Tag: Mortgage Underwriting

Westpac to Tighten Borrowing Terms

From Australian Broker.

Westpac will announce changes to its borrowing terms and conditions for local and foreign housing property buyers on partner visas next Monday, said a report.

The Australian Financial Review reported yesterday (30 January) that the changes will restrict appraisal of residential values, borrowers’ ability to repay, and eligible visas for housing loan applications.

The bank will tighten lending to holders of 309 and 820 partner visas, which allow the partner or spouse of an Australian citizen, permanent resident, or eligible New Zealand citizen to live in Australia. Borrowers on the partner visas will need an LVR of 80%, down from the current 90%.

On the other hand, the bank is relaxing its terms for borrowers relying on income from a second job. Instead of two years, borrowers need to have held a second job with the same employer for only one year, for their income to be acceptable. Borrowers and brokers are expected to welcome this, given the growing number of casual workers in Australia.

The report also said that Westpac is updating its household expenditure measure, which is used to assess borrowers’ ability to repay their loans. It did not specify what changes are being introduced.

Meanwhile, desktop valuations – which are based on computerised or photographic evidence – will be used only for a maximum LVR of 90%.

Greg Cook, senior credit advisor at mortgage brokerage firm Loan Market, welcomed these changes, saying that the banks are working to ensure that they have good credit policies in place for borrowers, in case there is a downturn.

“The more the banks look at their lending practices, the stronger our industry is. The more that they change their policies on a regular basis, the more valuable the mortgage broker is,” he said.

The new changes follow Westpac’s announcement last month that it would require home loan borrowers to disclose what they owe on short-term buy-now, pay-later loans on digital credit platforms like AfterPay and ZipPay. The move was part of the bank’s effort to bolster its assessment of borrowers’ loan serviceability.

The bank said then that borrowers with such loans have liabilities that must be captured in the loan application, along with the monthly repayment.

Westpac ditches “instant mortgage” plan

From Australian Broker.

Westpac has dropped its plan to offer “instant mortgages” as banks’ lending practices come under increased scrutiny.

The Australian Financial Review reported on 28 January that Westpac confirmed a plan to offer instant mortgages had been abandoned. The project had been active until as recently as late 2017.

The plan would have allowed Westpac to offer clients a nearly instant approval, or provisional approval.

Despite dropping the project, Westpac will continue to streamline its process for mortgage application and improve its turnaround times for housing borrowers, said the report.

The bank will go ahead with plans to extend innovations for its business clients and residential mortgage customers as it works to bolster its mortgage capabilities and protect its market share. These innovations include e-document signing and other technology-based solutions.

A Westpac spokesperson said the bank took its lending duties seriously and that it was always looking for ways to improve its mortgage lending experience for customers while complying with regulatory requirements, according to the report.

ASIC initiated civil proceedings against Westpac in March last year for its alleged failure between December 2011 and March 2015 to properly assess if borrowers could repay their housing loans.

The regulator said in its allegation that the bank relied on a benchmark to help it decide how much to lend to potential borrowers, instead of using actual expenses declared by borrowers.

Westpac has denied ASIC’s claim.

The Australian Financial Review said in its report that the bank was preparing for a courtroom fight with ASIC over this allegation.

Banks’ lending practices are expected to come under further scrutiny as the royal commission kicks off its investigation of misconduct in the banking, superannuation and financial services industry. The commission will hold an initial public hearing on 12 February.

1 in 3 mortgages being rejected

From The Adviser.

One Sydney-based BDM and former mortgage broker says that one in three clients are unable to obtain a loan as a result of credit tightening policies implemented by lenders.

Speaking to The Adviser, former eChoice broker and Mortgage Pros North Strathfield BDM Hank Hong said that an increasing number of his clients’ loan applications are being rejected.

“It’s [credit tightening] affected servicing and how much you can actually lend based on incomes,” Mr Hong said.

“Certain offers that they put into place, higher living expenses, certain buffer rates, have reduced what [clients] can borrow.

“In the last 12 months, I would say one in three deals that come into my hands weren’t able to [get] service[d] and weren’t able to get the funds they were after.

