Mortgage Industry – Page 22 – Digital Finance Analytics (DFA) Blog

Preparing Borrowers for the Unknown

Will the current standard serviceability buffer be enough to protect borrowers, or is a domino effect of defaults on the horizon?

Industry regulator APRA tightened lending criteria earlier this year and increased its scrutiny of banks’ lending practices – but with the cash rate likely to rise in the not-so-far-off future, some industry figures are now wondering if the restrictions fall short of what is actually needed to prevent borrowers from defaulting on their home loans.

In March, when the new lending caps were introduced, APRA reiterated the importance of the interest rate buffer, which it had earlier recommended be set at at least two percentage points. The regulator said “a prudent ADI would use a buffer comfortably above this”, but it set no further limits.

Harald Scheule, associate professor of finance at Sydney’s University of Technology, is among those questioning the efficacy of APRA’s buffer.

“I do not think that a 2% buffer is sufficient, as interest rate changes are likely to be greater in the medium term,” Scheule tells Australian Broker. “APRA has acknowledged this by making clear that 2% is only the bare minimum.”

Scheule is an expert in risk management and has undertaken consulting work for a wide range of financial institutions in Asia, Australia, Europe and North America. He says if the cash rate rises, as suggested by the RBA, it’s inevitable that some mortgage holders will be unable to meet their repayments.

“Rising interest rates will impact borrowers with limited free cash flow. This may include leveraged interest-only borrowers and borrowers that have recently purchased a property,” he warns. “Mortgage delinquency rates will increase.”

A recent survey by home loan lender ME asked 2,000 mortgage holders about potential interest rate rises and found the issue was causing major concern among homeowners.

“Rising interest rates will impact borrowers with limited free cash flow … [including] leveraged interest-only borrowers and borrowers who recently purchased a property” – Harald Scheule, UTS

More than half (56%) said that if the RBA were to raise the official cash rate by 1% from its current record low of 1.5%, it would have an “adverse impact”, with 43% indicating they would spend less, and 27% of investors saying they would sell their investment property.

“The prospect of rate rises is probably already impacting consumer sentiment, with 62% of borrowers expecting their lender to increase interest rates on their home loan in the next 12 months,” the survey said.

If a future rate rise does lead to increased mortgage delinquency, Scheule says banks are likely to tighten lending standards even further and drop the loan amounts offered to applicants. That combination could further constrain interest-only borrowers seeking to refinance at the end of their interest-only terms.

“This means more mortgage stress, as many had expected to roll over the interest-only period indefinitely, but now they are forced to make principal repayments next to interest payments,” Scheule says.

As loan supply is increasingly restricted alongside rising delinquency rates, housing prices will begin to tumble, and Scheule says Australia will be well on its way to a burst housing bubble.

“The cycle between delinquencies and tightening bank lending standards continues, and as a result there’s a noticeable drop in loan supply and a fall in house prices,” he explains.

When asked if banks and brokers are doing enough to protect borrowers, Scheule admits it’s a difficult question to answer but says the best thing brokers can do is provide balanced advice and education to their clients.

“High professional standards for both banks and brokers are critical to the resilience of our financial system,” he says. “This includes consumer awareness of risks. The impact of payment shocks via interest rate increases or loss of employment should be discussed.”

Tony MacRae, general manager of third party distribution at Westpac, agrees that high professional standards are a necessity in any market but says the situation isn’t as bleak as it’s sometimes portrayed.

“The number of our customers in arrears on their loans is at historically low levels, and we don’t expect this to increase in the short or medium term,” he says.

MacRae says Westpac remains conservative in its lending and has long included a range of protectionary measures in its processes, such as the addition of buffers and floor rates to account for possible future interest rate increases.

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

“They include consideration of customers’ specific circumstances, including income and expenditure, previous repayments history and the overall customer relationship.”

MacRae also says the bank has employed a range of measures to help it meet APRA’s benchmark of 30% for new interest-only lending, including adjusting its interest rates and lending policies.

