Tag: Mortgage Underwriting

The Hundred-million Dollar Home Loan Fraud Conspiracy

ASIC says false documents were used for more than 500 loan applications valued at approximately $170 million submitted between about March 2008 and August 2010 to numerous banks and financial institutions.

These included the Commonwealth Bank of Australia, Westpac Banking Corporation, St George Bank, Bankwest, Adelaide Bank, Bank of Queensland, Choice Home Loans, Citibank, National Australia Bank, Pepper Homeloans and Suncorp Bank.

The false documents included bank statements, payslips, citizenship certificates and statutory declarations. These were predominantly used in support of applications for home loans for house and land packages as well as for the purchase or refinance of existing homes.

The sentencing follows an ASIC investigation into Footscray-based finance broking company Myra Home Loans Pty Ltd, which traded as Myra Financial Services (Myra).

Mr Najam Shah, 58, of Victoria, has been sentenced to 5 years jail after pleading guilty to one charge of conspiring to defraud financial institutions. Mr Shah must serve 3 years and 3 months before being eligible for parole.

The charge relates to Mr Shah’s role at Myra and the creation and use of false documents to support loan applications valued at a total of approximately $170 million.

On 13 February 2017, Mr Shah entered the guilty plea during an appearance at the County Court of Victoria. Mr Shah’s plea followed his arrest and charge in January 2015. By pleading guilty, Mr Shah admitted to conspiring to defraud financial institutions.

In sentencing Mr Shah, Judge Gucciardo noted that mortgage fraud of this nature damages the integrity of the lending system and that Mr Shah’s well organised deception enabled such corruption. He further noted that Mr Shah was motivated by greed.

ASIC Deputy Chair Peter Kell said, “ASIC will continue to ensure that mortgage brokers who provide false documentation are held to account. Today’s sentencing reflects both the severity of Mr Shah’s actions and the consequences facing those who do not abide by the law.”

The matter was prosecuted by the Commonwealth Director of Public Prosecutions.

ASIC’s investigation is continuing.

Are IO Households Aware They Have IO Loans?

DFA analysis shows that over the next few years a considerable number of interest only loans (IO) which come up for review, will fail current underwriting standards.  So households will be forced to switch to more expensive P&I loans, assuming they find a lender, or even sell. The same drama played out in the UK a couple of years ago when they brought in tighter restrictions on IO loans.  The value of loans is significant. And may be understated, according to new research.

A few observations. ASIC in 2015, released a report that found lenders providing interest-only mortgages needed to lift their standards to meet important consumer protection laws. They identified a number of issues relating to bank underwriting practices. We would also make the point that despite the low losses on interest-only loans to date in Australia, in a downturn they are more vulnerable to credit loss.

In April this year we addressed the problem of IO loans.

Lenders need to throttle back new interest only loans. But this raises an important question. What happens when existing IO loans are refinanced?

Less than half of current borrowers have complete plans as to how to repay the principle amount.

Interest-only loans may seem like a convenient way to reduce monthly repayments, (and keep the interest charges as high as possible as a tax hedge), but at some time the chickens have to come home to roost, and the capital amount will need to be repaid.

Many loans are set on an interest-only basis for a set 5 year term, at which point the lender is required to reassess the loan and to determine whether it should be rolled on the same basis. Indeed the recent APRA guidelines contained some explicit guidance:

For interest-only loans, APRA expects ADIs to assess the ability of the borrower to meet future repayments on a principal and interest basis for the specific term over which the principal and interest repayments apply, excluding the interest-only period

We concluded:

This is important because the number of interest-only loans is rising again. Here is APRA data showing that about one quarter of all loans on the books of the banks are interest-only, and that recently, after a fall, the number of new interest-only loans is on the rise – around 35% – from a peak of 40% in mid 2015. There is a strong correlation between interest-only and investment mortgages, so they tend to grow together. Worth reading the recent ASIC commentary on broker originated interest-only loans.

