Mortgage Industry – Page 36 – Digital Finance Analytics (DFA) Blog

All Lenders Are Not The Same

In the latest of our series on deep home loan segmentation, using DSR, LTI and LVR we compare the averages across a number of lender portfolios. The chart shows the average from a range of 20 or so lenders in our surveys, including banks, non-banks, credit unions and building societies. We have selected lenders to give an indication of the spread of the results, but have masked the individual brands. For some, the average LVR in the portfolio is sitting north of 80%, whilst others are below 60%. The highest DSR is averaging at 32, whilst the lowest in 7.8. The highest LTI is on average 7.3, compared with 2.6 for the lowest.

These findings underscore that underwriting criteria do vary, risks in the portfolio will also vary, and the mix of business does change across the market.

Another view is the average loan value in the portfolio. Once again we found a surprising range of values, from just below $600k, down to $180k. Many factors influence the average of course, including lending policy, type of loan, time on book, how much households have paid ahead, and other factors.

Here is a split of average balances by lender of loans paid ahead and those who are not.

We see that households who are paying ahead generally have lower loan balances (reflecting differences in the LVR, LTI and DSR status). This chart provides more insight.

Those who have paid ahead have a lower LTI (2.7 compared with 6.0), lower DSR (9.5 compared with 19.6) but a slightly higher LVR. The portfolio averages are LTI 5.1, DSR 16.9 and LVR 68%.

Another interesting lens is the mortgage discounts being achieved by households, compared with LVR, LTI and DSR. It appears the best discounts are being made on LVR’s below 80%, but LTI and DSR have less bearing on the achieved rates. A low DSR or LTI does not necessarily translate into a bigger discount – something which lenders may want to reconsider, given the relative risks involved.

ABC 7:30 Does Lenders Mortgage Insurance

7:30 did a segment tonight on Lenders Mortgage Insurance (LMI). As we discussed in an earlier post there are a number of issues which make LMI a complex area. The segment includes comments from DFA.

Households wising to borrow at an LVR above 80% will be required to pay a significant insurance premium to get a mortgage – Lenders Mortgage Insurance. This extra cost may be bundled into their overall mortgage, or will be a large additional cost.

Many households are not clear on what is truly covered by the LMI in case of default. Whilst LMI may protect the bank, households are not necessarily protected.

In addition, the costs of LMI are not necessary transferable, and there are some industry concentration risks caused by the limited market of providers, over and above the captive insurers within the banks.

Home Loan Insights From Deep Segmentation

As we continue our journey into the depths of home loan segmentation analysis, using LTV, DSR and LTI ratios, we begin to see some insightful patterns emerging. Today we delve into our deep segmentation models.

We start by looking across the states and have sorted the results by DSR (Debt Servicing Ratio), as this is the most insightful lens, in our view. Households in NSW have the highest DSR, no surprise perhaps because home prices have risen strongly – so mortgages have grown – at a time when incomes have not. Remember DSR is based on current low interest rates, should they rise, the DSR will also raise. NSW also holds the prize for the highest average Loan to Income ratio, again because of the rise in market values, and mortgages. However, the average Loan to Value ratio is sitting at around 68%, compared with 72% in WA. DSR and LTI are the better indicators of potential risk, compared with LVR which only really comes into play as a factor if trying to sell into a downturn.

Next we look at age bands. Younger households have on average higher DSR’s, and LVR’s. But it is worth highlighting that the highest LTI’s are residing in older households, because here whilst LVR’s are lower, limited incomes mean they are more exposed. We are seeing a significant rise in the number of households who still have a mortgage to pay off as they enter retirement.

If we look at the picture by $50k income bands we see that the highest LVR’s, LTI’s and DSR’s rest with households whose income is in the range $50-100k. Interestingly, LVR’s do not vary that much by income band, but both LTI’s and DSR’s improve with income. This is because more wealthy households are able to buy more expensive property, and service larger loans. Remember these cuts tell us nothing about the relative number of households or loans in each income band.

That analysis shows more than 46% of households with a mortgage have an income of $50-100k, and 26% have an income of $100-150k, whereas only 0.29% have an income of over $500k.

Turning on our zonal segmentation, we see that households living in the inner suburbs have the highest DSR. This is because home prices are higher here, compared with outlying areas. Households in the regional and rural areas tend to have, on average, lower DSR, LTI and LVRs.

More than 12% of households live in the inner suburbs, compared with 26% in the outer suburbs and 22% in the urban fringe.

