Tag: Mortgage Underwriting

Liar Loans Not Gone Away

The latest UBS study, the fifth in their series looking at lending standards, and based on a survey of around 900 home loan applicants reveals that (perhaps surprisingly) there was a rise in “porkys” being told as part of the mortgage application, despite the Banking Royal Commission.

As a result, more than a third of Australian home loans could have ‘liar loans’ based on inaccurate information.

UBS Analyst Jonathan Mott said:

While asking detailed questions appears to be prudent, it does not appear to be effective as many factually inaccurate mortgages are still working their way through the process.

Of the borrowers who said their application was not completely factual in the past year, 20 per cent overstated their income, 23 per cent understated debts, 34 per cent understated their living costs, and 23 per cent misstated multiple categories.

Now, this is consistent with the DFA surveys where true incomes and costs are often higher than might be expected. And the extra granularity now required by the banks (many categories of costs, more detail on incomes etc) can create a false sense of accuracy – especially when many households are making best guesses to provide information to support their applications.

And financial intermediaries still appear to be part of the story, with a higher percentage of borrowers who misstated information on applications through a mortgage broker (40 per cent) than through the banks (27 per cent).

UBS said that a “large number” of survey respondents indicated their mortgage consultant advised them to misrepresent elements of their application.

At a time when the mortgage growth stops are being pulled, and lower rates are expected in a highly competitive market, this will simply create a bigger bust later.

And remember that on an international basis, we are right at the top of the international benchmarks in terms of household debt.

In fact according to the latest BIS data we lead in terms of debt servicing ratios.

And the falls in prices have created a significant gap which highlights the risks in the system.

You can watch our recent show where we look at household debt in more detail including the data above.

Lenders Drop Serviceability Floors Some More

In an attempt to drive more loan volumes Banks are now dropping their serviceability floors, following the recent APRA loosening.

As Australian Broker reports:

Westpac will decrease its floor rate from 5.75% to 5.35%, effective 30 September.

The same change will go into effect at its subsidiaries: St. George, BankSA and Bank of Melbourne. 

After the initial round of floor reductions across lenders of all sizes, Westpac matched CBA with the higher floor rate of the big four banks at 5.75%, while ANZ and NAB each amended theirs to 5.50%.

Smaller lenders followed suit, the majority also updating their rates to either the 5.50% or 5.75% figure. 

While some went even lower, ME Bank amending its rate down to 5.25% and Macquarie to 5.30%, Westpac has taken a step away from the other majors with its newest update.  

With July marking the strongest demand for new mortgages in five years and further RBA rate cuts expected in the near future, the floor reduction seems well timed to capitalise on the strong market activity forecasted to continue into the coming

This is a race to the bottom, and is bad news for financial stability. When will APRA wake up? It will also jack some home prices higher, in selected areas and types.

The Fall-Out From The ASIC Westpac HEM Case [Podcast]

We discuss the consequences of the judgement in favour of Westpac and their use of Household Expenditure Measure (HEM) benchmarks.

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
The Fall-Out From The ASIC Westpac HEM Case [Podcast]
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Westpac Changes Mortgage Underwriting Policies

Following its Tuesday victory against ASIC, with the court dismissing the regulator’s allegations of irresponsible lending, Westpac has announced a spectrum of changes to its home lending policies. From Australian Broker.

The updated guidelines are set to go into effect on 20 August, at not only the major, but its associated brands: St. George, Bank of Melbourne, and Bank SA.

Perhaps most notably, Westpac is to update and add new expense categories to its household expenditure measure “to reflect industry guidelines on the HEM values we use as our customer expense benchmarks” – bringing the total number of categories from 13 to 18.

Further, the bank will apply income-based HEM bands based on total gross unshaded income, including gross rental income.

Particularly relevant in light of the recently dismissed court case, in instances when total liability is seven times or more higher than total gross income, the loan applications will be reviewed by a credit assessment officer rather than run through the automated system.

ASIC’s case against the bank had hinged on the allegation Westpac breached the National Consumer Credit Protection Act 2009 through assessing loans via its automated system which solely considers the benchmark HEM rather than customers’ declared living expenses.

Westpac additionally addressed the changes being made to tax debt through changing its approach to margin loans. They will now be assessed on the higher of 1% of the balance or the customer’s monthly declared commitment.

Further, Westpac will require a more comprehensive understanding of payment plans businesses have made with the ATO and decline to lend to customers with an overdue amount payable to the ATO for the previous year’s tax without a formal payment plan in place.

The policy changes will impact all new and re-submitted applications made from Tuesday, requiring brokers to utilise the expanded 18 categories for expenses, as well as heed the new seven times debt-to-income ratio.

Westpac also announced that changes to the commercial, SME and private wealth broking channels will be made later this year.

What The HEM Decision Means

The key question now is will the banks revert to their previous practices of doing little to validate household spending patterns as part of the mortgage assessment processes. Some are already saying “buy now” with renewed vigour.

The Royal Commission revealed last year that some lenders ignored household expense data favouring the automated HEM decisioning. But on the basis of the finding, they are now in the clear.