“Two to three years ago, it was maybe one in five or one in six clients.”

The BDM added that borrowers, who have previously obtained unsuitable loans, are now struggling to manage their mortgage repayments.

“Existing clients are coming back because they’re not being able to service the loans that they were initially approved for because of the tightening of the service calculations,” the broker continued.

“Going back two years ago, people were getting million-dollar loans — $1 million to $1.5 million — with just $80,000 incomes or combined incomes of $150,000.

“They were on fixed rates of 3.99 per cent on interest-only loans, which they could afford, but when these fixed rates come off and the interest-only comes off, those clients are going to struggle to make the P&I repayments because they haven’t adapted to a lifestyle of paying principal and interest.”

Mr Hong believes that credit policy changes were “justified”, but he argued that lenders have “gone too far” and should “backtrack”.

“If they were trying to go 100 per cent, they’ve probably gone 150 or 160 per cent and they need to backtrack maybe 30 per cent,” Mr Hong said.

The former managing director and co-founder of Vault Lending Solutions recently revealed to The Adviser that he has departed the company after being “poached” by Mortgage Pros North Strathfield.

Mr Hong co-founded Vault Lending Solutions in March 2017 in partnership with Matthew Porfida, who will now take over as sole director of Vault Lending Solutions.

Irresponsible Mortgage Lending A Significant Risk For Seniors

From NestEgg.com.au

Surging property prices in Australia’s capital cities can be attributed to irresponsible lending, but it’s not just young buyers suffering the consequences, a consumer organisation has said.

In its submission to the royal commission into Misconduct in the Banking, Superannuation and Finance sector, the not-for-profit consumer organisation, the Consumer Action Law Centre (CALC) said the number of Aussie households facing mortgage stress has “soared” nearly 20 per cent in the last six months, and argued that lenders are to blame.

Referencing Digital Finance Analytics’ prediction that homes facing mortgage stress will top 1 million by 2019, CALC said older Australians are at particular risk.

The organisation explained: “Irresponsible mortgage lending can have severe consequences, including the loss of the security of a home.

“Consumer Action’s experience is that older people are at significant risk, particularly where they agree to mortgage or refinance their home for the benefit of third parties. This can be family members or someone who holds their trust.”

Continuing, CALC said a “common situation” features adult children persuading an older relative to enter into a loan contract as the borrower, assuring them that they will execute all the repayments.

“[However] the lack of appropriate inquiries into the suitability of a loan only comes to light when the adult child defaults on loan repayments and the bank commences proceedings for possession of the loan in order to discharge the debt,” CALC said.

The centre referred to a Financial Ombudsman Service (FOS) case study in which retiree and pensioner, Anne, entered into a loan contract with her son Brian. The repayments were to be made out of Brian’s salary and Anne’s pension. The loan was requested in order to extend her home so that Brian could live with her.

Following loan approval, the lender provided more advances under the loan contract. The advances were used to pay off Brian’s credit debt and buy a car.

When Brian left his job to travel, Anne could no longer afford the repayments and the lender said it would repossess her home.

“Anne lodged a dispute with FOS. After considering the dispute, FOS concluded that Anne was appropriately a co-debtor in the original loan contract, as she had received a direct benefit from the loan (the extension to her home and therefore an increase in its value),” CALC said.

“However, FOS considered that she was not liable for the further advances as she did not directly benefit from the application of the funds. Even though the repayment of Brian’s credit card debts may have provided more towards the household income, FOS concluded that this was not a direct benefit to Anne.

“Neither was the purchase of a car for Brian, as there was no information to show that Anne used the car or relied on Brian to transport her.”

CALC also expressed concern that the Household Expenditure Measure (HEM) is not a robust enough living expense test.

Noting that the Australian Prudential Regulation Authority shares their concern, the centre said the reliance on the HEM test raises concerns about the robustness of the actual measure.

“APRA states that it has concerns about whether these benchmarks provide realistic assessments of a borrower’s living expenses.

