Tag: Mortgage Industry

ASIC Confirms Poor Underwriting Practices Were Used By Some Lenders

As reported in the SMH.

An official review of lending standards in the red-hot investor property market is set to reveal serious flaws in how lenders have been assessing customers for credit.

The chairman of the Australian Securities and Investments Commission, Greg Medcraft, on Thursday said the watchdog would in August publish a report finding shortcomings among how some lenders were testing borrowers’ ability to cope with higher interest rates.

The report, based on surveillance of 11 banks and non-banks, had also found some lenders’ credit checks used inadequate estimates of customers’ living expenses, he said.

Even though banks are offering new borrowers interest rates of about 4.5 per cent, Mr Medcraft lenders and customers needed to assess whether borrowers could cope with interest rates of 7 per cent.

“That’s what you should be thinking about if you’re looking at your ability to repay the loan,” he said.

But adding to similar concerns raised by the prudential regulator in recent months, Mr Medcraft said the report had made “mixed” findings on whether banks were using a high enough “stress rate.”

He added that some of the underwriting standards had been improved in recent months. “Many of them have since corrected their ways or are correcting them.”

Mr Medcraft also highlighted some borrowers failing to rigorously assess a borrowers’ cost of living, including national indexes that did not reflect local variations.

DFA Survey Shows Property Demand Remains Strong

Following on from yesterdays video blog on the overall results from the latest household surveys, over the next few days, we will dig further into the data. We start with some cross segment observations, before in later posts, we begin to go deeper into segment specific motivations. You can read about our segmentation approach here. Many households still want to get into property – demand is strong, thanks to lower interest rates, despite high home prices and flat incomes. Future capital growth is expected by many in the market, and by those hoping to enter. This despite a fall in household confidence, as measured in our finance confidence index.

We start with savings intentions. Prospective first time buyers are saving the hardest, despite the lower interest being paid on deposits. More than 70% are actively saving to try and get into the market (though we will see later, more are switching to an investment purchase). Portfolio and solo property investors are saving the least – despite the recent changes to LVR’s on loans.

A significant proportion of those saving are actively foregoing other purchases and spending less, so they can top up their deposits. A higher proportion are also looking to the “Bank of Mum and Dad” for help.

SurveySavingJuly2015Looking next at borrowing intentions over the next 12 months (an indication of future mortgage finance demand), down-traders are slightly less likely to borrow now, compared with a year ago, whilst investors are firmly on the loan path. First time buyers will need to borrow. Refinancers are active, and one motivation we are seeing is the extraction of capital during refinance, onto a lower interest rate.

SurveyBorrowJuly2015Many households are still bullish on house price growth. Investors are the most optimistic, whilst down-traders the least. There are significant state differences, with those in the eastern states more positive than those elsewhere.

SurveyPricesJuly2015So, who is most likely to transact? Portfolio investors are most likely, then down-traders, and solo investors. There is also a lift in the number of households looking to refinance, to take advantage of lower interest rates. The recent public announcements by the banks, about tightening lending criteria appears to have encouraged some to bring forward their plans to purchase, in the expectation that later it may be more difficult to get a loan.

SurveyTransactJuly2015The recent tweaks in rates are having no impact on household plans, as the absolute rates are still very low – lower than ever – for many. We conclude that the demand side of the property and mortgage markets are still intact.

Next time we will look in detail at data from first time buyers, and then investors.

So Where Does The Mortgage Industry Go From Here?

We have just completed the latest DFA household survey, and in today’s DFA Video we summarise some of the main themes which we will cover in more detail in later posts.  In the video blog we discuss the key demand and supply issues and make some observations about the future direction of house prices.

In essence, demand for property is still strong. Investors are still keen to purchase, first time buyers are flocking to the investment sector, down-traders are looking to property for income, so are keen to grab an investment property, and the number of portfolio investors is rising. We also see a significant rise in the number of investors via SMSF. Some are bringing their purchase decision forward to try and avoid credit tightening later. Foreign investors remain active (and are finding ways to buy established property – still.) Rental income is static, but investors are still getting benefits from negative gearing, and believe further capital gains will be delivered (again tax efficient). Geographically speaking, investors are most positive in Sydney, least in Perth. Property is seen as an investment asset class.

On the owner-occupied side of the ledger, first time buyers are finding it hard to purchase, thanks to a lack of suitable property, contention with investors, and tighter underwriting standards. Our surveys also highlight the low interest rates on deposits is making saving for a larger deposit harder.  There is considerable interest in refinancing to a lower interest rate, and recent “great” deals on offer are encouraging more churn.

