How far away is the paperless mortgage really?

From Mortgage Professional Australia.

More data and end-to-end systems are pushing us ever closer to the paperless mortgage and point-of-sale approvals but predicting the future of technology is a risky business.


From the millennium bug to Google Glass, we’ve seen plenty of ‘game changers’ which were no such thing. Rather than take an impossibly broad view of the future, we asked our industry leaders to explain what brokers should expect over the next few years, starting with the paperless mortgage.

Glenn Lees, CEO of Connective, says the entirely paperless mortgage is “closer than ever … I think what’s driving it now is lenders understand what a competitive advantage it can be”. The barriers are simply “institutional inertia”, he says, with lenders’ risk and compliance teams “understandably nervous” about changing the application process.

NextGen.Net sales director Tony Carn is less optimistic; he believes the paperless mortgage will take some time to come about due to the current focus on credit risk. However, he says the technology is there, and mortgages are already becoming increasingly electronic thanks to e-conveyancing platform PEXA and increasing use of electronic verification by lenders.

At AFG, CIO Jaime Vogel believes that “we will end up with a significant number of applications being digital end-to-end”. The process will be similar to the gradual take-up of ApplyOnline. “As lenders understand the benefits of that innovation it’ll progressively change and we’ll find the vast majority will be digital end-to-end,” Vogel says. “We feel the technology would be relatively easily implemented in the broker process.”

Verifying with video at HashChing 

Identifying borrowers, under the Know Your Customer (KYC) guidelines, has long been a time-consuming part of the application process. It was a particular problem for online marketplace HashChing, CEO Mandeep Sodhi recalls. “The broker was seeing ‘the consumer is in Cairns, but I’ve got this great deal and I’m in Sydney’.” For brokers there was an additional problem: having to visit a bank or Australia Post outlet to get identified was causing many customers to walk away from a deal.

HashChing’s virtual online identification (VOI) technology uses a video call to compare the borrower to a photo on their Australian passport or driver’s licence, giving the broker a percentage of how much they match. It also does a behind-the-scenes DBS check and tells the broker the borrower’s current location, and the video is stored for seven years in case of an enquiry from ASIC. The system is currently being trialled by 150 brokers, saving them eight hours on average, with a full rollout scheduled for 1 March.

There’s no legal barrier to video identification; the challenge is persuading lenders to accept it. While HashChing has an exclusive partnership with the South African developer of the software, E4, it is encouraging lenders to work with E4 to use VOI technology. Combined with online document collection, VOI can free brokers from the tyranny of distance, Sodhi believes. “With this technology the broker can be anywhere in Australia and the consumer can be anywhere in Australia … the geographic barrier is gone.”

Using data

In March 2016 Siobhan Hayden, then-CEO of the MFAA, predicted the next evolution in mortgage broking would be driven by data scraping. Data scraping is extracting data from documents, web pages and storage vaults, which can then be put to use in a number of ways: automatically filling in forms, reducing the need to ask borrowers for documentation, and more informed decisions by lenders.

Data is already changing the mortgage application process. Electronic mortgages through Bank Australia and conditional approvals via the CommBank Property app are available to customers of these banks, as the banks already have the relevant data. Data scraping across institutions is in its early stages, warns AFG’s Vogel. “There’s certainly not enough data available to make a complete and proper assessment, but we’re trying to make the best of the data which is available to use.”

Other professions are further ahead in data scraping. Next.Gen.Net’s Carn points out that accountants can already access information on their clients held by the ATO; giving brokers the same access would be a “very simple technology solution, but there [needs to be] a risk appetite to allow that to happen”.

At Rubik Group a current project is looking at using wealth management to provide solutions for property investors. “One of the top unmet needs is around investment property,” head of product Emily Chen says. “It’s almost personal financial management: how do I budget? How do I know when I’m ready to buy that next property?”

Already some banks offer digital ‘dashboards’ that show customers the funds available in their current, savings and super accounts. Chen suggests that property could be added to this mix, bringing in external data on property values on fixed loan terms, creating “a total wealth view for the customer”.

What’s holding back data scraping – and by consequence paperless mortgages – is concerns around security. Computer hacking has become international news, and 71% of Australians are concerned about having their information stolen, according to Veda’s 2016 Cybercrime and Fraud Report, with older Australians more concerned.

“A lot of brokers are not aware of how much is invested in secure data processing,” argues Carn. However, he warns that vulnerabilities remain: “We’re operating in a market that’s heavily regulated, and everyone’s aware of data security, yet we still see a lot of emailing of personal customer information, which I think is quite horrifying.”

Vogel believes younger borrowers are more accepting of their data being used. “If there is value for the customer and the opportunity to get a reduced interest rate then I’d certainly expect that a high percentage of customers would be willing to provide that information.” That is conditional, however, on those customers trusting that brokers can keep their data secure, which is why AFG is investing heavily in data security.

