lent by category. Total seasonally adjusted balances for housing was $1.64 trillion, of which investment lending comprised 32.9%, or $575 billion. Lending for owner occupation was $1.071 billion.

Lending for business, as a proportion of all lending fell again.

The RBA notes:

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 $50 billion over the period of July 2015 to February 2017, of which $1 billion occurred in February 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.

We will discuss the APRA data which is also out today, in a separate post.  We doubt the changes by APRA announced today will have much impact on the market, although the continuing out of cycle rate hikes by the banks might.

More Lenders Raise Rates

Following the big four, several smaller lenders have also lifted mortgage rates, especially on the investment lending side of the ledger.

For example, ME Bank, announced it will increase its investor home loan reference rates by 25 basis points, effective 27 April 2017. The move will affect new and existing investor borrowers and will put ME’s standard variable rate for investor borrowers at 5.28% p.a. The bank said the change was made to address increasing regulatory and compliance costs and to ensure the bank remains within investor lending growth limits. The bank said it will not increase the reference rate for any owner-occupier home loans and continues to offer a highly competitive standard variable rate for owner-occupiers at 5.03% p.a.

ING Direct announced that it will increase the standard variable rate on two of its investor home loan products by 0.25 per cent from Tuesday, 4 April.  Their standard variable rate on the Orange Advantage home loan for investors will move to 5.42 per cent, while the standard variable rate on the Mortgage Simplifier home loan for investors will be 5.32 per cent at the new rate.

 

APRA announces further measures to reinforce sound residential mortgage lending practices

The Australian Prudential Regulation Authority (APRA) is today initiating additional supervisory measures to reinforce sound residential mortgage lending practices in an environment of heightened risks.

The measures appear to target interest only loan growth, but does not formally change the overall investment loan growth speed limit. This appears a weak response, clearly aim at trimming the sails, not fundamentally changing trajectory, or materially slowing investor lending. The serviceability parameters remain the same, and they also, for the first time, mention controlling the growth of warehousing of securitised mortgage pools for other lenders (which may include non-banks).

The latest measures build on those communicated to authorised deposit-taking institutions (ADIs) in December 2014 aimed at improving the quality of new mortgage lending generally and moderating the growth of investor lending in particular. As was the case previously, these latest measures have been developed following discussions with other members of the Council of Financial Regulators (CFR).

Since December 2014, APRA, together with CFR members, has closely monitored residential mortgage lending trends and the resulting impacts on the resilience of lenders, as well as the household sector more broadly. This increased scrutiny has been in response to an environment of heightened risks, reflected in an environment of high housing prices, high and rising household indebtedness, subdued household income growth, historically low interest rates, and strong competitive pressures.

Given this environment, APRA has concluded that further steps to address risks that continue to build within the mortgage lending market are appropriate.

APRA has written to all ADIs today advising, in summary, that APRA expects ADIs to:

  • limit the flow of new interest-only lending to 30 per cent of total new residential mortgage lending, and within that:
    • place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80 per cent; and
    • ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90 per cent;
  • manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10 per cent growth;
  • review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions; and
  • continue to restrain lending growth in higher risk segments of the portfolio (e.g. high loan-to-income loans, high LVR loans, and loans for very long terms).

APRA Chairman Wayne Byres said APRA believes the 10 per cent benchmark for growth in lending to investors continues to provide an appropriate constraint in the current environment, balancing the need to continue to moderate new investor lending with the increasing supply of newly completed construction which must be absorbed in the year ahead.

“APRA expects ADIs to target a level of investor lending growth that allows them to comfortably manage normal monthly volatility in lending flows without exceeding this benchmark level.”

However, additional supervisory measures, particularly in relation to the high level of interest-only lending, are warranted. Mr Byres said: “Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions.”

Mr Byres said lending on interest-only terms represents nearly 40 per cent of the stock of residential mortgage lending by ADIs – a share that is quite high by international and historical standards.

“APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile. We will therefore be monitoring the share of interest-only lending within total new mortgage lending for each ADI, and will consider the need to impose additional requirements on an ADI when the proportion of new lending on interest-only terms exceeds 30 per cent of total new mortgage lending.

“APRA has chosen not to set quantitative limits in relation to serviceability assessments at this point in time. However, APRA considers it important that borrowers retain some level of financial buffer to allow for unexpected events, especially for borrowers that have high levels of indebtedness.

“APRA will therefore continue to scrutinize serviceability assessments, and ADIs continue to need to advise APRA should they propose to change their existing methodologies or policies,” Mr Byres said.

APRA has advised ADIs that it is also monitoring the growth in warehouse facilities provided by ADIs to other lenders. These facilities allow lenders to build a portfolio of loans that will eventually be securitised. “APRA would be concerned if these warehouse facilities were growing at a materially faster rate than an ADI’s own housing loan portfolio, or if lending standards for loans held within warehouses are of a materially lower quality than would be consistent with industry-wide sound practices,” Mr Byres said.

He said that APRA also continues to monitor the prevalence of higher risk mortgage lending more generally, including lending at high loan-to-income ratios, lending at a high loan-to-valuation ratios, and lending at very long terms or with long interest only periods (e.g. beyond 5 years).

APRA will continue to observe conditions in the residential mortgage lending market, and may adjust the above measures, or implement additional ones, should circumstances warrant it.

A copy of the letter sent to ADIs today is available here: www.apra.gov.au/adi/Publications/Pages/other-information-for-adis.aspx