The proportion of property inactive households continues to rise.

On the supply side, there are concerns about the supply of property, and the supply of mortgage finance. We think mortgages for investment loans will be harder to get, will cost more, and some will miss out. Ongoing repricing and less discounting will provide to wider margins for the banks. Non-banks and some of the players operating below the 10% guide growth rate are still wanting to do deals.

To offset this, we expect to see rates for owner occupied refinance to be discounted, and a fierce battle for customers is breaking out. Discounts are still on offer here and other incentives are in play.

Brokers will need to change their tune a little, and tap some of the smaller players on behalf of their clients. Absolute volumes of investment loans are likely to fall, but owner occupied refinancing will likely fill the gap.

So on balance we think the demand/supply disequilibrium will continue to support house prices in the eastern states in coming months, although momentum will fall from current levels. The tweaks to interest rates, of a few basis points will not be large enough to kill the golden goose, (and for many are offset thanks to negative gearing) but the higher serviceability buffers and lower LVR ratios will make it harder for some to enter the market.

The killer blow to house prices will be a substantial rise in interest rates – if rates were to rise just 150 basis points, that would be enough to put many households under pressure. But in the current environment, we do not think a rise in rates is likely for a couple of years, so property momentum has some way to go.

 

Australian Major Banks’ Repricing of Residential Investor Loans Is Credit Positive – Moody’s

From Moody’s.

Over the past week, three major Australian banks increased their lending rates for residential property investment loans and interest-only (IO) loans. Australia and New Zealand Banking Group Limited and Commonwealth Bank of Australia each lifted the standard variable investor rate by 0.27%. National Australia Bank Limited increased the rate it charges for IO loans and line of credit facilities by 0.29% (investors, rather than owner-occupiers, primarily take out IO loans).

Increased lending rates are credit positive for the banks because they re-balance their portfolios away from the higher-risk investor and IO lending toward safer owner-occupied and principal amortizing loans. They also help to preserve net interest margins (NIM) and profitability amid higher capital requirements and increased competition from smaller lenders.

The banks’ moves follow increasing regulatory scrutiny of residential property lending. Investment and IO lending has grown rapidly in the recent past, reaching a record proportion of overall mortgage lending that has contributed to rapid house price appreciation, particularly in the Sydney and Melbourne markets.

In December 2014, the Australian Prudential Regulation Authority (APRA) announced a set of measures designed to ensure residential mortgage underwriting standards remain prudent and to curb growth in investment lending to 10% per year. The major Australian banks have since undertaken a number of initiatives to ensure compliance with APRA’s guidelines. Notably, these include the imposition of higher down payment requirements for investment lending and these most recent pricing changes.

Although investment and IO loans performed well during the global financial crisis of 2007-10, they inherently carry higher default probabilities and severities, and a larger proportion of such loans risks higher delinquencies for Australian banks at times of stress.

Investment loans typically have higher loan-to-value ratios: our data indicates that the average loan-to-value ratio for investment loans is 60.2%, versus 57.8% for owner-occupier loans. In addition, since the underlying properties are not the primary residence, they are more sensitive to changes in house prices and borrower employment status and thus are more likely to default if the borrower’s conditions change. IO loans are more exposed to rising interest rates than principal-and-interest loans.

We see APRA’s and the banks’ efforts to slow the growth in investment lending as an important credit support for the system. We also expect that the remaining major Australian bank, Westpac Banking Corporation will follow the other banks in repricing its investment mortgage book. Over time, these steps are likely to slow investment lending growth rates to below APRA’s 10% cap from current annualized growth rates of 10.6% for ANZ, 9.9% for CBA, 14.1% for NAB and 10.0% for Westpac, according to APRA data.

Curbing investment lending is particularly positive for those banks with significant investment loan portfolios. NAB and Westpac, when it follows suit, are especially well-placed to derive benefits from pricing changes. Westpac has the highest proportion of investment lending in its portfolio (46% of total housing loans), exposing it to a higher-risk segment, and NAB has opted to reprice its IO loans and line of credit facilities (together they constitute 47% of its overall portfolio), allowing it to capture a greater NIM benefit.

ING Direct Tightens Investment Loan Criteria

The AFR is reporting that ING has said new investor borrowers will need to find a 20% deposit, a hurdle which had previously applied only to loans in Sydney. They will also end discounts rates for new investor borrowers and tighten serviceability assessments.