Top Of The Housing Cycle? – UBS

From Investor Daily.

Australian house price growth will slow to 7 per cent in 2017 before it collapses to between zero and 3 per cent in 2018, predicts UBS.

In a new housing outlook report, UBS said it is “calling the top” for Australian residential housing activity despite a surprise rebound in February approvals to 228,000.

While the “historical trigger” for a housing downturn is missing (namely, RBA interest rate hikes), mortgage rates are rising and home buyer sentiment is at a near record low, said UBS.

“Hence, we are ‘calling the top’, but stick to our forecasts for commencements to ‘correct but not collapse’ to 200,000 in 2017 and 180,000 in 2018,” said the report.

House prices are rising four times faster than incomes, noted UBS, which is unsustainable and suggests that growth has peaked.

“We see a moderation to [approximately] 7 per cent in 2017 and 0-3 per cent in 2018, amid record supply and poor affordability, with the new buyer mortgage repayment share of income spiking to a decade high,” said UBS.

The report also pointed to the March 2017 Rider Levett Bucknall residential crane count, which has more than tripled since 2013 to a record 548, but is now flat year-on-year.

Housing affordability has gone from “bad to even worse”, said UBS, with the house price to income ratio soaring to a record 6.5.

“With record low rates, repayments haven’t yet reached historical tipping points where prices fell, but would if mortgage rates rose by only [approximately] 100 basis points,” said the report.

The gross rental yield for two-bedroom unit has fallen to a record-low of less than 4 per cent, said UBS, which is now below mortgage rates of 4.25-4.50 per cent.

UBS also pointed to Australia’s household debt to GDP ratio of 123 per cent, which is one of the highest in the world.

Are regulators too concerned about housing?

From Australian Broker.

Although dwelling valuations in Australia are 5-15% above historical averages, the risk of a catastrophic collapse in the housing market is low, argues Merlon Capital Partners, a Sydney-based boutique fund manager.

In its latest paper, entitled Some Thoughts on Australian House Prices, Merlon acknowledged that the nation is currently at a cyclical high point, with “house prices, housing finance activity and building approvals … all at historically elevated levels.” At the same time, interest rates are at record lows and have begun to hike, particularly for investors.

“We think the housing market is 5-15% overvalued relative to ‘mid-cycle’ levels. Contrary to recent commentary, we do not find this over-valuation to be concentrated in the Sydney market,” said Hamish Carlisle, analyst at Merlon Capital Partners.

Carlisle doesn’t find the modest system-wide overvaluation to be particularly surprising at the current point in the economic cycle, and notes that the nation is a long way off from what are considered to be “mid-cycle” interest rates. “Rising interest rates – as we are currently experiencing – are likely to be a precursor to a turn in the cycle so it is likely we will enter into a phase of more subdued house price inflation.”

Favourable tax treatment of housing, coupled with historically low interest rates and favourable fundamentals (i.e. income and rental growth), mean that it’s highly unlikely that house prices will retrace to “mid-cycle” levels in the foreseeable future.

Carlisle further asserts that regulator concerns about house prices are “overblown”. Growing regulatory restrictions, which force banks to ration lending, particularly to property investors, are probably unnecessary and will achieve little other than improving the short-term profitability of banks via higher interest rates for borrowers.

“As with all our investing, we work on the basis that, over time, interest rates will revert back to long term levels as will aggregate housing valuation metrics. Against this, we think aggregate rents and household incomes will continue to grow which will cushion the overall impact on dwelling prices and that the exposure of the household sector to higher interest rates means that the time frame over which interest rates will rise could be quite protracted. As such, we think the risk of a catastrophic collapse in the housing market is low,” he said.

AFG Highlights First Time Buyers

AFG has released their mortgage index today including Q3 2017. The overall volume of lodgements fell again, though volumes are still higher than last year at this time.

This data provides additional insights into the market, with the caveat, it reflects transactions via the AFG channel only.

The mix between majors and non-majors remained similar to last quarter, when the non-majors share grew a little.

The volumes of first time buyers rose a little, whilst refinanced transactions fell a little.

 

The national First Home Owner Grant (FHOG) scheme funded by the states and territories has largely been hailed a success as it seeks to ease the hefty upfront costs for new entrants to the market. The effectiveness of the scheme however has been questioned of late and it appears this may have encouraged governments to act. “The Victorian state government has recently announced a number of changes to the scheme in that state and New South Wales is currently examining their options to help counter rising house prices in those states,” said AFG Interim CEO David Bailey.

AFG data shows positive signs amongst the FHB market with lodgments lifting back up to 10% for the first time since the first quarter of 2014.

