Mortgage Industry – Page 37 – Digital Finance Analytics (DFA) Blog

AMP Bank Cuts Mortgage Rate By 10 Basis Points

AMP has said the Bank will reduce interest rates across all variable rate home loans by 10 basis points, effective Monday 22 August 2016.

The AMP Essential Home Loan for owner occupied loans will be reduced to 3.98 per cent per annum (comparison rate 4.00 per cent per annum).

The AMP Professional Pack Home Loan for owner occupied loans of $750,000 and above will be reduced to 3.85 per cent per annum (comparison rate 4.22 per cent per annum).

Sally Bruce, Managing Director AMP Bank commented: “We aim to provide our customers with competitive interest rates to help them own their home sooner.

“Changes to our home loan rates take into account not just the decision by the RBA but other factors such as wholesale funding costs, which are continuing to increase,” she said.

Genworth 1H16 Offers Mortgage Book Insights

Whilst Genworth, as one of the two independent Lender’s Mortgage Insurers in Australia, will have a skewed mortgage portfolio compared with the market (higher Loan-to-Value (LVR) loans which the banks prefer not to cover internally), we get a good feel for the market from their results today. Whilst the proportion of new loans with a high LVR is falling, delinquencies are rising especially in the mining heavy states.

Now a public company, the level of disclosure from Genworth is useful. They reported statutory net profit after tax (NPAT) of $135.8 million for 1H16. After adjusting for the after-tax mark-to-market move in the investment portfolio of $22.9 million, underlying NPAT was $112.9 million.

They show that Gross Written Premium declined 33.5% decreased 33.5% to $189.8 million in 1H16. The decline in GWP is consistent with the broader industry trend of a reduction in the proportion of mortgage originations above 90 per cent LVR. The result also reflects changes in the customer portfolio in 1H15.

New Insurance Written decreased 20.9% to $14.0 billion in 1H16. NIW in the greater than 90% LVR segment decreased 49.1% while NIW in the less than 80% LVR segment increased 10.9%. The decline in the proportion of high loan-to-value loans originated reflects changes in lender risk appetite and focused regulatory oversight in the Australian mortgage market. The result also reflects changes in the customer portfolio in 1H15.

The Net Earned Premium increased 1.4% reflecting higher earned premium from prior book years and the benefit from the premium earnings pattern revision adopted since the second half of 2015.

Net claims incurred increased due to an increase in the number of delinquent loans relative to a year ago and a higher average claim amount. The overall portfolio continues to be supported by strong performance in New South Wales and Victoria. However, the performance in Queensland and Western Australia is challenging, reflecting increased delinquencies, particularly in regions exposed to the slowdown in the resources sector.

They showed an interesting evolution of Genworth’s 3 month+ delinquencies (Flow only) by residential mortgage loan book year from the point of policy issuance.

Each line illustrates the level of 3 month+ delinquencies relative to the number of months an LMI policy has been in-force for policies issued within a specific year.

The 2008 Book Year was affected by the economic downturn experienced across Australia and heightened stress experienced among self-employed borrowers, particularly in Queensland, which was exacerbated by the floods in 2011.

The 2010 to 2015 Book Years are performing favourably relative to the previous five years (2005-2009). The recent increase in the 2012 and 2013 book years is due to increased delinquencies, mainly in parts of Queensland and Western Australia.

Finally, the delinquency population by months in arrears (MIA) aged bucket at the end of each reporting period. Over the past two years, the MIP percentage as a proportion of the total delinquency population has been trending down. This reflects strong housing market conditions and the low interest rate environment in which a mortgagee in possession (MIP) generally progresses faster to a claim, or sold with no claim situation, which in turn leads to a relatively lower claims pipeline. The 3-5 months MIA bucket, shows a seasonal uptick in the second quarter of each year, consistent with historical observed experience.