But if households are not aware they have IO loans in the first place, then this raises the systemic risks to a whole new level. The findings from the follow-up study by UBS, after their “Liar-Loans” report (using their online survey of 907 Australians who recently took out a mortgage – they claim a sampling error of just +/-3.18% at a 95% confidence level) are significant.

They say their survey showed that only 23.9% of respondents (by value) took out an interest only loan in the last twelve months. This compares to APRA statistics which showed that 35.3% of loan approvals in the year to June were interest only.

They believe the most likely explanation for the lack of respondents
indicating they have IO mortgages is that many customers may be
unaware that they have taken out an interest only mortgage. In fact, around 1/3 of interest only borrowers do not know that they have this style of mortgage.

Source: UBS

They also says 71% of respondents who took out an interest only mortgage during the last 12 months indicated they are already under moderate to high levels of financial stress.

Source: UBS

Finally, they found that Interest Only borrowers via the broker channel are more likely to be under high financial stress from recent rate rises.

 

 

 

ANZ tightens up on apartment lending

From The Advisor

ANZ has announced that it will be implementing new restrictions on some loans for residential apartments, units and flats in Brisbane and Perth.

Effective Monday, 2 October, there will be a maximum 80 per cent loan-to-value ratio (LVR) for owner-occupier and investment loans for all apartments in the following inner-city Brisbane postcodes:
– 4000
– 4006
– 4010
– 4011
– 4014
– 4102
– 4171

There will likewise be a new restriction on investment lending for apartments in some areas of inner-city Perth.

Also from 2 October, there will be a maximum 80 per cent LVR for investment loans for apartments in these Perth postcodes:
– 6000
– 6004
– 6104
– 6151

These policy changes apply to all apartments in affected postcodes, including off-the-plan and non-standard small residential properties (≥40m2 & <50m2) valued at less than $3 million.

Granny flats are not impacted by this change.

ANZ has told brokers that applications submitted prior to 2 October 2017 will be assessed under the previous policy (as will applications that have been granted an extension prior to Monday, 6 November 2017).

A spokesperson for the bank commented: “This update for a handful of Brisbane and Perth locations is part of our ongoing efforts to ensure we are lending responsibly and in consideration of all our regulatory responsibilities.

“We regularly look at a number of factors in relation to residential apartments to make sure we are meeting our responsibilities, including supply and demand, rental yield, vacancy rates and location.”

The moves come amid increasing concern of oversupply in apartment building, with several developers making headlines recently for being left with unsold apartments.

Analysts at BIS Oxford Economics suggested in June that new apartment completions in Australia that have been largely bought off the plan by investors will hit a record this year and “most cities will find that tenant demand will not be sufficient to support rents and consequently values”.

According to the report, the whole of Australia, barring NSW which is “heavily undersupplied”, will be in oversupply over the next three years, with the unit market likely to face more challenges than the house market as a result of APRA constraints on investor lending.

Further tightening could be on the horizon

Speaking to The Adviser, Ranjit Thambyrajah, managing director of Acuity Funding, suggested that there could be further tightening by ANZ in the coming months.

The commercial broker said: “Perth has been slowing down and slow for quite a while now and Brisbane is heading that way quite quickly. ANZ, in particular, pulled out of lending for both those states for development a little while ago, so I think [this recent change] is just following on from that.

“I think it’s probably going to be more than those areas, actually. I think they are going to face difficulty in other areas as well, in terms of oversupply.”

He explained: “We’re in the business of funding the developments and we are experiencing a lot of difficulty in funding things in Queensland, particularly with the ANZ bank, and we have the same situation in WA. So, they perceive the oversupply as going to continue for a while, but currently the areas that they are quoted on are the ones that they are experiencing most oversupply in.”

While Mr Thambyrajah said that other areas experiencing oversupply of apartments, such as Melbourne and some areas of Sydney, will “start feeling more tightening as well”, he said that he is not overly concerned by the changes.

“Just because one bank is not lending does not mean others are not. It really depends on their prudential limits to the area and also the blend of their book in terms of APRA guidelines as well.

“So, I’m not concerned by this at all. I think it just changes from month to month and bank to bank.”