“First home buyer numbers have been in the single digits for some time. It is good to see state governments looking to support those trying to get a foot on the property ladder. Time will tell if the proposed changes to the scheme go far enough to assist those looking to buy their first home in our two most populous states.”

APRA-imposed lender policy changes have had an impact on both the investor market and refinancers as many lenders lift interest rates for borrowers.

“Lenders have been told by the regulator to rein in their exposure to the investor market and APRA continues to monitor growth in lending to investors,” said Mr Bailey. “As a result many lenders have embarked upon a series of rate increases and a tightening of credit policy for investors to comply with APRA’s guidelines.

“This activity has seen investor loans drop from 34% to 32% across the quarter.”

Those looking to refinance have also been impacted, with that segment of the market dropping from 38% to 35% last quarter – its lowest level since the third quarter of 2015.

In overall lodgment numbers, AFG has reported a lift of 8% on Quarter 3 last year driven primarily by increasing activity of upgraders. “With a significant amount of changes being made to the appetites and pricing of lenders, help from a mortgage broker can be vital for consumers trying to navigate the dynamic market that is home lending,” said Mr Bailey.

“A result that should please the regulators is a drop in the loan to value ratio (LVR) in all states apart from South Australia where a marginal increase of 0.4% was evident. The national LVR is now down to 68.6%, the lowest level since the first quarter of 2013,” he concluded.

Financers deal out questionable loans for non-residents

From Australian Broker.

Evidence has emerged suggesting alternative lenders are offering commercial loans to non-residents for the purchase of residential property.

Loan documents obtained by Australian Broker through an anonymous source show commercial finance firm Prime Capital approving ‘working capital’ for the purchase of an inner city apartment in Brisbane.

The 12-month business loan for $315,000 was approved on 23 March for a property estimated to be worth $575,000. Despite this being a commercial loan, the borrower’s Australian Company Number (ACN) was only registered a day later.

Conditions for the loan include a “lower” interest rate of 10.95% per annum with a “higher” rate of 2% per month applying in the event of default.

Additional fees include a 2.2% establishment fee, a monthly loan management fee of 0.2%, a default fee of $635 per hour for time spent dealing with the default, and a 2.2% termination fee.

Avoiding the squeeze

This is an example of how alternative financiers may bypass tighter regulations on foreign lending as well as the guidelines in the National Consumer Credit Protection (NCCP) Act, the source said.

“Since last year, there has been a lot of tightening up on non-resident lending so basically these non-resident investors can’t borrow anymore. A lot of private lenders have come out and now basically ask buyers to change the purchase contract into a business.”

This involves creating an ACN or Australian Business Number (ABN) with the lender then providing ‘working capital’ to that business.

“This actually makes sense in a commercial deal because it’s working capital for you to purchase property. However, this is literally playing around with words. In the end, you’re still purchasing a residential unit for investment purposes.”

Risk at all costs

The excessive fees offered in the leaked loan contract were one concern, our source said, especially since they could be further increased in the event of default.

One condition of default in Prime Capital’s approved loan is using funds for a purpose other than working capital. However, whether this condition is met by purchasing residential property is a grey area, the source said.

“It depends on the angle that you take. From the company’s perspective, they are buying a property which can be deemed as working capital but from a transactional perspective, it’s borrowing to buy a residential unit.”

This means there is a risk that the borrowers in these schemes could eventually have their properties seized, he said.

“Obviously, the company has the right to take the property away from the borrower but they may not because they’ll lose business in the future. It may or may not be the case that they want to take the property – it’s a matter of what makes more money.”

Client confirmation

Prime Capital told Australian Broker of the challenges in the early application stages to confirm all details provided.

“We can confirm approvals are conditional, including being subject to items like valuation and any required clarification around use of funds/commercial purpose. It is a condition of our funding lines that our lawyers (Dentons and Kemp Strang) review all files before settlement to ensure compliance with our lending guidelines and all regulatory requirements,” they said in an emailed statement.

Regulated or unregulated?

If an unregulated commercial loan is written which should have fallen within the regulated residential mortgage space, there can be quite hefty fines as well as sanctions by the Australian Securities & Investments Commission (ASIC), Elise Ivory, partner at law firm Dentons, told Australian Broker.

“If they have an ACL and they’ve treated a loan as unregulated when they shouldn’t have, that could have implications for their licence.”

There are also implications for the borrower if it is determined they had defrauded the lender, Ivory said.

Determining whether a borrower is guilty of fraud is a difficult question that depends on a range of factors including who structured the loan, whether the lender or broker made recommendations or whether the borrower was acting alone.

Proper usage of funds

To ensure that funds are used for the purpose originally stated, lenders should note exactly where the loan proceeds are going on settlement, she said.