The Group’s capital position was strong as at 30 June 2016 with a regulatory capital solvency level of 1.56 times the Prescribed Capital Amount (PCA) on a Level 2 basis and a CET1 ratio of 1.43 times PCA. The decrease in CET1 capital reflects $114.9 million of dividends and the $202.4 million capital reduction paid to shareholders during 1H16, partially offset by $135.8 million reported NPAT. Tier 2 capital decreased due to the redemption of the remaining $49.6 million of the 2011 subordinated notes.

Update On US Residential Mortgage Lending Practices

The Fed has released the latest Senior Loan Officer Survey on Bank Lending practices and discussed the responses from 71 domestic banks and 23 U.S. branches and agencies of foreign banks.

The FED says banks reported that demand for most types of Residential Real Estate loans strengthened over the second quarter.

Responses to a set of special annual questions on the approximate levels of lending standards suggested that banks’ lending standards banks continued to report in the July 2016, that on balance, domestic banks lending standards for all five categories (GSE-eligible mortgages, government-insured mortgages, jumbo mortgages, subprime mortgages, and HELOCs) remained tighter than the midpoints of the ranges observed since 2005. Of note, a major net fraction of banks reported that the current level of standards on subprime residential mortgage loans is tighter than the reference point.

The report also discusses commercial lending and consumer loans.

Regarding loans to businesses, the July survey results indicated that, on balance, banks tightened their standards on commercial and industrial (C&I) and commercial real estate (CRE) loans over the second quarter of 2016. The survey results indicated that demand for C&I loans was little
changed, while demand for CRE loans had strengthened during the second quarter on net.

Banks’ lending standards for all categories of C&I loans are currently easier than the midpoints of the ranges that have prevailed since 2005, except
for syndicated loans to below-investment-grade firms. However, banks also generally indicated that standards on all types of CRE loans are currently tighter than the midpoints of their respective ranges.

Banks indicated that changes in standards on consumer loans were mixed, while demand strengthened across all consumer loan types.

Banks Are Still Chasing Home Loans

The latest data from APRA on the loan books of the banks shows that in June 2016, housing loans grew by $10.1 billion to $1,471 billion, up 0.69%. Owner occupied loans grew by $8.6 billion and investment loans by $1.5 billion.

Looking at the individual banks, CBA maintains its first place position with owner occupied loans, Westpac, first place on investment loans.

Loan portfolio movements show that CBA grew its overall book the most. However, bear in mind there were $1.3 billion of adjustments between classifications of loans in the month, so there is noise in the data.

However, if we take this as right, we can estimate overall investment loans growth. We use the data from the past 3 months, and gross it up to 12 months, to remove some of the noise. On that basis, overall growth is 3.3%, and most players are well within the APRA 10% speed limit.

More Ultra Low-Rate Mortgage Offers

ING DIRECT has introduced its lowest ever variable rate of 3.79% p.a. on its Orange Advantage loan for owner occupiers. This new rate is a reduction of 0.15% p.a. off the current rate and is effective from Monday 25 July for Orange Advantage formal approvals with a minimum LVR of 80%.

The bank is also introducing changes across its range of fixed rate residential owner occupier loans, with a rate of 3.69% p.a. available for a three-year fixed term when taken as part of a split package with an Orange Advantage loan.

Further evidence momentum enabled by the shape of the yield curve, which we discussed recently.

New Zealand Banks Will Benefit from Tighter Rules on High-LTV Mortgage Loans – Moody’s

According to Moody’s, New Zealand banks will benefit from tighter rules on high-LTV mortgage loans.It is also worth noting how the market responded to earlier less aggressive macroprudential measures.

On 19 July, the Reserve Bank of New Zealand (RBNZ) released a consultation paper outlining a proposal to limit bank lending to home investors at loan-to-value ratios (LTVs) above 60% to 5% of new originations and lending to owner-occupiers at LTVs above 80% to 10% of new lending. These restrictions are credit positive for New Zealand banks and their covered bond programs because they reduce their exposures to higher-risk lending at a time when house prices are at historic highs.

The proposal will be particularly beneficial to New Zealand’s four major banks, ANZ Bank New Zealand Limited, ASB Bank Limited, Bank of New Zealand and Westpac New Zealand Limited. These four banks hold approximately 86% of all New Zealand residential loans.