ANZ also tightened their underwriting standards according to MPA by issuing a Customer Interview Guide..

Yesterday ANZ issued a Customer Interview Guide which specific which topics brokers should discuss with home and investment loan borrowers.

“We expect brokers to use a customer interview guide (CIG) to record customer conversations as a minimum moving forward,” noted ANZ “while it is not required to submit the CIG with the application, it should be made available when requested as a part of the qualitative file reviews.”

Brokers and Banks Respond to ‘Liar’ Loan Claims from UBS

From Mortgage Professional Australia.

The MFAA and FBAA have harshly criticised a UBS report which claimed 1/3 of mortgage applications were not entirely accurate (which they term ‘liar loans’).

The report, which also claimed broker channel loans were more likely to contain inaccurate information, was branded ‘reckless’ by the FBAA because it was “based on implied presumptions.”

MFAA CEO Mike Felton questioned the validity of UBS’ results, stating that “we particularly question their comparison of misrepresentation in the ‘Banker vs broker’ channels given that the actual data shows us that default rates experienced on loans originated through the respective channels are quite similar once controlled for demographic differences.”

Felton also pointed to the low numbers of brokers being deregistered by ASIC, the high market share of brokers and ASIC’s Review of Mortgage Remuneration to counter UBS’ claims. He also notes that “whilst the broker is an intermediary in the process with a significant role, final responsibility for approving or declining a loan has to lie with the lender.”

eChoice’s general manager of aggregation Blake Buchanan argued that UBS’ report demonstrated a lack of understanding of the sector: “the level of scrutiny for  broker introduced business is greater than their retail counterparts and with advancements in technology, information sharing and better regulation the event of misrepresentation is more discoverable than ever before.”

Lenders also criticised UBS. Major bank ANZ, which was singled out by UBS for an alleged high proportion of incorrect loans, told MPA: “a survey of 907 people covering all of the major banks is an extremely limited sample given ANZ has more than one million home loans.”

Methodology and sample size

UBS results come from an online survey of 907 individuals who had taken out mortgages in the last 12 months.

Peter White, executive director of the FBAA, has asked to see UBS’ questions (of which there were 70) and asked whether participants were paid to take part, arguing that “UBS must prove there is no steering of answers or influences to produce outcomes which are not factual or fair or commercially sound.”

ANZ and brokers have questioned whether UBS’ sample size could adequately support the bank’s claims. UBS does not disclose what proportion of its respondents used brokers, but assuming 50%, that meant 65 respondents claimed “the broker suggested I misrepresent” on their mortgage application. Just 9 individuals claimed bankers had suggested they misrepresent.

In comparison, ASIC’s Review of Mortgage Broker Remuneration analysed 1.4m home loans worth $5.5bn, collecting 157 data points for each, in addition to surveying 3000 consumers on their opinion of brokers.

The MFAA told MPA it will continue to benchmark against ASIC’s data rather than consumer surveys.

UBS involvement in Australia and fines

FBAA boss White also criticised UBS’ knowledge of mortgage broking: “this is not their data and not data from a bank/lender, so the question must be asked as to the accuracy and integrity of the research, which is fundamentally divorced of market broker and lender marketplace data.”

According to APRA’s monthly banking statistics, UBS have $0 lent out in mortgages in Australia although they are involved in over $2bn of lending to Australian corporations.

UBS themselves disclose they are linked to the major banks through the provision of investment banking services. However, the bank is not a member of the Australian Bankers Association or the Australian Finance Industry Association, and so not involved in the Combined Industry Forum on broker remuneration.

The bank has been fined for misconduct several times in recent years, albeit for services not clearly connected with their recent report, and in many cases outside Australia.

In 2015 UBS was fined US$545m by the UK regulator for rigging inter-bank exchange rates, US$15m in 2016 by the US regulator for failing to properly instruct financial advisors on the products they were selling and 2 million Swiss Franks in 2017 for releasing price-sensitive information too late. UBS’ most recent brush with ASIC was a $280,000 fine in June this year for incorrect disclosures related to trading and an electronic trading system.

What is the industry doing to respond?