“Look at the cheques that are being drawn, look at the transfers that are being made – actually look at how the funds are being dispersed. That’s probably the best way to see what’s going on.”

A red flag for working capital being used to purchase residential property would be a cheque for the entire loan amount going to a third party the lender has never heard of, Ivory said.

“They would need to check why that party is being paid, who they are, what they have to do with the transaction. We normally recommend that any funds dispersed in excess of $10,000 must be investigated in terms of why that cheque is being paid to whomever it’s being paid to.”

“Lenders certainly can’t close their eyes to what the loan is actually being used for and pretend that just because they were told it was working capital for a company that this is exactly what is being done with it.”

Beware the newborn firm

Another big red flag is that if the company has only just been established prior to the loan, Ivory said, adding that further questions should be asked at this point.

“Why has the company just been set up? Has it been trading before? What is it going to be doing? If it was set up last week and suddenly it needs a large amount of money, the lender should understand what that money’s being used for.”

Major bank reveals lack of ‘clarity’ around aggregator oversight

From The Adviser.

A big four bank has acknowledged that data quality and public reporting could be further improved in the mortgage industry, revealing it ‘does not have clarity’ around some aggregator data.

Speaking last week at the final leg of the second series of the Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — NAB general manager for broker distribution Steve Kane touched on Finding 13 of the report, which notes that the regulator encountered “significant issues with the availability and quality of key data” from some participants.

According to the remuneration report, the lack of some data requested “affected [ASIC’s] ability to analyse the data for some of [its] core review objectives [and] raises concerns with the participants’ ability to monitor consumer outcomes in relation to their businesses”.

Some of the examples of the lack of data included an inability by a lender to “automatically track whether a particular loan was arranged by a particular individual broker or broker business”, which “increases the risk that lenders may be dealing with unlicensed persons” and “means that lenders have little visibility of patterns of poor loan performance connected to these individuals or businesses”.

At the NAB event, Mr Kane acknowledged that there was further work to be done in this area.

He said: “This is an interesting one. As a lender, we have lots of information on individual brokers and the loans they submit and we have lot of information about aggregators and their total portfolio… but we don’t have, for example, lots of information about any individual firms that operate (with many brokers under them) under that particular aggregator. That is just one example. So, we don’t have clarity around that.”

Mr Kane added that it is therefore “fair to say that the aggregators will be working much more closely with lenders around data” in the future.

The general manager for broker distribution went on to say that, through Proposal 6*, it was “clear that ASIC expected brokers to obviously adhere to NCCP, responsible lending and compliance issues around maintaining a licence, having your own ACL or being accredited under someone else’s’ ACL… [and that] the aggregators need to understand that brokers are actually compliant with all of those things… [and] actually be able to provide evidence of that and good consumer outcomes too”.

He added: “And they’re saying that the lenders need to do that as well…[they] need to ensure the aggregators have the proper information, proper record keeping, and proper understanding of the roles and responsibilities in relation to the legislation and good consumer outcomes.”

Public reporting regime

As well as improving oversight of brokers and broker businesses, ASIC has also proposed to Treasury that there be a new public reporting regime to “improve transparency in the mortgage broking market” (Proposal 5).

Specifically, this proposes that there be public reporting on:

(a) the actual value of remuneration received by aggregators and the potential value if all criteria for remuneration are satisfied;

(b) the average pricing of home loans that brokers obtain on behalf of consumers;

(c) the average pricing of home loans provided by lenders according to each distribution channel; and

(d) the distribution of loans by brokers between lenders to give consumers a better indication of the range of loans that brokers within the network offer.

Touching on this proposal, Mr Kane said that one such solution could be that brokers give their customers “information that says ‘I’ve settled 50 deals this year, I’ve used this number of banks, I’ve obtained this amount of finance and this has been the price on average I’ve achieved for the customer’. It could get down to this level, which is very important in terms of disclosure to the customers,” he said.

“This all goes to the governance of oversight perspective, which is really now starting to say: ‘Do we, as an industry, have a clear understanding of all of the consumer outcomes that brokers are providing to their customer? Do we have proper understanding of whether NCCP responsible lending is met at every instance for the customer? Do we have a robust process to identify when a broker has done wrong thing and therefore the accreditation has been removed from lenders and aggregators? Do we have a clear line of sight and understand what the process is for those people? Do we have a much stronger regime in relation to a register of all of these ‘bad apples’ and how do we go about doing that? How do we go about ensuring that the end consumers know that they are not to be dealing with those people?’”

Mr Kane concluded: “When it comes to governance and oversight, it really is about accountabilities and responsibilities and understanding that disclosure to the customer about all the facilities that are available to them.

“So,” he said, “you can see that there is going to be far more reporting available to the public around these things.”