However, what MacRae says Westpac has seen is an increase in the number of customers taking out or switching to principal and interest repayments – something Canberra broker Stephanie Duncan, of Tiffen & Co, has also noticed.

According to Duncan, who has been recognised as one of the most successful female brokers in Australia, the trend suggests clients are fully aware that the interest rates are likely to rise, and they understand the impact this will have on their financial situation.

“The increase in repayments to mortgage holders if rates are to rise is somewhat expected by consumers. It is not going to come as a surprise that rates will be increasing in the short to medium term,” she says.

“Most of my clients are opting for P&I repayments so as to take advantage of the record lows in anticipation of better preparing themselves for the future rates rises,” she adds.

Duncan agrees that the banks are being incredibly cautious with lending in the current climate, which is helping to offset much of the risk that mortgage holders could potentially face.

“There have certainly been some fairly significant changes to policy that have reduced overall lending amounts and, in turn, the risk to consumers,” she says.

However, Duncan says there are some significantly more pressing problems that the industry should be dealing with.

“My biggest issue is not the tightening of policy and reduced lending capacities but the inconsistency of assessment and discrepancies between credit assessors,” she continues.

“With so many changes in such a short space of time, I feel the education on credit is lacking. This results in multiple touches to a file, and when there is no ownership of a file and it is being touched by different assessors this can result in a very slow and frustrating approval process.”

Duncan also suggested that clients are more likely to be adversely impacted by lenders’ mortgage insurance rather than increasing interest rates.

“In my experience there has been an increase in family guarantee lending and gifts from family becoming a new norm for most young people borrowing these days due to the high cost of living,” she says.

Based on this, Duncan says the bigger issue for clients is raising a large enough deposit to avoid LMI when entering the market, rather than the problem of having enough regular income to service the loan.

More Evidence of Slowing Mortgage Lending

The APRA ADI data for November 2017 was released today. As normal we focus in on the mortgage datasets. Overall momentum in mortgage lending is slowing, with investment loans leading the way down.

Total Owner Occupied Balances are $1.041 trillion, up 0.56% in the month (so still well above income growth), while Investment Loans reach $551 billion, up 0.1%. So overall portfolio growth is now at 0.4%, and continues to slow (the dip in the chart below in August was an CBA one-off adjustment). Total lending is $1.59 Trillion, another record.

Investment lending fell as a proportion of all loans to 36.6% (still too high, considering the Bank of England worries at 16% of loans for investment purposes!)

The portfolio movements of major lenders shows significant variation, with ANZ growing share the most, whilst CBA shrunk their portfolio a little. Westpac and NAB grew their investment loans more than the others.

On a 12 month rolling basis, the market growth for investor loans was 2.8%, with a wide spread of banks across the field. Some small players remain above the 10% APRA speed limit. This reflects a trend away from the majors.

Finally, here is the portfolio view, with CBA leading the OO portfolio, and WBC the INV portfolio.

We will look at the RBA data next.

The Property Playing Field Is Tilting Away From Investors

Continuing our series on our latest household survey results, we look more deeply at the attitude of property investors, who over the past few years have been driving the market. We already showed they are now less likely to transact, but now we can look at why this is the case.

Looking at investors (and portfolio investors) as a group, we see the prime attraction is the tax effectiveness of the investment (negative gearing and capital gains tax) at 43% (which has been rising in recent times). But availability of low finance rates and appreciating capital values have both fallen this time around. They are still driven by better returns than deposits (23%) but returns from stocks currently look better, so only 6% say returns from investment property are better than stocks! Only tax breaks are keeping the sector afloat.

We can also look at the barriers to investing. One third of property investors now report that they are unable to obtain funding for further property transactions, nearly double this time last year.

Then 32% say they have already bought, and are not in the market at the moment. Whilst concerns about more rate rises have dissipated a little, factors such as prices being too high, potential changes to regulation and RBA warnings all registered.

