Non-Majors Strike Back – AFG

The AFG Competition Index for the last quarter of 2015 shows that non-major lenders have made up ground after a punishing few months for the challenger sector.

AFG General Manager of Sales and Operations said the recent turnaround had been dramatic. “We have been through a period of uncertainty and this has seen the majors use the size of their balance sheets to dominate their smaller competitors.

“This quarter the tide has turned and non-majors have had their best run since June, just prior to the regulator enforced changes to investment and interest only lending policy being introduced. Over the last 3 months we have seen the non-majors adjust to these changes and it appears that the flow of business is settling back into a more competitive pattern.

“Looking at the product categories, the non-majors have made up ground across all lending products apart from fixed. Their share of refinancing has increased from 29.8% in August to 39.5% in November. During the same period, investor lending has gone from 27.4% of the total to 29.1% while first homeowners has leapt from 27% to 32%.  The non-major’s share of fixed rates fell from 45.2% in August and a high of 56.8% in May to 42.5% for the last quarter.

“After a three year trend of declining use of fixed rate loans, the tide has turned. The corresponding increase in the major’s share of fixed rate lending has reflected that change. The next edition of the AFG Mortgage Index, due for release in mid January, will show that fixed rate lending as a percentage of AFG’s overall business, has increased from 11% to 13%.

“Borrower expectations that the likelihood of an interest rate rise in the new year has many borrowers opting to fix their home loans,” said Mr Hewitt. “Once again, the changing nature of the market means Australian borrowers are recognizing more than ever the
value of using a broker to help them navigate their way through.”

Brokers responsible for more than half of interest-only lending

From Australian Broker.

More than half of interest-only loans come through the third party channel, corporate regulator ASIC has revealed ahead of its forthcoming review of mortgage brokers in regards to interest-only lending.

Speaking at the FBAA conference held on the Gold Coast in November, ASIC senior executive leader – deposit takers, credit & insurers, Michael Saadat announced that the regulator would turn its focus to mortgage brokers following its recent review of banks in regards to interest-only lending.

Saadat has now revealed to Australian Broker that the shift in focus has come after its review of lenders found that interest-only loans through the broker channel increased by 8% over two years.

“Since 2012, the proportion of interest-only loans sold through the broker channel has gone up from 49% to 57% as of the fourth quarter of 2014.”

However, despite writing more than half of the interest-only loans in the market, Saadat said the review found that the average value of an interest-only loan submitted by a broker was less than that of a bank.

“Clearly brokers are involved in arranging interest-only loans but the other thing we noted in our report was the size of interest-only loans also varies by channel, and actually, it is the direct channel rather than the broker channel where the larger interest-only loans have been provided.”

ASIC’s forthcoming review will analyse quantitative and qualitative data of around 10 to 12 large broking groups, according to Saadat. The review will also have a focus on record-keeping practices.

“We will also be looking to get individual customer files to see how brokers are meeting their responsible lending obligations, and how they go about recording the information they obtain and the verification they conduct on the file,” Saadat told Australian Broker.

“One of the findings of our review of lenders’ files was that record keeping practices were not as good as they could be, so we are quite interested to see how brokers are going with record keeping as well.”

 

ANZ Launches Australia’s first Home Loan Centre

ANZ today continued its expansion in NSW opening Australia’s first dedicated Home Loan Centre. Located at Westfield in Parramatta, the centre will provide customers with a specialist service to improve the process of obtaining a home loan.

ANZ Managing Director Retail Distribution Australia Catriona Noble said: “We understand that buying a house is usually the single biggest investment people make and we want to remove some of the stress associated with organising a home loan.

“By creating a dedicated space for home loans, customers will have access to a team of specialists in an environment not usually associated with a bank. We’ve designed this to look and feel like a typical home and we’re confident this will resonate strongly with our customers.

“Our two Home Loan Centres in New Zealand have been incredibly successful helping thousands of New Zealanders into a new home since late 2014. We expect our centre in Western Sydney to be equally well received,” Ms Noble said.

 

Increasing loan size brings housing affordability down

The latest edition of the Adelaide Bank/ REIA Housing Affordability Report shows that overall housing affordability in Australia declined over the September quarter with homes becoming less affordable in five out of the eight states and territories.

The report provides a comprehensive update for the sector using the latest data for the September Quarter 2015.

REIA President Neville Sanders says, “The latest REIA Housing Affordability Report shows that the proportion of median family income required to meet average loan repayments was 31.7%. The figure increased 1.4 percentage points during the quarter and 1.3 percentage points compared to a year ago largely due to the increasing size of new loans.”