This is further evidence that smaller banks are reacting to the APRA 10% threshold. APRA data shows ING has about $9bn of investment loans but is not growing above the 10% limit. Their move looks like preemptive action to avoid a flood of applications as investors seek loans from smaller players in response to the majors throttling back, or a reduction in focus on mortgages in Australia.  Macquarie purchased a mortgage portfolio of $1.5bn from ING in September 2014.

ING-Profile

AMP Bank Stops Property Investor Lending and Lifts Rates

In a media release, AMP say that in response to  regulator guidelines to limit growth in investor property lending across the  market to 10 per cent, AMP Bank will increase variable rates on all existing  investor property loans by 0.47 per cent per annum from 7 September 2015.

All investor  property loan applications that have been approved will be subject to the 0.47 per cent  increase on settlement.

In addition, AMP  Bank will not be accepting new or assessing existing investor property lending  applications from today.  This is expected to last until later in 2015, depending on market conditions.

“We appreciate the  position this puts our customers in and will be working with our distribution  network to actively communicate with them,” said Michael Lawrence, Managing  Director, AMP Bank.

AMP Bank remains  committed to helping Australians own their homes and, effective 27 July,  reduced interest rates for new owner occupied variable loan rates on the AMP  Bank Professional Package to as low as 4.12 per cent per annum.

“Australia’s  property market is experiencing high levels of investor property lending growth  and we are supportive of the regulator’s intention to slow this growth to  appropriate levels,” said Mr Lawrence.

AMP has a small share of the market (around 1%), as shown in the APRA monthly banking statistics, but has been growing its investment loans by well above the 10% APRA guidance rate. Their investment book is worth around $2.9bn, and is half the size of its owner occupied loan book.

As we highlighted, if growth was strong in the first half, and above 10%, then the corollary is that in the second half the growth must be significantly lower to net out at 10%.

Their reduction in rates for new owner occupied loans highlights that the upcoming battleground will be refinancing of owner-occupied loans in substitution of the investment sector.

Do Systems Limitations Hamper Mortgage Repricing?

Westpac, the bank with the largest share of Investment Home Loans will be the last of the big four to tweak their rates, following recent changes at NAB, ANZ and CBA. However, systems limitations may cramp their style according to reports today.

According to SMH Business Day,

“Westpac Banking Corp is missing out on $1 million a day that its competitors are now creaming from landlords because its computer systems will not allow it to charge differing interest rates.

Westpac, which is the largest lender to landlords, is the only one of the big four banks not to have increased interest rates for property investors in recent days.

National Australia Bank on Monday said it would raise rates by 0.29 percentage points on all interest-only loans following Commonwealth Bank of Australia and ANZ Banking Group, which last week raised rates for investors only.

Sources said NAB is constrained from charging different rates to investors and owner-occupiers because of technical problems. The bank declined to comment.

Westpac too is finding it challenging to distinguish between investors and owner-occupiers, sources said.

Westpac and NAB use a single “reference rate” for owner-occupier and investor borrowers, which means they cannot increase the standard variable rate for property investors without also hitting owner-occupiers.
Banking sources said it might take Westpac several months to work through systems issues to enable it to charge different rates. This could involve senior members of the IT team re-coding some of the banking systems to allow different reference rates even though the bank has created different home loan products for investors and owner-occupiers.

The pressure on Westpac to resolve its systems issues to enable it to charge different rates is growing because senior bankers tip a bifurcation of the home loan interest rate market, with owner-occupiers and investors expected to pay different rates in coming years.

Up to 1998, it was common for banks to offer owner-occupiers lower interest rates compared to property investors. The interest rate differential was around 1 percentage point”.

NAB Repricing Mortgage Strategy Has Different Tenor

NAB is the latest player to announce mortgage repricing changes, but with a focus in interest-only loans (whether owner-occupied or investment loans).

“National Australia Bank today announced it will increase variable interest rates on interest-only home loans and line of credit facilities by 29 basis points.

The changes are in response to industry concerns about the pace of investor growth, and NAB’s focus on delivering responsible lending practices into the Australian housing market.

Over the past three years, total housing loans have grown by 27 per cent across the industry.

During the same period, growth in housing investment loans and interest only loans has been 34 per cent and 44 per cent respectively. Interest only loans are the predominant structure for investors.

NAB Group Executive Personal Banking, Gavin Slater, said that the higher growth rates in investment and interest only loans had implications from a regulatory, industry and banking perspective.