With UBS’ report covered extensively by Australia’s financial and mainstream press, the industry has come under pressure to protect broking’s reputation.

The MFAA and FBAA have made public statements against the report, although it is not clear whether they will engage directly with UBS.

ANZ told MPA that: “We have processes in place designed to ensure our home loans continue to be assessed conservatively. This includes applying an interest rate floor of 7.25% and using the higher of either the customer-stated expenses or a benchmark based on independent data provided by the Melbourne Institute.”

ANZ added that UBS’ report “reinforces the need for the introduction of Comprehensive Credit Reporting which ANZ strongly supports.”

Damn Lies and Statistics

We have been watching the continued switching between owner occupied and investor loans – $1.4 billion last month, and more than $56 billion – 10% of the investor loan book over the past few months.

This has, we think been driven by the lower interest rates on offer for owner occupied loans, compared with investor loans. But, we wondered if there was “flexibility with the truth” being exercised to get these cheaper loans.

So we were interested to read the latest from UBS which further underscores the possibility of untruths being told as part of the mortgage underwriting processes – to the extent of $500bn (on a book of $1.6 trillion).

This is based on survey results from 907 mortgage applicants over the last year.  There are significant differences across channels and individual lenders.  The net effect is that loan portfolios contain more risks than banks believe – something which our own analysis also demonstrates.

Understating living costs was the most significant misrepresentation, plus overstating income, especially loans via brokers.

In 2017 one-third of mortgage applications were not factual and accurate UBS Evidence Lab found that only 67% of respondents stated their mortgage application was “completely factual and accurate” in 2017 – a statistically significant reduction from the 2016 Vintage (72%). This year 25% of participants said their application was “mostly factual and accurate”, 8% said it was “partially factual and accurate”, while 1% “would rather not say”. By channel the level of “completely factual and accurate” mortgages fell across both brokers to just 61% (from 68%) and via the branches to 75% (from 78%). At a bank level there was a statistically significant fall in factual accuracy at NAB to 62%. While at ANZ the level of factual accuracy fell to 55% in 2017, statistically significantly lower than the Industry (99% confidence level).

Given the rising level of misstatement over multiple years we estimate there are now ~$500bn of factually inaccurate mortgages on the banks’ books (ie ‘Liar Loans’ – a term used in USA during the Financial Crisis for mortgages where documentation was not accurate). While household debt levels, elevated house prices and subdued income growth are well known, these finding suggest mortgagors are more stretched than the banks believe, implying losses in a downturn could be larger than the banks anticipate.

We are underweight Australian banks and are very cautious the medium term outlook.

Expect the normal rebuttals from the lenders, but that has more to do with protecting their positions than wanting to understand the truth – a core cultural problem across the sector.

Westpac facing ASIC loan assessment allegations

From Australian Broker.

Westpac’s usage of expenditure indexes to assess borrower suitability has come under fire by the Australian Securities & Investments Commission (ASIC) in its ongoing legal battle with the major bank.

The civil proceedings allege the bank failed to conduct proper assessments to ascertain whether borrowers could afford to repay their home loans. Westpac has denied this claim.

Court filings obtained by the Australian Financial Review put the spotlight on Westpac’s use of the University of Melbourne’s household expenditure measure (HEM) to determine borrower suitability.

In these documents, ASIC claims that the bank reliance on the HEM to assess borrowers led to approvals where a “proper assessment” based on actual spending would have unveiled a monthly financial shortfall.

ASIC said that the benchmark was based on “conservative” estimates of what a household would spend and “represents only an estimate of what Australian families consume”.

Furthermore, the regulator said that the HEM used “was not compiled by reference to expenditure data collected during the relevant period”. In other words, it claims Westpac used HEM benchmarks based on data from 2009 to 2010 when assessing borrowers for loans issued between December 2011 and March 2015.

Further allegations state Westpac only “scaled” the HEM to account for location, number of dependants and marital status when this could also have been extended to other factors, such as total household income, net wealth, savings patterns, and number of credit cards.

Westpac has said that the court action does not concern current lending policies or practices, reported the AFR.