“Sadly, the deterioration was seen in most states and territories and the overall level of housing affordability now is at its worst level since March 2013. Western Australia and the Australian Capital Territory were the only jurisdictions to record improvements while the proportion of the median family income required to meet average loan repayments remained unchanged in the Northern Territory.”

“Already the least affordable, New South Wales recorded the biggest fall in housing affordability across the country. New South Wales is still the only state or territory with an average loan size above $400,000, however Victoria follows closely at $390,503.”

“The report shows overall rental affordability improved over the quarter with 24.6% of the median family income now required to pay median rents. The proportion of the median family income required to meet median rents was sitting at 23.4% in Queensland, 23.2% in South Australia and 24.1% in Tasmania.”

Banks Still Hooked On Mortgage Loans – New Investment Loans Up 19%

The latest APRA Property Exposure data, to September 2015 provides an additional perspective on the loan books of the ADI’s. Overall property exposures are a record $1.35 trillion, up from $1.33 trillion in June, and up 9% on September 2014. Within the mix, owner occupied loans rose from $810 bn to $841 bn, up 8.9% from 2014; in response to the changed lending environment, whilst investment loans for residential property fell from $517 bn to $514 bn, the first fall in a long long time (APRA data goes back to 2008), but still up 9.1% from September 2014.  Within the data we can see the adjustments which the ADI’s have made as they reclassify loans. A process which is not yet complete.

APRA-Ptpy-Sep-2015-6Investment loans comprise 37.9% of all loans, a fall from 38.9% last quarter, but still worryingly high, and higher than the regulators previously had thought.

APRA-Ptpy-Sep-2015-5Looking at some of the key characteristics of loans on book, 40% of loans (by value) have offset facilities, and 35% are interest only loans. There appears to be a slight slowing in the growth of interest only loans, reflecting the changed lending environment, and a slowing in investment lending.  But see below for data on new loans.

APRA-Ptpy-Sep-2015-4The volumes of new loans being written is still strong, with close to 100,000 being written each month. Owner-occupied loan approvals were $219.0 billion (59.8 per cent), an increase of $13.1 billion (6.4 per cent) from the year ending 30 September 2014;
investment loan approvals were $147.0 billion (40.2 per cent), an increase of $23.4 billion (19.0 per cent) from the year ending 30 September 2014.

APRA-Ptpy-Sep-2015-7The LVR splits show the bulk of loans are in the 60-80% band, and there is a fall in the LVR above 90% being written.

APRA-Ptpy-Sep-2015-2The distribution chart below shows this well, and also shows that around 24% of loans are still be written above 80% LVR – at a point in the cycle where house prices in Sydney and Melbourne are probably close to their peaks, and values are falling in some other states.

APRA-Ptpy-Sep-2015-3 Data on the characteristics of the new loans shows a fall in new interest only loans being approved (but still more than 40% of new loans are interest only, and as we know these contain more potential risks later). The proportion via brokers sits at 47.7%, just a tad lower than last quarter, but it shows how important the broker sector is, in terms of originating new loans. There are a small number of new loans still being approved outside standard serviceability, at 3.6% in the past quarter, slightly lower than then 3.8% in June, but still higher than in previous times. Given the tighter lending standards, this is a concern. Only 0.4% of new loans are low documentation loans via the ADI’s though more are being written via the non-bank lenders, and so are not caught in these figures.

APRA-Ptpy-Sep-2015-1

ING DIRECT to launch new upfront commission model

ING DIRECT has announced a new upfront commission model that will come into effect from 1 January 2016.

The simplified commission model will be structured around individual accounts as opposed to the current model’s focus on aggregator volumes and conversion rates, ensuring transparency for brokers and alignment with the bank’s primary bank strategy.

Mark Woolnough, Head of Third Party Distribution, commented: “We reward our customers for their loyalty and for supporting our business strategy to be the main bank for Australians. It made sense to do the same for brokers, resulting in our new, simplified commission model which will reward the type of business that best supports our primary bank strategy – lower LVR, Orange Advantage home loans.”

The minimum upfront commission will remain unchanged at 50bps (+GST) with the maximum increasing to 80bps (+GST) until 30 June 2016.

ING DIRECT’s new commission model was finalised following consultation sessions with aggregators and will apply on new residential loans with new to ING DIRECT security property settled from 1 January 2016.