“In the same vein, ASIC has issued proceedings against Westpac in the Federal Court for failing to properly assess whether borrowers could meet repayment obligations, due to the use of benchmarks rather than the actual expenses declared by borrowers.”

CALC warned that over-indebtedness has ramifications for the economy but also for individuals and families.

Highlighting the link between high levels of debt and lower standards of living, CALC said it can have significant long-term effects as well, with the capacity to damage housing, health, education and retirement prospects

More Evidence of Poor Mortgage Lending Practice

The Australian Financial Review is reporting that New ‘liar loans’ data reveal borrowers more stretched than some lenders suspect.

One in five property borrowers are exaggerating their income and nearly half understating their spending, triggering new concerns about underwriting standards and vulnerability to sharp economic corrections, according to new analysis of loan applications by online property lender Tic:Toc Home Loans.

The number of ‘liar loans’ exceeds original estimates by investment bank UBS that last year found about 30 per cent of home loans, or $500 billion worth of loans could be affected.

Tic:Toc Home Loans’ founder and chief executive, Anthony Baum, said loan applications are representative of larger lenders in terms of location, borrower and loan size, which range from about $60,000 to $1.3 million.

Mr Baum, a senior banker for nearly 30 years, said in many cases applicants did not have to over-state their income for the required loan.

“Our portfolio looks like other organisations,” he said.

Analysis of their applications reveals about 20 per cent overstate their income, typically by about 30 per cent, and 50 per cent state their expenses are lower than the Household Expenditure Measure, also by about 30 per cent.

Property market experts claim the latest analysis, although based on a smaller sample than UBS’s survey, are credible and consistent with independent analysis of the lending standards.

“They do not surprise me,” said Richard Holden, professor economics at University of NSW Business School, who argues the potential problems are compounded by more than one-in-three loans being interest only.

Martin North, principal of Digital Finance Analytics, an independent consultancy, also backed the latest ‘liar loan’ numbers.

Mr North said standards had slipped because of lenders’ readiness to “jump over backwards” to increase business and commission incentives for mortgage brokers rewarding bigger loans.

“Not all lenders are the same but these numbers do not surprise me at all,” he said.

Mr North said there was strong evidence that salaries are overstated by between 15 and 20 per cent by borrowers using a range of tactics, such as over-stating bonuses or, for variable income earners, using peak rather than average income.

Westpac Tightens Serviceability Requirements Again

From Australian Broker.

Consumers who use digital credit platforms like AfterPay and ZipPay will now have to disclose what they owe on these transactions if they apply for a home loan through Westpac.

Westpac announced in a broker note on 11 December that it would require borrowers to disclose these short-term buy-now, pay-later loans so the bank could better assess borrowers’ loan serviceability.

AfterPay and ZipPay allow customers to make and immediately receive goods and services purchased at a retail store or online without having to pay for it upfront. The digital credit companies pay on the customer’s behalf. The customer then has to make repayments, usually in installments over a short period of time with fees and charges incurred if they fail to do so.

“In the scenario above, the customer has created a liability which must be captured in the loan application along with the monthly repayment,” the Westpac note said.

“Where evidence is held to confirm the liability will be cleared in full before settlement or drawdown, a $1 repayment is acceptable to be entered against the liability.”

The bank said it expects detailed comments to be included in the application with evidence confirming the amount owing and the required repayments.

Banks are starting to zero in on borrowers’ spending habits and expenses, going above and beyond just looking into their credit and debit card charges.

In September, ANZ and CBA added extra checks to their application processes. ANZ’s updated customer questionnaire prompts brokers to ask prospective borrowers about their Netflix and Spotify subscriptions and whether they’re planning to start a family. CBA introduced a simulator to show interest-only borrowers how their repayments would change and affect their lifestyle. Customers wanting to proceed have to fill in an acknowledgement form.

Aren’t mortgage applications tough enough?

From Mortgage Professional Australia.

Amid regulatory and market concern, banks are scrambling to make mortgage applications tougher, leaving brokers to pick up the pieces, writes MPA editor Sam Richardson

Although ASIC and APRA didn’t exist, applying for a mortgage in 1960s Australia was a highly regulated business. The government controlled not only lending conditions but even your interest rate, and you’d have to head to a branch to apply for a loan. Now you can apply without ever setting foot in a bank or even leaving your computer.