In December last year, APRA announced a range of measures to reinforce sound lending practices across the industry. NAB has been working closely with the regulator to support these measures, including actions to restrict investor lending growth to no more than 10% p.a..

“In considering these and a range of other factors, NAB is confident the steps we are taking are the right approach to further support responsible lending practices,” Mr Slater said.

“In an environment of record low interest rates, NAB believes it is important to encourage our customers to pay down their home loan.”

NAB continually reviews its lending practices and remains committed to maintaining prudent lending standards and fulfilling its regulatory obligations.

For new loans, NAB’s interest only variable rate changes will be effective 10 August 2015.The change for existing interest only variable rate loans will be effective 10 September 2015. Additionally, changes to NAB’s fixed rate interest only loans will be effective 10 August 2015. Changes to NAB’s line of credit loans will be effective 10 September 2015.

Customers who want to know more about these changes and the impact on their circumstances are encouraged to talk to their banker about what works best for them”.

Our modelling suggests up to 35% of NAB mortgages may be impacted by these changes, creating a broader base of re-pricing than ANZ and CBA have announced. The quantum of the interest rise at 29 basis points is similar.  The net yield from this approach could well provide a higher return for NAB in terms of margins, unless owner-occupied interest-only borrowers decide to refinance to a competitor with a lower rate. Also NAB’s headline investor loan rate (not interest-only) will be more competitive than others, though of course headline rates are often discounted. We are noting some reduction in net average discounts on new loans being written across the industry.

In APRA’s recent reviews, they noted that some lenders were not adequately considering borrower repayment strategies on interest-only loans beyond the initial interest-only term. NAB’s repricing will reduce the relative attractiveness of interest-only loans.

Of note is the fact that Basel IV will likely lift the capital required for interest-only lending, so NAB’s move could be seen as preemptive positioning.

Resmiac announces key changes to prime alt doc loans

According to MPA, non-bank lender Resmiac has announced key policy changes to its prime alt doc product, aimed at giving self-employed borrowers even more choice.

Among the key policy changes announced is an increase in maximum loan amount to $1,500,000 for those borrowers seeking to borrow up to 75 per cent of the security value, the ability to access cash out for any worthwhile purpose and the removal of automated credit decisions.

Additionally, the non-bank says borrowers will now have more flexibility when it comes to verifying their income with the option of either an accountant’s letter, six months Business Activity Statements or three months business bank statements to support their declared income.

CPA’s Push into Broking Will Threaten the Channel

According to Australian Broker, accounting body CPA Australia’s planned move into mortgage broking is going to shake up traditional accountant/broker relationships and referral sources, citing one broker and digital marketing expert, so brokers need to insure themselves now.

Darren Moffatt, founder of Seniors First Specialist Finance and the CEO of Webbuzz – which specialises in digital marketing for financial services – told Australian Broker that CPA’s plans to obtain an Australian Credit License and move into mortgage broking is a big threat to the broker channel.

“If you talk to the majority of brokers, they have one or more accountants as referral sources. Everyone in the industry would agree that accountants are the best referral source you can get. So this announcement by CPA is really going to shake things up,” he said.

“CPA is essentially saying to their accountant membership, ‘we now have the channel for you’ – if you want to generate additional revenue for your business, we will make it easy for you to get into mortgage broking. They are saying ‘we’ve got the credit license and the infrastructure; all you need to do is send the deals in.’

“This is going to threaten a lot of existing broker/accountant relationships… Those brokers who are heavily reliant on accountants as referral sources are really going to have to start to look at hedging their bets and developing alternative streams of inquiry in case they start losing referral sources.”

The most important way for brokers to insure themselves against any threat, according to Moffatt, is to invest into their online footprint.

“Brokers should be getting into the online channel and starting to build a digital footprint for their business. That means establishing a modern, mobile-friendly website and converting their website into a lead generation machine.

“For brokers who have relied heavily on referrals from accountants, the most obvious way is to go direct to market and essentially build the infrastructure required to generate leads from the internet.”

But where is the best place to start? Moffatt says that there are two key elements brokers should focus on to start with.

“The key thing at the moment is to have a mobile site. If you don’t have a mobile-friendly website now then you essentially get penalised by Google. Another thing is Google rewards specialisation, so brokers need to figure out what kind of business they want to specialise in for online.

“It is better, for instance, if they decide to use their online marketing to really go after investor loans, rather than go for the general mass market home loan. Or you can take it down to a localisation, so targeting specific areas, such as Sydney,” he told Australian Broker.