So to our master household segmentation. We use this to separate households based on a range of demographic indicators – which have proved reliable over many years. Young Growing families have the highest DSR (18.3) and the highest LVR (92.5%). Many have bought quite recently and are leveraged to the max. It is worth looking at the various measures across these segments as there are some fundamentally different things in play with different risk outcomes and sensitivities.

Finally, for today we look at the data through the lens of our technographic segmentation. We classify households into digital natives, migrants and luddites. The descriptions are self-explanatory, in that natives have always been digitally aligned, whereas migrants have adopted digital channels and luddites are resisting. Interestingly, natives have a higher DSR, LVR and LTI, compared with the other segments. This is because on average they are younger, and more likely to be in the main urban areas.

Such segmentation is important because Fintech’s need to understand where their potential markets are. We featured uno yesterday, a relatively new digital alternative to brokers. Digital natives would be directly in their sights.

Next time we will look at DSR, LVR and LTI by individual lenders – there are some interesting variations.

So Where Are DSR’s Highest?

As we continue our analysis of household mortgage debt, and having described the ratios we are using (Loan to Value (LVR), Loan to Income (LTI) and Debt Servicing Ratio (DSR)) we can drill into the more specific data slices. Today we look across the top ten locations by DSR.

We see at once that some of the highest DSR ratios are found in some of the more affluent suburbs – such as Torak (VIC) and the lower north shore in NSW. In these locations, home prices are very high, and as a result households have extended their borrowings – with high LVRs, DSRs and DTIs. This suggests that those will more ability to borrow and service large mortgages are most in debt.

We can then look at each state in more detail. For example, here is NSW.

As we go down the list we begin to see a more mixed set of locations figuring in the top 10, though generally still closer to the CBD. We see somewhat similar pictures in WA, QLD and VIC.

Of course averages can be misleading, as we see a small number of mortgages well above $1m. We also see a high penetration of interest only loans, and recent refinancing events. Provided interest rates remain low, and incomes are solid, the risks are probably relatively well contained. It would be a different matter if home prices slipped significantly.

As we go into more detail in later posts, we will identify some other factors are creating more risks within the portfolio.

Mortgage arrears increase over June quarter

From Australian Broker.

Mortgage arrears increased across Australia in the June quarter, driven by conditions in regional markets.

According to Standard & Poor’s Performance Index (SPIN), the global credit rating agency claims that prime Australian residential mortgage-backed securities (RMBS) transactions more than 30 days in arrears increased to 1.19% over the three months to June, up from 1.13%.

Standard & Poor’s’ data shows regional areas have been hit hardest by the increase in arrears. The past eight months have seen arrears in non-metropolitan markets increase from 1.24% to 1.77%, which the rating agency says reflects the greater vulnerability of regional areas to downturns in key industries or employers.

Though arrears increased nationally over the June quarter, Standard & Poor’s believe conditions will likely improve as 2016 rolls on.

“While prime arrears are up year on year, they are still below their peak of 1.69% and decade-long average of 1.25%. Furthermore, arrears generally start to drift lower in the second half of the year so we expect that arrears are likely to remain at these low levels in most parts of the country over the next quarter,” Standard & Poor’s said in a statement.

“The rate cut by the Reserve Bank of Australia in August will also help. Lower wage growth and higher household indebtedness are no doubt creating a degree of mortgage stress for some borrowers but we expect that relatively stable employment conditions and historically low interest rates will enable the majority of borrowers underlying RMBS transactions to stay on top of their mortgage repayments,” the statement said.

On a state-by-state basis, the data shows arrears increased in all states and territories over the June quarter, except for New South Wales where they remained unchanged.

Over the three-month period, Western Australia was home to the highest level of arrears at 1.95%, followed by Tasmania (1.62%) and South Australia (1.56%). The continued slowdown of the mining boom is identified as the reason behind conditions in Western Australia, while high unemployment is contributing to conditions in South Australia and Tasmania.

Five of Australia’s 10 worst-performing postcodes in terms of arrears were in Queensland in the June quarter, up from three in the March quarter.

Westpac makes $16.5m investment in Fintech uno

Fintch “uno” has received a $16.5m strategic investment from Westpac. uno is a digital mortgage service offering households tools to search, compare and settle a better home loan for themselves online, including realtime chat

uno allows consumers to access real-time home loan rates based on their personal situation – not just advertised rates. These next generation tools– that in the past only a traditional mortgage broker would have access to – allow them to calculate their borrowing power across lenders, save and share their data with someone else getting the home loan, and select the option that best suits their needs. The entire system is built on the premise that if people had the right knowledge and access to information, they could do better for themselves.