It’s become easier to get a mortgage; for some, too easy. Over four days in late September two major banks added extra checks to an already-extensive application process. ANZ introduced a Customer Interview Guide requiring brokers to ask questions about everything from a customer’s Netflix subscription to whether they were planning to start a family. Three days later CBA introduced a simulator that would show interest-only borrowers how their repayments would change and affect their lifestyle. Customers would be required to fill in an ‘acknowledgement form’ to proceed with an interest-only application.

ANZ and CBA are trapped between a rock and a hard place. On one side is the mantra of customer convenience and choice, but on the other the lenders and regulators are desperate to avoid public embarrassment. Brokers have been caught in the middle.

Not tough enough

Two weeks before the majors took action, Swiss investment bank UBS published an alarming and controversial report. Surveying 907 recent borrowers on their experience of getting a mortgage, it argued that the “ease of attaining approval had improved over every prior vintage back to the 1990s”.

Therefore, UBS concluded, “we believe there is little evidence to suggest customers are finding it more difficult to attain credit or that mortgage underwriting standards are being tightened from a customer’s perspective”. That was a problem, UBS argued, because the banks had already written $500m of ‘liar loans’ based on inaccurate information, with ANZ the worst affected.

UBS’s conclusions have been met with intense criticism. ASIC senior executive Michael Saadat told the Senate that, because of the sophistication of the verification process, “we think consumers are probably not the best judge of what banks are doing behind the scenes to make sure borrowers can afford the loans they’re being provided with”.

Yet while it defends lending standards with one hand, ASIC has been strengthening them with the other. The regulator is currently embroiled in a long-running court case against Westpac over the bank’s estimation of customer expenditure, in addition to dictating tougher rules for interest-only lending in April and preparing a ‘shadow shop’ of brokers later this year. Additionally, the Consumer Action Law Centre told MPA that verification was “critically important” and that it supported high standards. For Consumer Action, ASIC and UBS, application standards are still very much a work in progress.

The cost of compliance
Brokers have a very different opinion. Mortgage Choice CEO John Flavell has publicly stated that “lenders are more scrupulous than ever”, explaining that “new legislation requires brokers and lenders to forensically examine a borrower’s assets and liability situation”.

While no friends of the broker channel, UBS noted that brokers “arguably do much of the application heavy lifting” and brokers can attest to the impact of tightening lending standards. Turnaround times have actually got worse over the past year, according to 40% of respondents to MPA’s Brokers on Banks survey. Compliance and bank mismanagement have negated the gains of huge investments in technology, the experience of one broker suggests: “I have been doing this for 20 years. Twenty years ago we were getting unconditional approval in five days. We are still struggling for that 20 years later.”


“If I go back four or five years, I was amazed at just how loose many of the processes were” – Martin North, Digital Finance Analytics

Easier, not shorter
Martin North, principal of consultancy Digital Finance Analytics, has studied mortgage applications for years and has observed an improvement in standards. “If I go back four or five years, I was amazed at just how loose many of the processes were and in fact what would happen is the information would be captured on the form but never used in the underwriting process,” he says.

Progress has been driven not by extra questions for borrowers, North explains, but by an increase in documentation required from applicants. North believes there is room for improvement, however, particularly when it comes to understanding borrower expenditure. Only half of households have formal budgeting, he explains, and “whether it’s a real lie that households have not been truthful with the lenders, or whether they’ve got the best estimate and it might not be accurate, is probably the moot point”.

Applications can be made easier, North argues, but “easier doesn’t necessarily mean shorter”. Improvements in technology could improve underwriting standards for banks while pre-populating interactive application forms for consumers and offering time-saving solutions to brokers.

This is already occurring. Realestate.com.au’s new home loans offering integrates an online calculator into its website, which indicates how a borrower’s lifestyle would be impacted by mortgage repayments on a particular property. When borrowers apply for conditional approval the calculator’s details are fed into the form, allowing a quick online form to lead to instant approval.