Turning to solo property investors (who own just one or two investment properties), 43% report the prime motivation is tax efficiency, 40% better returns than bank deposits and better returns than stocks (7%). But the accessibility of low finance rates and appreciating property prices have fallen away.

Those investing via SMSF also exhibit similar trends with tax efficiency at 43%, leverage at 16%, and better returns than deposits 14%. Once again, cheap finance and appreciating property values have diminished in significance.

We also see 23% of SMSF trustees get their investment advice from internet or social media sites, 21% use their own knowledge, while 13% look to a mortgage broker, 14% an accountant and 4% a financial planner. 15% will consult with a real estate agent and 9% with a property developer.

There is a fair spread of portfolio distribution into property. 13% have between 40-50% of SMSF investments in property, 29% 30-40% and 30% 20-30% of their portfolios.

Next time we will look at first time buyers and other owner occupied purchasers. Some are taking up the slack from investors, but is that sufficient to keep the market afloat?

Majors Mortgage Share Slips – AFG

AFG has today released Competition index figures for the final quarter
of 2017. Whilst this is a skewed result, reflecting traffic through AFG only, it is a reasonable bellwether.

Once again, Australia’s major lenders have taken a hit with their market share now down to a post-GFC low of 62.57% of the mortgage market. The majors lost ground in all categories since the time of the last AFG Competition Index, including a drop of more than 3% in refinancing and more than 2% in fixed rates.

AFG General Manager – Broker and Residential Mark Hewitt explained the results: “The major banks have been under intense scrutiny by government and the regulators and it is probably no wonder if they have been distracted,” he said.

“With the recently announced Royal Commission into the banking sector we all hope lenders can respond whilst still maintaining a focus on their customers.

The Royal Commission, and the industry need to focus on how competition can be further improved and this should include the impact the government guarantee has on competition.

“The Westpac group as a whole were the only ones to make up any ground, up from 19.19% at the time of the last AFG Competition Index to finish the quarter at 20.33%.

ANZ lost the most ground amongst the major banks, down 3.5% for the quarter.

The non-majors now enjoy a market share of 37.43%.

“The non-majors picking up market share were Macquarie, with an increase from 2.91% to 4.70% and AFG Home Loans with a lift from 8.88% to 10.15%,” concluded Mr Hewitt.

NAB refunds $1.7 million for overcharging interest on home loans

ASIC says National Australia Bank Limited (NAB) has refunded $1.7 million to 966 home loan customers after it failed to properly set up mortgage offset accounts.

Following customer complaints, NAB conducted an internal review which found that between April 2010 and August 2017 it had not linked some offset accounts to broker originated loans. This resulted in those customers overpaying interest on their home loan.

NAB has refunded affected customers so that they are only charged interest that would have been payable had the mortgage offset account been properly linked from the commencement of the home loan.

‘Consumers should be confident that when they sign up for a home loan they are receiving all of the benefits that are being promoted,’ Acting ASIC Chair Peter Kell said.

‘Where there are errors there should be timely and appropriate action to ensure that consumers are not any worse off as a result of the mistake.’

NAB reported the issue to ASIC. NAB has also engaged PwC to review the remediation approach and to ensure NAB’s compliance systems will prevent a similar error from occurring in future.

NAB has commenced contacting and refunding affected customers.

Background

An offset account is a savings or transaction account that is linked to a home loan account. Any money in the offset account reduces the amount of interest payable on the linked home loan. For example, if the outstanding balance on the home loan is $300,000 and there are savings of $50,000 in the offset account, then interest is only payable on the difference ($250,000).

In this case, NAB failed to link some offset accounts to home loan accounts, which meant that money held in those offset accounts did not reduce the interest payable on the home loan accounts. As a result, consumers paid more in interest than was required.

NAB also conducted a broader investigation which found that the issue only applies to broker originated loans.

NAB will also remediate customers who had an offset account during the relevant period but had repaid their home loan before 2017.