“Governance and oversight will play a much bigger role and therefore there will be much more work an information sharing and much more collation of performance and outcomes for consumers.”

The Knowledge is Everything: ASIC Review of Mortgage Broker Remuneration — put together by NAB and Advantedge in association with The Adviser — also revealed that the big four bank believes that Australian brokers could achieve up to 73 per cent market share if reaction to the ASIC remuneration review is “right”.

NAB’s executive general manager for broker partnerships, Anthony Waldron, told brokers that the industry reaction to the current consultation on the ASIC report could further boost the third-party share of the market by improving trust.

Mr Waldron said that there is an “opportunity” if “industry can react and get this right”.

He explained: “It’s the opportunity for more people to understand what brokers do, it’s the opportunity to build trust even further in what you do. And if we can do that then we won’t be talking about 53 or 54 per cent of mortgages going through the broker community, we will be talking about more like the numbers in the UK where it is already in the 72 or 73 per cent.”

*Proposal 6 of ASIC’s Review of broker remuneration states that the regulator expects lenders and aggregators to improve their oversight of brokers and broker businesses, for example by using a consistent process to identify each broker and broker business (such as the use of the Australian credit licensee or credit representative number where relevant, or a unique number provided by the aggregator).

Australia’s Limits on Interest-Only Mortgages Will Curb Riskier Lending

Moody’s says last Friday, the Australian Prudential Regulation Authority (APRA) announced new measures to restrict growth in riskier mortgage loans, including limiting the origination of interest-only mortgages, particularly those with high loan-to-value (LTV) ratios. On Monday, the Australian Securities Investments Commission (ASIC) announced that it will closely monitor lenders and mortgage brokers to ensure they are not inappropriately recommending more expensive interest-only loans to borrowers.

The new measures are credit positive for Australian banks, residential mortgage-backed securities (RMBS) and covered bonds because they will curb growth in riskier mortgage loans amid rising house prices and high household indebtedness. The measures include limiting the flow of new interest-only mortgages by banks to 30% of total new residential mortgage lending. Banks also will be required to have internal limits on the volume of interest-only lending at LTV ratios of more than 80% and ensure that there is strong justification for any interest-only loan with an LTV of 90% or more.

Interest-only loans accounted for 38% of total housing loan approvals in December 2016 and for more than 30% of total housing-loan approvals every month since June 2009 (see Exhibit 1). Housing investment loans, which are often interest-only loans, accounted for 35% of total housing loan approvals as of December 2016. In the RMBS sector, interest-only loans account for 35% of the mortgages backing the deals we rate.

We expect banks to raise interest rates on interest-only loans to reduce growth in this segment and support their net interest margin from ongoing price competition for lower-risk loans and stable deposits. When APRA introduced limits on housing investment loans in December 2014, banks responded by raising interest rates on such loans. In addition to the new limits on interest-only loans, APRA instructed banks to ensure that growth in housing investment loans remains “comfortably” below the 10% limit introduced in December 2014. APRA advised that banks will no longer have leeway to exceed this growth speed limit and that any breach will immediately prompt a review of the offending bank’s capital requirements. This contrasts with APRA’s original guidance, under which the 10% cap was not a hard limit.

APRA also announced that it would monitor the warehouse facilities that banks use to fund non-bank lenders. APRA does not regulate non-bank lenders, but monitoring the warehouse facilities will effectively allow the regulator to influence non-banks’ mortgage underwriting standards and promote the overall stability of the financial system. Non-bank lenders have increased housing investment lending since the introduction of the 10% limit on such loans (see Exhibit 1).

Although the APRA’s and ASIC’s measures add a layer of protection against a house price correction for banks, RMBS and covered bonds, it remains to be seen how effective these measures will be amid moderating house price appreciation, particularly when low interest rates continue to support housing demand. As Exhibit 2 shows, house prices have continued to rise, despite previous measures to slow the housing market.

APRA’s and ASIC’s latest measures and interest rate increases by banks on interest-only loans will slow demand for housing, but we continue to expect house prices in Australia to rise amid low interest rates. Although low interest rates will continue to support borrowers’ capacity to service their debt, rising house prices, in combination with high household leverage and low wage growth, remain risks for banks, RMBS and covered bonds.

The RBA on Housing and Debt

Remarks at tonights Reserve Bank Board Dinner by Philip Lowe, RBA Governor included the level of household debt and the housing market.

This is something we have been focused on for some time. The level of household debt in Australia is high and it is rising. Over the past year the value of housing-related debt outstanding increased by 6½ per cent. This compares with growth of around 3 per cent in aggregate household income. The result has been a further rise in the ratio of household debt to income, from an already high level.