Banks of course need mortgage lending to grow to enable their profits to rise, and in recent times that has been a problem. New lending momentum has been pretty slow.

HEM standards were tightened in July, meaning that the minimum spending benchmarks were lifted especially for households on higher incomes. Some banks have been asking for painful detail and history in lieu of using HEM, and this has slowed lending decisions but around half of loans are still approved by HEM.

We also need to link this with the APRA loosening of the interest rate hurdle which gives lenders flexibility on their decisioning (within limits).

ASIC is currently taking evidence from the industry on potential changes to responsible lending, and has said we should expect some revisions by years end. Plus they have previously stated that even if they lost the Westpac case, they would still insist that while HEM is a useful too it is not necessary and sufficient to meet their requirements.

The trouble is the original ASIC guidelines were vague, and the “non-unsuitable” formulation left significant ambiguity. This needs to be changed.

The way through this is to use debt to income ratios, something which has been in place in the UK and NZ for some time, as we know the risks of loss are greater when the Debt To Income ratios are higher.

But then the question will become, how prescriptive should the regulators be, and of course in the current weakening economic environment there will be an attempt to push lending harder.

So, my expectation is there will be some loosening of underwriting standards (which is bad) while the Banks can assume class actions relating to responsible lending will be unlikely to proceed.

I expect households will be required to certify the accuracy of their expenses, but that banks once they have that protection will be will to lending within the HEM framework.

So the bottom line is, yes, I expect more credit will be offered, the question is will households lap it up – leading to rises in prices (as credit growth and home price growth are linked), or will the weak wages growth, high costs of living and home price momentum (or lack of it) reduce demand.

The finance and real estate sector will be spinning hard to try and entice people into the market. Just remember we have the biggest debt bomb ticking away.

But the banks are also on notice now.

Amidst the court proceedings with ASIC, Westpac updated its group credit policies “to enhance the way [it] captures customer living expenses, commitments, and verify documentation.”

A Westpac spokesperson said, “We recognise sometimes it can be difficult for customers to provide a complete picture of their expenses and the enhancement of our expense categories means our staff and brokers have the opportunity to prompt customers to remind them about particular expenses they may have forgotten.”

APRA Opens The Mortgage Lending Taps [Podcast]

We look at today’s APRA announcement and their changes to mortgage lending practice guidelines. What are the implications?

Digital Finance Analytics (DFA) Blog
Digital Finance Analytics (DFA) Blog
APRA Opens The Mortgage Lending Taps [Podcast]
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APRA finalises amendments to guidance on residential mortgage lending

The Australian Prudential Regulation Authority (APRA) has announced that it will proceed with proposed changes to its guidance on the serviceability assessments that authorised deposit-taking institutions (ADIs) perform on residential mortgage applications.

In a letter to ADIs issued today, APRA confirmed its updated guidance on residential mortgage lending will no longer expect them to assess home loan applications using a minimum interest rate of at least 7 per cent. Common industry practice has been to use a rate of 7.25 per cent.

Instead, ADIs will be able to review and set their own minimum interest rate floor for use in serviceability assessments and utilise a revised interest rate buffer of at least 2.5 per cent over the loan’s interest rate.

APRA received 26 submissions after commencing a consultation in May on proposed amendments to Prudential Practice Guide APG 223 Residential Mortgage Lending (APG 223). The majority of submissions supported the direction of APRA’s proposals, although some respondents requested that APRA provide new or additional guidance on how floor rates should be set and applied.

Having considered the submissions, Chair Wayne Byres said APRA believes its amendments are appropriately calibrated.

In the prevailing environment, a serviceability floor of more than seven per cent is higher than necessary for ADIs to maintain sound lending standards. Additionally, the widespread use of differential pricing for different types of loans has challenged the merit of a uniform interest rate floor across all mortgage products,” Mr Byres said.

“However, with many risk factors remaining in place, such as high household debt, and subdued income growth, it is important that ADIs actively consider their portfolio mix and risk appetite in setting their own serviceability floors. Furthermore, they should regularly review these to ensure their approach to loan serviceability remains appropriate.”

APRA originally introduced the serviceability guidance in December 2014 as part of a package of measures designed to reinforce residential lending standards.

Mr Byres said: “The changes being finalised today are not intended to signal any lessening in the importance APRA places on the maintenance of sound lending standards. This updated guidance provides ADIs with greater flexibility to set their own serviceability floors, while maintaining a measure of prudence through the application of an appropriate buffer that reflects the inherent uncertainty in credit assessments.” 

The new guidance takes effect immediately.

Copies of the letter and the updated APG 223 are available on the APRA website here.

Associations call for ‘clarity’ on expense verification

The MFAA and the FBAA have called on ASIC to provide the mortgage industry with greater guidance surrounding expense verification, but have urged the regulator not to adopt a “prescriptive approach” to responsible lending, via The Adviser.

The Australian Securities and Investments Commission (ASIC) has published submissions from its first round of consultation regarding its proposal to update its responsible lending guidelines (RG 209).  

In February, ASIC stated that it considered it “timely” to review and update its guidance (in place since 2010) in light of its regulatory and enforcement work since 2011, changes in technology, and the release of the banking royal commission’s final report.