The entire uno loan application process can be done from a desktop, tablet and smartphone, and is supported by a team of experts who can help with real-time advice, when a consumer wants it.

So it is an alternative to a mortgage broker and so far they say more than $400m loans have been search for via the platform. uno’s home loan experts that provide advice do not personally receive sales commissions. The company says they take out all of the filters and pre-decisions that traditional brokers apply before making a recommendation to a home buyer and instead offers full transparency, putting decision making power in the hands of the consumer.

The company says: uno is redefining the way property finance is secured by using a ‘technology plus people’ approach to provide the consumer the power to get a home loan that gives them a better deal – from both major and smaller lenders via any digital device with real-time advice and support. Driven by next generation tools and calculators with the capability to provide real-time home loan rates and borrowing power based on a consumer’s personal situation, uno has reimagined how Australians can buy or refinance a home.

The successful launch of unohomeloans.com.au in May this year has attracted a number of high profile investors, such as Westpac, that have discovered the service’s potential to redefine how Australians buy or refinance their home.

The popularity of the unohomeloans.com.au service has grown rapidly as customers have discovered the benefits of having greater power in the home loan search process, and direct access to the technology and information that traditional mortgage brokers use. uno’s offering also includes full-service support and advice for customers via chat, phone and video, helping customers search, compare and settle in the one place.

Founder and CEO of uno, Vincent Turner, said in the three months since launch, millions of dollars’ worth of loans had been settled as customers reviewed their loan position with uno’s service team to find a better deal in today’s low interest rate environment.

Mr Turner said: “We’ve grown to 34 employees to meet the service demands of thousands of registered customers who have used the platform to compare more than $400 million worth of mortgages. With the support of our investors we’ve worked hard to test and enhance the customer experience, as well as finesse the functionality of our original platform to include options such as new calculators and video chat.”

Chief Strategy Officer at Westpac, Gary Thursby, said: “uno’s success has been impressive and we’re seeing its potential to become a serious player in the home loan market. Westpac has been involved since the concept phase, and today we’re pleased to announce we will increase our involvement in uno as a strategic investor. Westpac is proud of its reputation as a supporter of early stage fintech companies like uno that drive digital innovation and benefit Australians.”

Mr Turner added: “We knew from the start that by creating a platform with direct visibility to lenders’ products and pricing, we could give Australians greater control over the home loan process and the confidence to achieve the best home loan deal. We also challenged the status quo by giving customers the ability to search, compare and settle a home loan in the one place, which has proven extremely useful for busy professionals. “With the healthy investment we need to drive the company forward, we are excited to keep expanding and help more people get a better home loan.”

How Best To Look At Mortgage Serviceability

There are at least three key ratios we consider when examining households and their mortgage commitments. Today we discuses these in the light of data from our surveys, which follows on from yesterdays post.

Loan to Value (LVR) calculations tell us about the proportion of a property owner by the home owner, versus the bank.

Higher loan to value ratios are a sign of potential financial instability, because if prices were to fall the borrower could be left with a mortgage bigger than the value of the property. In Australia, LVR’s higher than 80% will normally require extra lender mortgage insurance, and this in turn has changed the shape of the market. The average marked to market LVR is 68%. Many lenders rely on the LVR at loan inception and use this data in their risk models.

Of course in Australia, home prices have been rising strongly in some states, though we have seen some falls in value in WA recently. Some regulators have imposed specific loan to value limits on lenders, for example the Reserve Bank of New Zealand. However, LVR ratios have limitations, because as the value of the property rises, the LVR falls. In a strongly rising market, this may mask issues within the portfolio. Recently the proportion of high LVR loans being written has been falling as regulators turn up the heat. However APRA only reports scanty aggregated data.

Loan to income (LTI) ratios tell us about the households borrowing footprint. The higher the income ratio, the higher the risk.

Over time the average LTI has risen from around three times income to more than five times income. This illustrates the extra leverage households have been able to create in response to strongly rising prices as lending standards have been relaxed. Some regulators have started to limit high LTI loans. For example the Bank of England. LTI is sensitive to rising property prices and larger mortgages as well as static or falling incomes. There is no regular LTI reporting in Australia.

The third is the debt servicing ratio (DSR). This is the ratio between gross household income and the amount paid on the mortgage. The DSR is defined as the ratio of interest payments plus amortisations to income. As such, the DSR provides a flow-to-flow comparison – the flow of debt service payments divided by the flow of income. We think the DSR is an important lens to look at households debt footprint, but the ratio is highly sensitive to interest rates because as interest rates fall, the ratio improves. Current DSR ratios are often seen as reasonable because of the current ultra low rates, but of course that tells us nothing about the impact of rising rates later. The average DSR is 16.8, but there is a very wide spread. In 2015 the BIS published some relative benchmarks and found that Australia was at around 16 one of the highest in the developed world. DSR is the recommended macroprudential measure. There is no regular DSR reporting in Australia.