In aggregate, households are coping reasonably well with the higher debt levels. Arrears rates remain low and many households have built up sizeable buffers in mortgage offset accounts. At the same time, though, slow growth in wages is making it harder for some households to pay down their debt. For many people, the high debt levels and low wage growth are a sobering combination.

In the housing market, conditions continue to vary considerably across the country. The Melbourne and Sydney markets are very strong and prices are increasing briskly. In contrast, conditions are more subdued in most other cities and, in some areas, most notably Perth, prices have declined. Nationally, growth in rents is the lowest for some decades.

So it’s a complex picture and there is not a single story that applies across the country. But, as is often the case in economics, it largely comes down to supply and demand. On the demand side, population growth in Australia – especially in our largest cities – picked up unexpectedly in the mid 2000s and it is only in the past couple of years that the rate of home building has responded. This imbalance was compounded by insufficient investment in the transport infrastructure needed to support our growing population. Nothing increases the supply of well-located land like good transport links. Underinvestment in this area is one of the factors that has pushed housing prices up. Put simply, the supply side simply did not keep pace with the stronger demand side. The result has been higher prices.

Not surprisingly, the rising prices have encouraged people to buy residential property as an investment in the hope of ongoing capital gains. With global interest rates so low, many investors have found it attractive to borrow money to invest in appreciating residential property. This has reinforced the upward pressure on prices.

This configuration of ongoing increases in indebtedness and rising housing prices has been discussed at length by the Council of Financial Regulators. This council, which I chair, brings together the heads of the RBA, APRA, ASIC and the Australian Treasury. The concern has not been that these developments have posed a risk to the stability of our financial system. Our banks are resilient and they are soundly capitalised. Instead, the concern has been that the longer the recent trends continued, the greater the risk to the future health of the Australian economy. Stretched balance sheets make for more volatility when things turn down.

Given this, over the past couple of years there has been a concerted effort by APRA to encourage lenders to strengthen their lending standards. This followed deterioration in these standards a few years ago. Also, at the end of 2014, when growth in investor lending was accelerating, APRA announced that it would pay very close attention to lenders whose investor loan portfolios were growing faster than 10 per cent. It did so with the full support of the RBA. This guidance helped pull the whole system back and has made a positive contribution to overall financial stability. So too has ASIC’s focus on responsible lending. These measures constrained some higher-risk lending and reinforced the message to lenders that they need to take a system-wide focus in their risk assessments.

Notwithstanding this, given recent trends and the heightened risk environment, APRA announced some further measures last Friday. Again, it did this with the full support of the Council of Financial Regulators.

There are two parts of APRA’s announcements that I would like to draw your attention to.

The first is the need for lenders to have a very strong focus on serviceability assessments. Despite the focus on this area over recent times, too many loans are still made where the borrower has the skinniest of income buffers after interest payments. In some cases, lenders are assuming that people can live more frugally than in practice they can, leaving little buffer if things go wrong. So APRA quite rightly has said that lenders can expect a strong supervisory focus on loans with a very low net income surplus.

The second area is interest-only lending. Over the past year, close to 40 per cent of the housing loans made in Australia have not required the scheduled repayment of even one dollar of principal at least in the first years of the life of the loan; only interest payments are required. This is unusual by international standards. In some countries, repayment of at least some principal is required on all housing loans for the entire life of the loan. In other countries, interest-only loans are available only if the borrower has already contributed a fair degree of equity. So this is one area where Australia stands out. We are not unique in this area, but we are unusual.

There are a couple of factors that help explain the popularity of interest-only loans in Australia. One is the flexible nature of Australian mortgages. Many people with interest-only loans make significant payments into offset accounts rather than explicitly paying down principal. This flexibility, which is of value to many people, isn’t available in most countries. A second factor is the taxation arrangements that apply to investment in residential property in Australia.

Last week APRA stated that it expected that new interest-only loans should account for no more than 30 per cent of the flow of new loans. It also stated that institutions should place strict limits on interest-only loans with high loan-to-valuation ratios.

Like the earlier ‘speed limits’ on investor lending, these new requirements should help the whole system pull back to a more sustainable position. A reduced reliance on interest-only loans in Australia would be a positive development and would help improve our resilience. With interest rates so low, now is a good time for us to move in this direction. Hopefully, the changes might encourage a few more people to think about the merit of taking out very large interest-only loans when interest rates are near historical lows.

So the RBA welcomes these latest changes.

It is important, though, that we are all realistic about what these and other prudential measures can achieve. As I said before, the underlying driver in our housing market is the balance between supply and demand. The availability of credit is undoubtedly a factor that can amplify demand, but it is not the root cause. This assessment is consistent with the observation that housing market dynamics currently differ significantly across the country, despite Australia having nationwide financial institutions and the level of interest rates being the same across the country. It is hard to escape the conclusion that we need to address the supply side if we are to avoid ever-rising housing costs relative to our incomes and to avoid the attendant incentive to borrow that is created by rising housing prices.