First Time Buyers Still In The Market But…

Continuing our analysis of the latest DFA household survey of property drivers and expectations, today we look at the First Time Buyer segment. For those wanting to buy, but are unable to do so, the main barriers remain high house prices, and costs of living (no surprise given static real income growth). However, we also see a spike in availability of funding as a barrier, compared with a couple of months ago. Lending criteria may be getting tighter for some. We also see fears of unemployment receding in the eastern states, though it was a little higher this time in WA.

Survey-Nov-2015---WTBSo then, looking at those who are actively seeking to buy for the first time, more than 20% are unsure of the type of property they can find. Overall houses, are preferred but we see units very much in the frame, especially in the eastern states, in and around the main urban centres. There are more units available (resale and new construction) than houses in these areas, and prices for units will be a little lower.

Survey-Nov-2015---FTB2For those actively seeking to buy for the first time, prices are the major barrier, most seem able still to get finance if they do find a place to buy.

Survey-Nov-2015---FTBOne final perspective, from our earlier research, we are seeing some reduction in the absolute number of first time buyers going direct to the investment sector (the red line), but it is still a very significant factor. It is still a logical approach for some, to gain access to the housing market, perhaps by buying a cheaper place to rent and hoping for capital gains and tax breaks, though of course interest rates have risen in the investment mortgage sector, and prospective buyers are likely to be buying into very full (some would say precarious) prices.  For many it is a dilemma, will prices continue to rise (in which case they need to get in now) or will prices begin to correct (in which case it is better to wait, to avoid the pitfalls of negative equity)?  Given yesterday’s comments, waiting a bit may be the more sensible path as the property worm is turning, especially in the eastern states.

FTB-DFA-Sept-2015More next time on the other segments in our surveys. You can read our last Property Imperative Report which summaries the state of play as at September 2015. This post updates some of the data in that report.

The Property Worm Turns

Change is afoot, according to the latest findings from our household surveys which looks at property intentions and motivations. The results, (which includes data from as recent as last week), are showing significant changes compared with a couple of months ago, and investors, in particular, are feeling the heat, thanks to rising lending costs, flat rentals, and lower house price rise expectations.

The intent to transact is on the wain, with portfolio and solo investors signalling a fall in expected transactions. In contrast, there is a significant uplift in those seeking to refinance an existing loan (which mirrors recent rises in refinanced loans, and the current attempts by lenders to attract borrowers with attractive deals for owner occupied loans).

Survey-Nov-2015---TransactHouse prices expectations are on the turn, with investors, those eternal optimists, now more uncertain about future capital appreciation. Almost all segments are showing a fall in future expected growth compared with a couple of months ago, but investors are in the headlights. Such large changes over just a couple of months is unusual.

Survey-Nov-2015---PricesThere remains significant demand for loans, and those wishing to borrow more…

Survey-Nov-2015---Borrow… but investors are banking on tax breaks to support their investments, as the cost of finance rises, in the context of flat income growth and rentals.  Overall investors think there is still a better return to be had than from bank deposit accounts, although as we showed recently, may, in net cash flow terms, will be underwater.

Survey-Nov-2015---InvestorsFinally, looking at savings intentions, we see little change, with prospective first time buyers still saving hard, despite low returns from deposits.

Survey-Nov-2015---Buy   In the next few days we will drill further into the detailed segment specific data, but it looks as if the property worm is indeed turning.

The Risks In Broker Originated Loans

From Mortgage Professional Australia.

You may recall the stir caused among brokers when APRA chairman Wayne Byres warned lenders about third-party originated loans at the Australian Business Economists briefing in August.

Byres said, “Third-party originated loans tend to have a materially higher default rate compared to loans originated through proprietary channels.”

The regulator gave MPA an insight into its data on default rates, which it had requested from a number of the largest lenders. Its spokesperson said: “This data showed that the default rate on mortgages originated through third-party channels was typically higher than mortgages originated via proprietary channels. There were differences from lender to lender but, on average, the average default rate for third-party originated loans was around 30% higher.”

But despite highlighting higher default rates on third-party loans, the chairman went on to say at the briefing: “This does not mean third-party channels have lower underwriting standards, but simply that the new business that flows through these channels appears to be of higher risk, and must be managed with appropriate care.”

However, the mention of higher default rates and higher risk associated with third party loans gave brokers cause for concern that their loan-writing abilities and the quality of broker-sourced loans were being negatively portrayed, leading the industry associations to question APRA’s comments.

MFAA CEO Siobhan Hayden was able to meet with APRA and clarify for the industry that Byres’ comments on the riskier nature of third-party loans were not an attack on brokers’ loan-writing abilities.