The bank defended the HEM benchmark in its defence filing, saying it was an “objective measure that does not depend on the quality of a consumer’s estimation of their expenses … [and] excludes discretionary non-basic expenses that a consumer could reduce to meet their commitments without substantial hardship”.

In a statement released in March, Westpac Group chief executive of consumer bank George Frazis said that the bank had confidence in its lending standards and processes.

“It is not in the bank’s or customers’ interests to put people into loans that they cannot afford to repay. It goes hand in hand that we have robust credit approval processes while helping customers purchase their home,” he said.

“Our credit policies are informed by our deep experience and understanding of the mortgage market.”

Frazis said Westpac used “sophisticated systems” including the HEM to develop a broad analysis of customer expenditure.

“In our experience this survey is a useful input into our loan assessment process, in combination with our understanding of customers’ circumstances,” he said.

Westpac has denied claims that it relied solely on the HEM benchmark and that it failed to account for the customer’s declared expenses in its unsuitability assessment.

 

Westpac Tightens Mortgage Underwriting Some More

From The AFR.

Westpac, the nation’s second largest mortgage lender, is ditching mortgage and equity-release products in a high-level review of its product range and underwriting standards.

The top-down review is expected to reassess dozens of loans and lending packages, which include credit and insurance products, as the bank and its subsidiaries adjust lending criteria to changing market conditions.

It is being undertaken as major big four competitors continue to tighten lending for interest-only loans, increase mandatory deposits for home loans and tighten access to credit-related products.

It also comes as new independent research backs prudential regulators’ fears about potential bottom line, long-term risks to borrowers being created by soaring property values and static incomes needed to repay inflated loans.

“Westpac is currently review our suite of home loans,” the bank is telling mortgage brokers in a confidential memo. It claims the bank needs to “simplify systems and processes to achieve productivity in the way we operate”.

It confirms suspicions the bank was undergoing an extensive cull following the recent withdrawal of equity-release products offered to older property owners, such as Seniors Access and Seniors Access Plus, which are both lines of credit secured against the borrowers’ property.

The latest products to be dumped include equity access low documentation loans, which is a revolving line of credit secured against property; and a range of fixed rate low documentation home loan.

A low documentation loan is aimed at those who cannot provide the usual required paperwork to the lender, such as tax returns and financial statements. They are popular with self employed or those relying irregular bonus payments.

Review recommendations are expected to flow onto Bank of Melbourne, St George Bank and BankSA.

New independent analysis reveals that lenders need to review their underwriting standards because of record levels of household debt, static incomes and unprecedented borrowing needed to buy houses in Melbourne and Sydney, the nation’s property hotspots.

Lenders are also juggling the need to continue mortgage lending, one of their most profitable businesses, with strict prudential criteria on the speed and size of lending to higher risk interest-only lenders.

One-in-10 borrowers would fail underwriting standards for owner occupation and two-thirds for investment purposes if recent borrowing criteria was applied to new loans, according to analysis by Digital Finance Analytics (DFA).

The majority of failing loans would be for between $500,000 to $700,000, predominantly in NSW and Victoria.

Martin North, DFA principal, expects lending criteria to continue tightening, which means more existing loans will fall outside current underwriting standards.

“Our industry contacts suggest that many lenders are reviewing their spending assessment, and that more details and granular information is now being used (to assess borrowers). But this might not help those who got bigger loans in easier conditions as affordability bites.”

This also helps to explain why traditionally wealthier postcodes are beginning to appear amongst those with financially distressed households.

“There is still lending momentum,” said Mr North. “Nothing that is being done will change the momentum because banks are happy to lend. The lending mix will be different,” he said.

Lenders are dumping prospective higher risk interest-only borrowers for principal and interest. Many are offering interest-only borrowers incentives to switch across to lower risk alternatives, or repeatedly increasing interest-only interest rates to force a switch.

Westpac recently announced it was preventing existing borrowers from switching into lower cost loans and was raising popular interest-only lending rates by 34 basis points and hit property investors using self managed super funds with higher rates, tougher policies and processes. 