For brokers, Advantedge has introduced two mobile apps to make collection of identification documents faster. Looking further ahead, banks have committed to sharing data within two years, which according to Australian Bankers’ Association chief executive Anna Bligh means that “at the click of a button, Australians will be able to directly share their transaction data with other banks or financial services”.

Should technology meet these lofty expectations, today’s paper-heavy application process could eventually be viewed in the same way that we view the branch of the 1960s today. Yet until this technology kicks in, brokers should prepare themselves for more heavy lifting.

Warnings over home loans not meeting serviceability requirements

We discussed Mortgage Lending Standards on 6PR Today.

Banking analysts have raised concerns after the number of home loans being approved despite not meeting serviceability requirements jumped to its highest point since before the global financial crisis.

Digital Finance Analytics Principal, Martin North told Mornings with Gareth Parker, we could be headed for some strife if rates go up.

Listen to the discussion.

CBA announces major lending changes

From The Adviser.

CBA has today revealed a raft of changes including LVR caps and restrictions to rental income for serviceability that will impact mortgage brokers and their clients from next week.

On Saturday (2 December) CBA will introducing a new Home Loan Written Assessment document called the Credit Assessment Summary (CAS) for all owner occupied and investment home loan and line of credit applications solely involving personal borrowers.

“These changes further strengthen our responsible lending commitments related to the capture and documentation of customer information,” the bank said.

“The CAS will present a summary of the information you provided on behalf of your borrower(s) and / or that the Bank has verified (where relevant) and used to complete its credit assessment.”

It will include a summary of loan requirements and objectives, personal details and financial information, total monthly living expenses at a household level and information about the credit applied for.

CBA said the CAS will form part of the loan offer document packs for all owner occupied and investment home loan and line of credit applications.

“The CAS will not be issued for Short Form Top Up applications or applications involving non-person applicants (i.e. Trust or Company). The Document Checklist, which is on the last page of the Covering Letter to Borrower (Full Pack), will indicate when a CAS has been issued,” the group said.

“An application exception will be raised if the CAS is not returned or not signed by all personal borrowers. The application will not progress to funding until the exception is resolved.”

LVR and postcode restrictions

Meanwhile, CBA confirmed that it will introduce credit policy changes for certain property types in selected postcodes from Monday 4 December.

The changes include reducing the maximum LVR without LMI from 80 per cent to 70 per cent, reducing the amount of rental income and negative gearing eligible for servicing and changing eligibility for LMI waivers including all Professional Packages and LMI offers for customers financing security types in some postcodes.

“We continue to lend in all postcodes across Australia,” CBA said.

However, on Monday the bank will also introduce what it has called the Postcode Lookup Tool, which will be available under the Tools and Calculators section on CommBroker.

“This tool will provide you with detail on policies that may apply in certain areas. You should use this tool during your customer discussions to understand policies that may apply to postcodes in which they have expressed a home lending need. If policies apply, you should discuss these with your customers,” the bank said.

Fintech Spotlight – Tic:Toc:The 22 Minute Home Loan

This time, in our occasional series where we feature Australian Fintechs, we caught up with Anthony Baum, Founder & CEO of Tic:Toc.

Whilst there are any number of players in the market who may claim they have an online application process for home loans, the truth is, under the hood, there are still many manual processes, workflow delays and rework, which means the average time to get an approved loan is often 22 days, or more.

But Tic:Toc has cracked the problem, and can genuinely say they can approve a loan in 22 minutes. This represents a significant improvement from a customer experience perspective, but also a radical shift in the idea of home lending, moving it from a “specialised” service which requires broker or lender help, to something which can be automated and commoditised, thanks to the right smart systems and processes. Think of the cost savings which could be passed back to consumers!

But, what is it that Tic:Toc have done? Well, they have built an intelligent platform from the ground up, and have turned the loan appraisal on its head, through a five-step process.