“It was more around that the type of customers that would present themselves to a teller versus the type of customers that would engage with a finance broker – [they] are different, and inherently I would agree with that,” Hayden told MPA. “The types of structures that finance brokers are asked to support customers on are more detailed, more involved and require more consideration, so I didn’t disagree with that analysis.”

She said APRA did suggest very clearly to her that the overall rate of arrears and defaults was negligible – the lowest it had been in this economic climate. Another positive outcome was that the association was also able to provide more details to the regulator on how APRA’s decisions affect the broker channel directly.

Clearing up areas of confusion such as these is one of the reasons associations are invaluable to brokers and their industry as a whole.

“You need the industry body to be able to be there having that dialogue [with APRA or ASIC], and this is one of the most important things that associations do,” said FBAA chief executive Peter White. “This is where industry associations are at their fore.

“Normally it’s not a regulator that we deal with; they don’t regulate our industry. At the end of the day APRA is looking at the credit and regulatory regime of the lenders and they’re looking at their processes and credit policies – a broker can’t write a loan that isn’t within credit policy.”

MPA took a look at what other statistics had to reveal about third-party originated loans, and what lenders, a risk expert and an aggregator had to say on the quality of broker introduced loans.

The MFAA’s 2015 Ernst & Young report Observations on the Value of Mortgage Broking found there was no difference between thecredit quality of the retail and broker channels. “There has not been any material differences witnessed in the characteristics (ie credit quality, cost of acquisition (post commissions), net interest margin and loyalty) of the broker portfolio to that of proprietary channels,” the report stated.

“With regards to credit quality, lenders noted that the arrears rate in both portfolios is largely similar. It should be noted however, that given the historically low levels of arrears lenders are experiencing this has only been analysed by lenders at a headline level.”

One thing that is certain is the broker market share is only going up. The MFAA’s 2015 report states that broker-originated loans now contribute to 50% of mortgages in the system (both new and refinanced), double the volume since 2003 when around 25% of all new home loans were sourced through brokers, according to the Reserve Bank’s 2004 Financial Stability Review.

Risk management expert Professor Paul Kennedy of Macquarie University said the fact that broker-originated loans involved extra participants gave them a tendency to be riskier.

“Every layer you put in the financial process gives you more challenge in getting the incentives right and making sure everything is aligned to a fair and equitable outcome,” Kennedy said.

‘I think [broker-originated loans] bring their own challenges, and the challenges include they are one step removed from the lender, so you need to ensure that you have strong connection and oversight with them – also, the population of people that they are dealing with may be different from those who come directly to the lender themselves.

“You need different channels to ensure you can service the market. Different channels come with their own particular challenges. Those are not insurmountable challenges; you just need to be aware of them when you are growing that channel.”

WHY AUSSIE BROKERS RANK HIGHLY ON COMPLIANCE ON GLOBAL STAGE

The risk involved in broker introduced loans within Australia compares well with those originated by brokers globally, says Professor Paul Kennedy of Macquarie University. With extensive experience in risk management at top banks in Europe and Australia, among them CBA and NAB, Kennedy says historically Australian brokers have compared quite well.

“Although Australia has suffered incidents of, for instance, poor broker-originated loans, they tend to be restricted to specific firms and regions,” he says.

“I think Australia’s had isolated poor incidents which are intrinsic to the business model, and there will always be the odd bad apple, but so far we have escaped the worst systemic abuse that has been perhaps a bit more obvious particularly in the UK. We actually have a reasonable financial system and I think we’ve been tested quite well through the global financial crisis in comparison – our financial system is pretty sound.”

Brokers’ top priority
That most brokers in the industry want to achieve high compliance and do the best by their clients is probably fair to say.

“I think brokers have a very real concern that they are compliant with the law. I would say it’s probably on the top of mind with just about every broker that I speak to,” said Vow CEO Tim Brown, who explained that their compliance webinars were the best attended of all of Vow’s webinars.

One of Australia’s largest aggregation groups, Vow has a strong presence in compliance training for its brokers and runs a broker survey every six months. “Compliance is our most highly regarded area,” says Brown. “Our compliance area gets a 93% satisfaction rating, which shows they really value the education that we give them through our compliance.”

The aggregator also runs workshops that give brokers the opportunity to bring in their own files and discuss them. “People are able to have an open discussion without feeling threatened that they are going to get caught out. We find, educationally wise, they learn more from that experience than by us going and doing audits.”

While compulsory for those under Vow’s licence, brokers are finding the workshops so useful that those with their own licences are requesting that the aggregator runs similar workshops for a fee.