The tighter restrictions on LTV limits will benefit banks and their cover pools by providing a buffer against declining house prices before the size of the loan exceeds the value of the property. In the longer run, banks will have fewer high LTV loans to sell into their cover pools, which will strengthen the pools’ credit quality.

The new rules would replace existing limits that restrict new lending to investors in Auckland at LTVs greater than 70% to 5%, lending to owner-occupiers in Auckland at LTVs above 80% to 10%, and all other housing lending outside of Auckland at LTVs above 80% to 15%. The proposal is in response to the boom in New Zealand house prices, which are at historical highs, creating a sensitivity to a sharp reversal in home prices.

Although LTV restrictions protect banks against a sharp correction in house prices, it remains to be seen how effective these measures will be in moderating house price appreciation if interest rates decline further. In March 2016, the Reserve Bank of New Zealand reduced its policy rate by 25 basis points to 2.25%, the fifth reduction since June 2015, while also stating that further policy easing may be required. Furthermore, strong immigration and supply shortages continue to support house prices, particularly in Auckland.

The first of New Zealand’s macro-prudential measures, introduced in October 2013, had a sharp but temporary effect on house price growth. Further measures were introduced in 2015 that also immediately reduced house price growth in fourth quarter of 2015. However, prices rebounded and have appreciated in 2016.

The Reserve Bank of New Zealand is inviting market feedback on its proposal until 10 August, after which, a final policy will be released to take effect from 1 September 2016.

Homeloans Limited and Resimac to Merge

From Australian Broker.

Two leading non-bank lenders – Homeloans Limited and Resimac – have announced a major merger deal.

Homeloans Limited has released a statement announcing it has entered into a Scheme Implementation Agreement (SIA) with Resimac, under which Homeloans will merge with Resimac through the issue of new Homeloans shares to Resimac shareholders and the acquisition by Homeloans of all of the shares in Resimac.

The SIA will merge the Homeloans brand, existing wholesale funding arrangements, and third party broker relationships, with Resimac’s established securitisation capabilities, strong product development and distribution channels.

Homeloans said the merger will create one of Australia’s largest non-bank lenders with a combined loan portfolio of over $13 billion, and combined new originations exceeding $3 billion in the 12 months to 30 June 2016.

“Entering into binding documentation in relation to the Transaction represents a significant step forward in the realisation of Homeloans’ growth strategy and in the Board’s opinion delivers the best solution for all stakeholders,” Homeloans chairman, Robert Scott said.

“Homeloans and Resimac have highly complementary businesses and strategies; Homeloans has a strong brand in the Australian mortgage industry and a national distribution network, while Resimac has well established securitisation and product development capabilities.”

It is expected that upon completion of the transaction, existing Resimac shareholders will hold 72.5% of the Merged Group and existing Homeloans shareholders will hold 27.5% of the Merged Group.

Warren McLeland, the current executive chairman and CEO of Resimac, said he was excited about the opportunities that the union would bring.

“We are delighted to be merging with Homeloans and the Transaction presents a compelling value proposition for shareholders through combining Resimac’s funding capabilities with Homeloans distribution expertise, as well as providing synergies through the integration of the businesses’ operations,” McLeland said.

McLeland is to be appointed as managing director of the Merged Group, with Scott McWilliam, the current CEO of Homeloans, to be appointed joint deputy managing director along with Mary Ploughman, Resimac’s executive director of securitisation.

Mortgage Arrears Move Higher, Again

Standard & Poor’s Performance Index (SPIN) for May 2016 shows that 1.21% of high quality residential mortgage-backed securities (RMBS) were in arrears during the month, which is higher than the 1.14% reported in April. In fact this is the seventh month in a row that arrears have lifted. A year back the index was standing at 1.07%.

The index covers the universe of Australian RMBS rated by S&P. It measures the weighted-average arrears more than 30 days past due on loans in RMBS transactions. It is worth highlighting that it does not necessarily represent the entire market, as specific loan portfolios will be selected to package up and sell.