The Bank of Canada has recently been looking at DSR. Here is an example of their findings in their home market.

We can look at age and income distribution in Australia.We see that a significant proportion of younger households have a DSR in excess of 20. Older households have on average lower DSR’s.

Like Canada, lower income households tend to have higher DSR’s.

One important point to consider is whether the ratio should take account of other repayments – such as credit cards – or other living expenses. Most DSR calculations do not factor in other elements, although thanks to regulatory pressure, lenders are now more conservative in their underwriting criteria when it comes to assessing true income.

Next time we will dive further into these metrics by looking across our household segments. The results are surprising.

Understanding Household Income, Wealth and Property Footprints

Today we commence the first in a new series of posts which examines household wealth, income, property and mortgage footprints. We will look at the latest trends in LVR and LTI; highly relevant given the tightening standards being applied in other countries, including Norway and New Zealand. We will be using data from our rolling household surveys, up to 9th September 2016.

Today we paint some initial pictures to contextualize our subsequent more detailed analysis, which will flow eventually into the next edition of the Property Imperative, due out in October 2016.

To start the analysis we look at the relative distribution of our master household segments. You can read about our segmentation approach here.

Next we show the relative household income and net worth by our master segments. The average household across Australia has an estimated annual income of $103,500 and an average net worth (assets less debts) of $600,600; the bulk of which is property related.

There are wide variations across the segments. The most wealthy segment has an average annual income of more than eight times the least wealthy, and more than ten times the relative net worth.

Across the states, the ACT has the highest average income and net worth, whilst TAS has the lowest income (half the income), and NT the lowest net worth (third the net worth).

Property owners are better placed, with significantly higher incomes and net worth, compared with those renting or in other living arrangements. Those with a mortgage have higher incomes, but lower net worth relative to those who own their property outright.

The loan to value (LVR) and loan to income (LTI) ratios vary by segment.

Young growing families, many of whom are first time buyers, have the higher LVR’s whilst young affluent have the higher LTI’s (along with some older borrowers). Bearing in mind incomes are relatively static, those with higher LTI’s are more leveraged, and would be exposed if rates were to rise.

Finally, we see that many loans have been turned over, or refinanced relatively recently, so the average duration of a mortgage is under 4 years.

There is a relatively small proportion of much older dated loans which we have excluded from the chart above. Nearly a quarter of all loans churned in 2015, and 2016 shows the year to date count.

Next time we will look at LTI and LVR data in more detail.

Norway Tightens Mortgage Underwriting Standards

Moody’s says Norway’s Proposed Tighter Mortgage Underwriting Standards Are Credit Positive for Banks and Covered Bonds.

On 8 September, Norway’s Financial Supervisory Authority (FSA) published a proposal for tighter mortgage underwriting limits. The proposed regulation, made to the Ministry of Finance, includes a limit of 5x loan value to the borrower’s gross income; requiring loans to amortise down to a 60% loan-to-value (LTV) ratio, down from 70%; a maximum home-equity LTV of 60%, down from 70%; and the reduction or complete elimination of banks’ ability to deviate by 10% from the regulatory limits, including the 85% maximum LTV requirement.

The new measures would reduce borrowers’ ability to take on excessive debt amid still-increasing house prices, particularly in the urban areas concentrated around the capital city of Oslo. These more restrictive proposals are credit positive and would strengthen the credit quality of mortgage loans on banks’ balance sheets and in covered bond cover pools.

Norway has experienced strong house price growth since 2008 and the proposal for tighter regulations seeks to dampen excessive house price growth and credit expansion. Despite house price contraction in oilreliant areas such as Stavanger, prices in Oslo remain on a strong upward trajectory and increased more than 12% per year to the end of June. During the same period, banks and mortgage companies’ residential mortgage lending grew nationally by around 6%, according to Statistics Norway. Although Norwegian banks and covered bonds performed strongly even after the decline in oil prices, a mortgage market cool down would reduce the risk of asset price bubbles and excessive lending to vulnerable households.

Capping the loan-to-income ratio limits the overall size of loan a borrower can take, regardless of affordability. In the present low interest rate environment, loan affordability is good, but large loans can easily become burdensome if interest rates rise. Lower LTV ratios decrease the loan’s probability of default and increase recoveries of loans that do default.