“They’ve been requesting that they want to attend our workshops, and they want us to do audits on them. It would give us some comfort, too, to know they are being compliant, albeit they’re not under our licence.”

Brown’s background in banking has placed him in a good position to compare the retail and broker channels.

“Most brokers have been in the industry a long time; they tend to have come out of major banks and so they tend to be well trained anyway and they know what not to do. They’ve got integrity and they know that their licence can be put at risk if they put a client into a loan that they can’t afford or that isn’t the right product for them.”

Broker-originated lending stands tall
MPA spoke to three lenders, who explained why the future was looking bright for the broker channel – and said third-party originated loans were ticking all the boxes.

Australia’s largest customer-owned bank, Heritage Bank, sources 50% of its mortgage loans through brokers and 50% from its retail network. The bank has also had an exceedingly strong year in loan origination through its broker partners, head of third party channels David Ure said. “This channel gives us access to markets across Australia,” he said. “Our relationship with the channel is considered very important.”

Ure said the bank’s main risk associated with loans introduced through a third party was in receiving/assessing and approving loan applications. “However, this risk is well mitigated through legislation and compliance requirements within the industry, as well as Heritage’s relationship with our broker partners,” he said.

But for ING Direct head of broker distribution Mark Woolnough, brokers don’t introduce any material risk into the process. “We’ve been working with brokers for a long time, nearing 20 years now, and we’ve always said to brokers and internally, they are essentially an extension of our own sales team. Being a branchless bank we don’t have a face-to-face or mobile sales network. We see our broker partners as the extension of our sales force, and therefore they’re effectively seen as our shopfront.”

He said brokers accounted for more than 20% of ING Direct’s lending business and there was no significant difference regarding approvals, defaults or refinances between direct and broker customers. “For us, there’s no statistical difference because our focus is not on just getting people into their homes but to make sure they stay in their homes longterm, which is reflected in where we pitch our products and our credit policy and our appetite to help customers.”

ME’s general manager brokers Lino Pelaccia said his bank’s experience of working with brokers had been “extremely positive”, with half of ME’s home loan sales originating from brokers in the past year.

“Brokers run professional, risk-averse businesses that are compliant and accredited with industry bodies,” said Pelaccia. “Brokers are also a great source for instant feedback on the state of the market and how our products and services are being received.”

ME plans to expand its broker network and expects it to generate 55% of home loan settlements over the next three years, totalling $3.3bn in FY16 and increasing to $5.3bn in FY18. “Brokers are a valued sales channel for ME, and the broker channel is critical to our growth plans going forward.”

NSW Investment Property On The Slide

The data from the ABS today, provides a view of all finance for September, and contains a number of significant points.  Trend data (which irons out the noise month by month) shows that lending for owner occupied housing was $20.6 bn, up 2% from last month ($20.2 bn). Personal finance was down 1.1% from $7.3 bn to $7.2 bn, whilst commercial finance – which includes investment home lending – was down by 0.4% from $44.4 bn to $44.3 bn.

However, looking in more detail, and separating out investment lending from other commercial lending, we see that investment housing was $12.9 bn, down from $13.2 bn last month.  The relative proportion of new loans for investment housing in the month sat at 38.6%, down from 39.6% last month. So owner occupied lending is now dish of the day.

We also see that business lending, net of investment housing, fell from 48.1% to 48%, although the value rose a little from $31.2 bn to $31.3 bn. We continue to see the relative share of lending to the commercial sector falling, which is not healthy for future growth prospects. The banks prefer to lend against residential property as the current capital adequacy ratios still makes this more attractive than commercial lending, and loss rates are lower, so net margins remain strong. Firms are still holding off from investing, and many who would borrow are finding the terms, and costs prohibitive. We will discuss this further in the next report on the business sector, to be released shortly.

Lending-Trend-Flows-Sept-2015

The other data point, which is quite stunning, is the fall in investment lending in NSW. Looking at the original data we see that it fell from a peak monthly flow of more than $6 bn in June to $5.5 bn, supported by a relative growth in investment by entities other than individuals, which would include self-managed superannuation funds and other commercial entities.  Momentum looks set to fall further, in the investment sector, whilst owner occupied lending is set to grow. Indeed the trend line for owner occupied loans in the graph above, shows a clear movement up, as banks reset their sites on attracting owner occupied business and refinance – this explains all the heavy discounts currently available for owner occupied loans in the market at the moment, funded by hikes in rates to existing borrowers.

NSW-Investment-Sept-2015