S&P says that the larger upward movements were in the major banks and other bank categories, while non-bank financial institutions was the only sector to see a decline in arrears. Most of the increase in arrears for the month was in the more severe category of 90-plus days overdue. The major banks’ 90 day-plus arrears rose four basis points to 0.48%, while non-banks fell a point to 17 basis points. This is an interesting observation as the major banks, in theory at least should have more sophisticated risk assessment capabilities.

They also say that the proportion of non-conforming loans in arrears increased to 4.71 per cent during the month from 4.25 per cent in April. However, note the non-conforming measure tends to exhibit some volatility from month to month and remains low by historical standards and well below the peak of 17 per cent in 2009.

Investment Home Lending Is Where It Is At

The data from the ABS of lending finance for May 2016 shows an overall fall of 0.8% in borrowing flow of all types, or $885 million, compared with the previous month. Within this, there was a relative rise in the proportion of new loans for investment housing (16.% of all lending flows), whilst the relative proportion of lending to business, net of investment housing, fell, to 53.8% of all lending in the month, down from a maximum of 61% of all flows in Match 2015.

This is not a good outcome when lending to business can translate to productive growth, whilst lending for investment housing continues to stoke up home prices and bank balance sheets. No surprise the banks are cutting mortgage rates to try and attract more business, but at the expense of business lending.

The total value of owner occupied housing commitments excluding alterations and additions fell 0.6% in trend terms to $20.5 billion. Investment lending volumes, which are included in the business volumes, were similar to the previous month, showing a relative swing towards investment loans at $11.6 billion.

The trend series for the value of total personal finance commitments rose 0.9%, or $65 million to $7.3 billion. Revolving credit commitments rose 1.8% and fixed lending commitments rose 0.3%. The seasonally adjusted series for the value of total personal finance commitments fell 4.6%. Revolving credit commitments fell 7.8% and fixed lending commitments fell 2.3%. Households are borrowing more on personal credit, including making up the difference on deposits for housing, as lending criteria get tighter.

The trend series for the value of total commercial finance commitments fell 1.2% to $28.4 billion, net of investment housing. Revolving credit commitments and Fixed lending commitments both fell 1.2%. The seasonally adjusted series for the value of total commercial finance commitments fell 4.1%. Fixed lending commitments fell 4.4% and revolving credit commitments fell 3.2%.

The trend series for the value of total lease finance commitments fell 3.9% in May 2016 and the seasonally adjusted series fell 14.2%, following a fall of 0.6% in April 2016 to $517 million.

What Is Driving The Mortgage Pricing Blitz?

The article in the AFR today, in which Digital Finance Analytics is cited, makes the point that fixed rate mortgage offers are being made at very low rates. “Four major banks are cutting showcase fixed rate mortgage deals to build market share and lock-in property buyers before the next cut in base rates. HSBC, Bank of Queensland, National Australia Bank and Australia and New Zealand Banking Group are alerting mortgage brokers, who account for more than half of recommendations, about the new deals”.

There is intense competition in a market where mortgage flows are slowing, and banks are desperate to write business. Refinancing and investment lending are the target areas. As I said, “About 27 percent of lenders’ mortgage books have been churned in the past 12 months, compared to 35 per cent in New Zealand.”

More importantly, the yield curve have enabled lenders to generate lower implied forward rates on their fixed deals. This data from JP Morgan, nicely illustrates the opportunity.

The rates are sitting at 1.6% out to 3 years, which enables lenders to lock in nice margins even as they reprice down. As a result, the discounts on offer from the advertised rates, which a couple of months ago were rising, are being cut to offset the headline reductions. So borrowers who lock in fixed term loans can get some amazing rates, though depositors are also getting squeezed further.

Two issues to bear in mind. First, we may well see the RBA cutting rates again in coming months, and the yield curve has priced this in, at the moment. If they do not cut, rates may rise. Second. households who lock in a great low fixed rate for the next few years, should bear in mind that when they come to refinance, later, they may well have to pay a higher rate then.