Increased amortization and limits on home-equity withdrawal reduce or constrain LTVs and limit potential payment shocks, benefiting mortgage loans’ credit quality. Currently, banks must factor amortisation into affordability testing, but a material proportion of loans are still interest-only. Interest-only loans can be vulnerable in a falling house price environment. Unlike an amortising loan, an interest-only loan’s LTV only declines over time as a result of house price appreciation, resulting in a potentially lower equity buffer against declining house prices and leaving the borrower exposed if selling the property is the only method of repaying the loan at maturity. Similarly, restricting home-equity withdrawals limits increases in LTVs and discourages borrowers from taking on high debt burdens.

Removing or reducing banks’ ability to have up to 10% of loans breach the maximum 85% LTV requirement or other requirements would be prudent. The FSA considers the 10% limit substantial in light of debt and house price developments. If the government does not completely remove the 10% waiver from the regulations, the FSA suggests reducing it to 4%.

An advantage of having the regulator set underwriting restrictions is that it prevents competition from eroding prudent practices, while also allowing the rules to be changed when conditions warrant such changes. However, nationally applicable restrictions do not differentiate between Norway’s regions, and regional economic developments vary. The FSA emphasized that the tighter regulation may be temporary and could be lifted if market conditions changed, which would give banks the opportunity to recover some flexibility in their lending practices. Nevertheless, Norway’s underwriting standards and prudential regulation of mortgage loans are among the strongest in Europe, particularly the country’s conservative approach to LTVs and its affordability stress of five percentage points on loan interest rates.

Former Aussie mortgage broker convicted of submitting false or misleading documents

ASIC says Mr Madhvan Nair, a former mortgage broker with AHL Investments Pty Ltd (trading as Aussie Home Loans), was convicted and sentenced in the Downing Centre Local Court last week on eighteen charges involving the submission of false or misleading information to banks.

Mr Nair was convicted after admitting to providing documents in support of eighteen loan applications to Westpac Banking Corporation (Westpac), Australia and New Zealand Banking Group (ANZ) and National Australia Bank (NAB) knowing that they contained false or misleading information.

The applications contained documents which purported to be from the applicant’s employer. These documents were false and in most instances, the loan applicant had never worked for the particular employer.

For each and all eighteen charges, Mr Nair was convicted and released upon entering into a recognizance in the amount of $1,000 on the condition that he be of good behaviour for three years.

In sentencing Mr Nair, Magistrate Atkinson noted that it was a serious matter and that there are tough laws for good reason.

Magistrate Atkinson described the nature of the offending in submitting 18 separate loan applications containing false information or documents as very troubling. Noting Mr Nair had no prior convictions, his ill health, the relatively small financial benefit he received, his plea of guilty and high level of cooperation with ASIC, Magistrate Atkinson stated that had any of the factors been different, the defendant may have faced full-time imprisonment.

ASIC Deputy Chair Peter Kell said, ‘ASIC wants to ensure that dishonest brokers are removed from the industry and we will take all necessary steps to achieve this.’

The Commonwealth Director of Public Prosecutions (CDPP) prosecuted the matter.

Background

ASIC’s investigation found that between September 2012 and June 2014, Mr Nair submitted eighteen loan applications containing false borrower employment documents. Of the eighteen loan applications, twelve were approved and disbursed, totaling $3,256,684.

Mr Nair received commission on those twelve loans of $7,583.49. In addition, Mr Nair received cash payments totalling $2,500 from two of the loan applicants upon approval of their loan applications. Mr Nair received a total financial benefit of $10,083.49 as a result of the approved loan applications.

The eighteen loan applications ranged in value from $10,000 to $490,875.

Mr Nair received his commission through Smee & Pree Nair Enterprises Pty Ltd (ACN 091 014 756), a company controlled and owned by Mr Nair.

On 5 July 2016, Mr Nair appeared at the Downing Centre Local Court and pleaded guilty to seventeen charges under sections 160D and one charge under the former section 33(2) of the National Consumer Credit Protection Act 2009.

Section 160D (formerly section 33(2)) makes it an offence for a person engaging in credit activities to give information or documents to another person which is false in a material particular or materially misleading.

Mr Nair was sentenced on 30 August 2016.

Since becoming the national regulator of consumer credit on 1 July 2010, ASIC has taken 80 actions involving loan fraud, including 61 actions to ban individuals and companies from providing or engaging in credit services or holding an Australian credit licence. ASIC has also commenced 14 criminal proceedings involving loan fraud.