The various prudential measures do not address the underlying supply-demand issues. But they can reduce the risk from the financial side of the housing market while the underlying issues are addressed. These prudential measures help lessen the amplification of the cycle we get from borrowing and reduce the risk of developments on the financial side weakening the resilience that our economy has exhibited for many years. Ideally, this would be achieved by financial institutions acting themselves, without the need for prudential guidance. But sometimes prudential guidance can help the whole system adjust.

The calibration of this guidance is not precise or straightforward so we need to keep matters under review. The Council of Financial Regulators will continue to assess how the system responds to the various measures so far. It would consider further measures if needed. As I have said, though, in the end addressing the supply side of the housing market is likely to prove a more durable way of dealing with the concerns that people have about debt and housing prices than detailed supervisory guidance.

So that is enough on debt and housing.

Housing affordability takes a $2000 hit in just three months

From The NewDaily.

First home buyers will be forced to save an extra $2000 towards a deposit just to keep up with the last three months of price growth, according to CoreLogic data exclusive to The New Daily.

The median house price in the eight capital cities is now $613,200, CoreLogic estimated, based on sales in the March quarter.

At the end of last year, this figure was $592,807, which means in just three months, as hopeful buyers saved madly, the goalposts shifted 3.4 per cent further away. And that’s only for a modest 10 per cent deposit.

All up, a young couple now needs about $61,300 for a 10 per cent deposit on a median-priced house in the city. In Sydney, it’s a staggering $88,000.

If they’re saving for a 20 per cent deposit, which many banks now prefer, they’ll need $176,000 for a median-priced Sydney home – up $8200 in three months.

house-price-growth-depositIf prices stood still from today, a couple saving for a 10 per cent deposit in a capital city would need to put away roughly $1200 a month for the next four years, presuming they earned 2.5 per cent interest, compounded monthly.

And this doesn’t include lenders mortgage insurance (LMI), which Australian banks have made compulsory for all borrowers with deposits below 20 per cent. Gone are the days of 0 per cent deposit loans unless you have a guarantor.

A median-priced house in a capital would require roughly an extra $13,500 in LMI, which the couple would presumably ask to be ‘capitalised’ into their loan – meaning they would pay an extra $67 per month on their repayments.

To avoid LMI entirely, first-time buyers would need to save a 20 per cent deposit of $122,640, based on CoreLogic’s median capital house price. That’s $4000 more than three months ago.

And then there’s stamp duty and the litany of other upfront costs that home buyers face. Stamp duty alone could add an extra $23,000 to a median-priced home.

As these figures show, a guarantor is probably the only way for many buyers to get into the market. Many institutions will lend 100 per cent or even 110 per cent of the home value if first-time buyers have a guarantor.

There is plenty of controversy over whether or not houses are more or less affordable than ever. For example, Jamie Alcock, an academic at The University of Sydney, wrote in The Conversation last week that mortgages are now more affordable, as record-low interest rates are nowhere near the 17 per cent highs of the 1990s.

Even if that’s true, the CoreLogic figures, coupled with the tighter lending requirements of the banks, prove that house price growth is making it harder for deposit savers to keep up.

And as Professor Alcock warned, when interest rates do inevitably rise, today’s ‘comfortable’ borrowers will become tomorrow’s highly stressed repayers.

ASIC announces further measures to promote responsible lending in the home loan sector

ASIC today announced a targeted industry surveillance to examine whether lenders and mortgage brokers are inappropriately recommending more expensive interest-only loans. With many lenders, including major lenders, charging higher interest rates for interest-only loans compared with principal-and-interest loans, lenders and brokers must ensure that consumers are not provided with unsuitable interest-only loans.

Building on earlier work on home lending standards, ASIC is also announcing that eight major lenders will provide remediation to consumers who suffer financial difficulty as a result of shortcomings in past lending practices.

Interest-only loans

ASIC will shortly commence a surveillance to identify lenders and mortgage brokers who are recommending high numbers of more expensive interest-only loans. Data will be gathered using ASIC’s compulsory information-gathering powers from large banks, other banks, mutual banks and non-bank lenders.

In an environment where many interest-only loans are now clearly more expensive than principal-and-interest loans, lenders and mortgage brokers must carefully consider the implications of providing borrowers with interest-only loans. While interest-only loans may be a reasonable option for some borrowers, for the vast majority of owner-occupiers in particular, an interest-only loan will not make sense.

Past lending practices

In 2015, ASIC conducted a review of how lenders provide interest-only home loans. ASIC found that lenders were not properly inquiring into a consumer’s actual living expenses when assessing their capacity to make repayments. ASIC’s review led to industry-wide improvements by lenders: see 15-220MR Lenders to improve standards following interest-only loan review.