ASIC added that its review of RG 209 will consider whether the guidance “remains effective” and will seek to identify changes and additions to the guidance that “may help holders of an Australian credit licence to understand ASIC’s expectations for complying with the responsible lending obligations”.

In submissions to ASIC, the Mortgage & Finance Association of Australia (MFAA) and the Finance Brokers Association of Australia (FBAA) called for greater clarification surrounding guidelines that relate to the verification of a borrower’s expenses (which was a key point of scrutiny during the royal commission).

The MFAA encouraged ASIC to provide “as much guidance as possible”, and lamented the lack of uniformity in the application of current guidelines.  

“An unfortunate side effect of these changes is that the requirements of individual lenders have changed from being reasonably consistent to being quite diverse,” the MFAA noted.

“This is causing significant cost, confusion and delay for consumers as well as for brokers.

“This is not a good consumer outcome because it has become very difficult for brokers to be familiar with the requirements of multiple lenders whose credit policies vary considerably.”

The industry association claimed that a disparity in the credit policies imposed by lenders may limit borrower choice by “resulting in brokers dealing with a smaller panel of lenders”.

“It is important that RG 209 provides as much guidance as possible, specifically dealing with the five most common finance types (home loans, residential investment loans, car loans, credit cards and personal loans – excluding small amount credit contracts) to assist consistency in consumer accessibility to these products while supporting the spread of credit access across the market through the enhanced clarity of regulatory expectation,” the MFAA added.

“We envisage that within each of these five loan types, RG 209 should specify ‘base’ inquiries and verifications because current industry standards are often quite similar across the product range.”

The FBAA agreed, calling for “some additional guidance to be provided around expense verification”, but has warned against a move to a more prescriptive approach to responsible lending.  

“Responsible lending is principles-based and intended to be flexible, adaptable and technology neutral,” the FBAA stated.

“There are genuine risks associated with guidance becoming too prescriptive. It would undermine the intentions of the responsible lending framework, stifle productivity and innovation and impede consumer access to regulated finance.”

Public hearing to be held in August

Last week, ASIC confirmed that it will host a new set of public hearings to further discuss its proposed changes to its responsible lending guidelines.

The corporate regulator has now confirmed that the hearings will take place in August and will be held in both Sydney and Melbourne.

ASIC stated that the hearings, which will be live streamed online, are aimed at “testing the views of stakeholders and providing greater understanding of business operations”.

“The responsible provision of credit is critical to the Australian economy,” ASIC commissioner Sean Hughes said. 

“We are taking this opportunity to test views to make sure our guidance remains relevant, clear and timely.

“Public hearings will provide a robust and transparent way to air issues and views raised in written submissions.”

The stakeholders invited to participate in the hearings will be drawn from the groups or individuals who provided a written submission to ASIC on the responsible lending guidance.

APRA changes “unlikely” to invigorate housing market

While APRA’s proposed changes to serviceability assessments for ADIs have been broadly celebrated, others have expressed doubt that the regulatory revisions will stimulate the housing market in as meaningful a way as is hoped. Via Australian Broker.

“While these changes are welcome and will help some borrowers that can’t quite access a mortgage currently to get one, it is unlikely to result in a rebound in the housing market,” said CoreLogic research analyst Cameron Kusher.

Kusher referred to ANZ’s recent investor update to the market to elaborate on his stance.

The update from ANZ attributed reduced borrowing capacity to three factors: changes to HEM accounting for 60%, the servicing rate floor responsible for 30%, and income haircuts causing the remaining 10%.

Kusher pointed out that, according to this data, 70% of the reduction in borrowing capacity is unrelated to the current serviceability assessment model. Even if APRA were to change its current guidelines, it will likely continue to be much more challenging to get a mortgage than in the past.

Roger Ward, director of Champion Mortgage Brokers, agrees that the current 7.25% assessment rate is just one of six lending standards that have contributed to the credit squeeze.

Drawing from his 25 years in the banking and finance industry, Ward outlined the remaining five challenges to lending as:

  • Banks considering borrowers’ capacity to repay for the full 25 to 30 years of a mortgage term, despite most loans now only lasting seven to eight years
  • A one-dimensional and inaccurate approach to identifying spending habits and current costs of living
  • Changes in credit reporting providing data on the last 24 months’ payment history on credit cards, with one late payment sometimes enough to be declined by a bank
  • LVR changes and limitations, especially those impacting investors
  • Tiered interest rates dependant on the size of the original deposit

While allowing lenders to review and set their own minimum interest rate floor will undoubtedly help some borrowers access previously unreachable mortgages, the housing market will require stimulation from elsewhere in order for dwelling values to begin their rise.

According to Kusher, “[APRA’s] proposed changes, in conjunction with the uncertainty of the election now behind, will potentially provide additional positives for the housing market. [They] would potentially slow the declines further and may result in an earlier bottoming of the housing market.

“Despite that prospect, it will remain more difficult to obtain a mortgage than it has done in the past and we would expect that if or when the market bottoms, a rapid re-inflation of dwelling values is unlikely,” he concluded.