Other major lenders, including Commonwealth Bank of Australia, the nation’s biggest mortgage and credit card provider, are cracking down on issuing credit cards to property borrowers.

AMP, the nation’s largest financial services group, is also tightening popular lending and credit products.

The LTI Light Is Dawning!

NAB has said that they will “start automatically rejecting customers who want to borrow a high multiple of their income and only pay interest on their home loan, amid concerns over the growing risks created by rising household indebtedness.

From this Saturday, the bank will decline any customer applying for an interest-only loan who has a high loan-to-income ratio – an approach that banking sources said was not used by other lenders in the mortgage market”, according to the SMH.

While NAB already calculates loan-to-income ratios when assessing loans, it has not previously used the metric to determine whether a customer gets a loan, and such a blanket approach is understood to be unusual in the industry.

We have maintained for some time that LTI is an important measure. It should be use more widely in Australia, as it is a better indicator of risk than LVR (especially in a rising market).

 

St George closes net on IO loan switching

From Australian Broker.

St George Bank (part of Westpac) will bring in tighter loan assessment criteria for customers seeking to change to an interest only loan or extend their interest only loan term.

Effective from 1 July, the changes mean that a serviceability assessment and income verification documents will be required to switch/split repayments from principal & interest to interest only. This will be completed and assessed by the bank and is not available for completion by mortgage brokers, St George wrote in a broker note.

Brokers receiving a request to switch/split payments to IO or extend the IO term will need to ensure the loan drawdown date occurred over 12 months prior, determine if IO repayments are available on the loan, and factor in any previous IO terms the customer may have held to meet credit policy IO maximum rules. If these criteria are satisfied, the customer will have to contact the bank directly to proceed.

However, if these criteria are not satisfied, the loan will need to be re-originated.

St George has also brought in a number of changes to its self-managed super fund (SMSF) home loans which came into effect on 26 June.

The maximum IO repayment term has been reduced from 10 years to five years while a minimum SMSF fund balance of $200,000 will need to be demonstrated on application. The bank has also brought in two newly updated forms for SMSF loan applications.

Finally, the bank has said that switching/splitting to a portfolio loan (LOC) will no longer be permitted from 1 July. This will now require a re-origination into the line of credit facility instead

US Fannie Mae to increase its debt-to-income (DTI) ceiling

From Moody’s

On 9 June, Fannie Mae announced that it would increase its debt-to-income (DTI) ceiling for mortgage borrowers to 50% from 45%, effective on 29 July. The increase is credit positive for US state housing finance agencies (HFAs) because it will make mortgage loans more attainable for first-time homebuyers, thereby supporting HFA loan originations, which have been driving HFAs’ profitability margin growth.

HFAs are charged with providing and increasing the supply of affordable housing in their respective states, specifically for first-time homebuyers. The DTI ratio is often the barrier to home ownership for first-time borrowers, so increasing the DTI ratio ceiling will increase mortgage approvals, thereby increasing the pool of borrowers who may opt for HFA loans.

Over the past five years, HFAs have more than tripled their single-family loan originations to $20.6 billion in 2016 from $6.5 billion in 2012. This has been one of the primary drivers of HFA profit margin growth, which reached an all-time high of 17% in fiscal 2015 (see exhibit).

One of the challenges that HFAs face is a shrinking supply of single-family affordable housing inventory, which hinders first-time homebuyers and hampers HFA loan originations. The increase in the DTI ratio limits will help offset these challenges by expanding the pool of borrowers eligible for mortgages as well as allowing some borrowers to buy somewhat more expensive homes. Additionally, we expect HFAs to continue to maintain their high level of originations, which will support their strong margins.

Although Fannie Mae’s increase in the DTI ratio will ease financial standards for potential first-time homebuyers by allowing applicants to carry additional debt, the HFAs will not bear the credit risk of these lower credit quality borrowers. Loans approved by Fannie Mae are either securitized or sold to Fannie Mae and loan payments are guaranteed by Fannie Mae regardless of the underlying performance of the mortgage.