As part of today’s announcement, eight lenders examined by ASIC have improved their practices for enquiring about expenses to determine the consumer’s financial situation and capacity to make repayments. Rather than obtaining a single monthly living expense figure and then relying on a benchmark figure to assess suitability, borrowers’ actual figures for different categories of living expenses (e.g. food, transport, insurance, entertainment) will now be obtained. This will provide lenders with a better understanding of consumers’ expenses.

In addition to typical hardship processes, lenders will individually review cases where consumers suffer financial difficulty in repaying their home loans, and determine whether they have been impacted by shortcomings in past lending practices. Where appropriate, consumers will be provided with tailored remediation, which may include refunds of fees or interest.

As interest rates are currently at record lows, and were falling in the lead up to 2015 and during 2016, ASIC does not expect lenders to identify high numbers of consumers who are now experiencing financial difficulty due to past lending decisions. Nevertheless, these additional actions will ensure that consumers are not disadvantaged.

To ensure that these remediation programs are operating effectively, ASIC is requiring lenders to audit their processes.

ASIC Deputy Chairman Peter Kell said, ‘Home loans are the biggest financial commitment most people will ever make. In assessing whether borrowers can meet loan repayments without substantial hardship in the short and longer term, it is important that lenders can collect and rely on information which provides an accurate view of the consumer’s financial situation. This is especially the case when interest rates are at record low levels’.

‘Lenders and mortgage brokers must also ensure that consumers are being provided with the home loan product that meets their needs. Lenders and mortgage brokers need to think twice before recommending that a consumer obtain a more expensive interest-only loan’.

Background

In 2015, ASIC reviewed interest-only loans provided by 11 home lenders, and issued REP 445 Review of interest-only home loans (Refer: REP 445) in 2015, which made a number of recommendations for home lenders to comply with their responsible lending obligations (Refer:15-297MR).

In REP 445, ASIC gave guidance on how lenders can make proper inquiries into a borrower’s actual expenses.

ASIC’s monitoring of lenders’ home lending practices continues. ASIC will carry out further reviews to ensure that industry standards are improved where necessary. ASIC will also take enforcement action as appropriate.

Any consumer with concerns about their ability to make home loan repayments should contact their lender in the first instance. Consumers can also access free external dispute resolution, through either the Financial Ombudsman Service (FOS) or Credit and Investments Ombudsman (CIO).

The eight lenders are:

  • Australia and New Zealand Banking Group Limited
  • Bendigo and Adelaide Bank Limited
  • Commonwealth Bank of Australia
  • Firstmac Limited
  • ING Bank (Australia) Limited
  • Macquarie Bank Limited
  • National Australia Bank Limited
  • Pepper Group Limited.

ASIC has also provided guidance to industry in Regulatory Guide 209 Credit licensing: Responsible lending conduct (Refer: RG 209).

Responsible lending is a key priority for ASIC in its regulation of the consumer credit industry. The changes made by the eight reviewed lenders continue a number of developments and outcomes involving responsible lending:

  • Treasury releases ASIC’s Review of Mortgage Broker Remuneration.
  • ASIC filed civil penalty proceedings against Westpac in the Federal Court on 1 March 2017 for alleged breaches of the National Consumer Credit Protection Act 2009 (refer: 17-048MR).
  • Cairns-based car yard lender, Channic Pty Ltd, and broker, Cash Brokers Pty Ltd, breached consumer credit laws (refer: 16-335MR). Part of the court’s judgement was that the broker did not meet all of the necessary responsible lending obligations before providing credit assistance because he did not consider the borrower’s insurance expenses, which was required under the credit contract and represented a significant portion of the borrower’s income.
  • ANZ paid a $212,500 penalty for breaching responsible lending laws when offering overdrafts (refer: 16-063MR).
  • Payday lender Nimble to refund $1.5 million following ASIC probe (Refer: 16-089MR).
  • BMW Finance pays $391,000 penalty for breaching responsible lending and repossession laws  (refer: 16-019MR).
  • Westpac pays $1 million following ASIC’s concerns about credit card limit increase practices (refer: 16-009MR).
  • Bank of Queensland Limited improved its lending practices following ASIC’s concerns about the way it assessed applications for home loans (Refer: 15-125MR).
  • The Cash Store Pty Ltd and Assistive Finance Australia Pty Ltd failed to comply with their responsible lending obligations. The Federal Court awarded record civil penalties (refer: 15-032MR).
  • Wide Bay Australia Ltd (now Auswide Bank Ltd) made changes to their responsible lending policy as a result of ASIC’s intervention (refer: 15-013MR).