The first step, when a potential customer is seeking a home loan, is to start with the prospective property. The applicant completes some relatively simple details about the home they want to purchase or refinance, and the system then applies, in real time, some business rules, including access to multiple automatic valuation models (AVMs) to a set confidence level, to determine whether a desktop valuation, or full valuation is required to progress, or whether the prospective deal is within parameters. If it is, the application proceeds immediately to stage 2. In the case of a refinanced loan, this is certainly more often the case.

In the second step, the business rules at Tic:Toc focus on the product. They have built in the responsible lending requirements under the credit code. This means they can apply a consistent set of parameters. This approach has been approved by ASIC, and also been subject to independent audit. Compared with the vagaries we see in some other lender and broker processes, the Tic:Toc approach is just tighter and more controlled.

Up to this point, there is no personal information captured, which makes the first two steps both quick, and smart.

In step three, the Tic:Toc platform takes the application through the eligibility assessment by capturing personal information and verifying it through an online ID check, and then makes an initial assessment, before completing a financial assessment.

In step four, for the application to progress, the information is validated. This may include uploading documents, or accessing bank transaction information using Yodlee to validate their stated financial position. Tic:Toc says their method applies a more thorough and consistent  approach to the financial assessment, important given the current APRA focus on household financial assessment and spending patterns.

After this, the decisioning technology kicks in, with underwriting based on their business rules. There is also a credit underwriter available 7 days a week to deal with any exceptions, such as use of retirement savings.

The customer, in a straightforward case if approved, will receive confirmation of the mortgage offer, and an email, with the documentation attached, which they can sign, and send the documents back in the post. So, application to confirmed offer in 22 minutes is achievable.

The lender of record is Bendigo and Adelaide Bank, who will provide the loan, and Tic:Toc has a margin sharing arrangement with them, rather than receiving a commission or referral fee. Of course the subsequent settlement and funding will follow the more normal bank processes.

Since starting a few months ago, they have had around 89,000 visits from some 66,000 unique visitors and in 4 months have received around $330m of applications, with a conversion of around 17% in November. Anthony says that initially there had been quite a high rate of people applying who were declined elsewhere in the first few weeks, but this has now eased down, and the settlement rate is improving. They also had a few technical hiccups initially which are now ironed out.

In terms of the loan types, they only offer principal and interest loans (though an interest-only product is on the way), and around 50% of applications are for refinance from an existing loan.  Around 75% of applications are for owner occupied loans, and 25% from investors.

The average loan size is about $433,000. However, there are significant state variations:

In the short time the business has been up and running, they have managed to build brand awareness, receive a significant pipeline of applications, and lay the foundation for future growth. The team stands at 40, and continues to grow.

The firm also has won a number of innovation awards.  They have been listed in the KPMG and H2 Venture’s Fintech 100 (as one of the emerging stars); was a finalist, Best Banking Innovation in the Finder 2017 Innovation Awards; and a standout (and case study), in the Efma Accenture Distribution & Marketing Innovation Awards.

Looking ahead, Tic:Toc is looking to power up its B2B dimension, so offering access to its platform to broker groups and other lenders. Whilst the relationship with Bendigo and Adelaide Bank has been important and mutually beneficial, they are still free to explore other options.

In our view, the Tic:Toc platform and the intellectual property residing on it, have the potential to change the home lending landscape. Not only does it improve the risk management and credit assessment processes by applying consistent business rules, it improves the customer experience and coverts the mysterious and resource heavy home loan process into something more elegant, if commoditised.

Strangely, within the industry there has been significant misinformation circulating about Tic:Toc, which may be a reaction to the radical proposition it represents.

Reflecting on the conversation, I was left with some interesting thoughts.

First, in this new digital world, where as our recent Quiet Revolution Report showed, more households are wanting a better digital experience, it seems to me there will be significant demand for this type of proposition.

But it does potentially redefine the role of mortgage brokers, and it will be a disruptive force in the mortgage industry. I would not be surprised to hear of other lenders joining the platform as the momentum for quicker yet more accurate home loan underwriting grows.

As a result, some of the excessive costs in the system could be removed, making loans cheaper as well as offering a quantum improvement in customer experience.

Time is running out for the current mortgage industry!