NAB said:

In February 2017, NAB commenced a review into how it processes offset account requests for customers who apply for a home loan through a Broker, looking back to 2010.

This review found that some customers may not have had their offset account correctly linked to their home loan, and that these customers may have consequently paid additional interest.

We sincerely apologise to our customers for this, which was due to administration errors.

All of the customers identified through this review with an open account have been contacted and received refunds. They represent 0.73% of the total number of offset accounts established through our Broker channel since 2010 (approximately 178,000).

NAB advised ASIC about this matter earlier this year, and, over the past 12 months, has implemented a number of measures to improve offset origination processes, and enhanced the ability for customers to review their offset arrangements themselves.

Blackstone taps Australia’s shadow-lending market with La Trobe stake

From Reuters.

Blackstone Group has snapped up an 80-percent stake in property financing company La Trobe Financial for an undisclosed amount, in a move that will help the New York-based investment giant expand in Australia’s lucrative mortgage-lending market.

This deal comes as Australia’s push to control a bubble in its red-hot housing market, by reining in bank lending, forces some property developers in the country to look outside the regular banking system to secure financing.

The Blackstone-La Trobe partnership aims to focus on the A$1.7 trillion Australian mortgage loan market and service small to medium enterprises “who are finding it increasingly difficult to obtain credit from the traditional bank sources”, the companies said in a joint statement on Monday.

La Trobe will use the tie-up to attract retail investors for its A$2 billion Credit Fund and its A$4.6 billion mortgage loan portfolios, according to the statement.

Chief Executive Greg O‘Neil will continue to head the Melbourne-based company while Blackstone will appoint two directors to La Trobe’s board.

While Blackstone has been a prolific investor in Australian commercial real estate with about A$9 billion ($6.9 billion) in property purchases in the last seven years, the deal with La Trobe marks the private equity giant’s entry into small-business mortgage lending in the country, according to a spokeswoman.

The broader shadow banking market accounts for about 7 percent of Australia’s total financial assets, according to the country’s central bank.

These lenders are funding some developers at more than double the interest rate for the same type of loans that the country’s big banks were providing just a few months earlier, before regulatory pressure forced them to limit exposure to new projects.

Chief executive Greg O’Neill will retain 20% ownership and continue in his role while the existing management and executive team will also remain unchanged.

O’Neill said the opportunity for La Trobe to partner with Blackstone was the perfect fit for staff, customers and the business.

“The specialist credit space is experiencing a defining period of change and growth around the world right now and it is critical that we continue to build on our strong capital position, expand our networks and draw on global best practice,” he said.

“We look forward to working closely with them over the coming years to expand and substantially grow our retail and institutional investment programs and our specialist lending offerings.”

La Trobe Financial manages investment mandates in excess of A$13 billion, including a retail Credit Fund of almost $2 billion and over $1 billion of public RMBS bonds issued.

eChoice Sold To CBA Subsidiary

The Voluntary Administrators have announced that they have accepted an offer and executed an unconditional sale agreement with, Finconnect (Australia) Pty Limited (as subsidiary of Commonwealth Bank of Australia) to sell the assets of the eChoice Administration Group companies.

This does not include the assets of the eChoice companies which have existing contracts with brokers or lenders that have not been placed into administration. The assets consist principally of the eChoice concierge platform, IT, intellectual property and staff.

The sale to Finconnect will allow eChoice’s employees, suppliers, brokers, lenders and leadership team to continue to operate and deliver for customers as they always have, but benefitting from the support of a larger financial institution, with minimal impact to current roles and leadership structure.

The Administrators will continue with their review of the affairs of the Administration Group with a view to the preparation of a report to creditors next year. This report will provide details of the Group’s financial affairs, including its background and historical trading. At this stage, the Administrators are not in a position to advise in respect to these matters or provide any further details pertaining to the sale agreement. These are issues properly considered in the report to creditors.

In accordance with the orders of the Federal Court of Australia made on 14 December 2017, this report will be forwarded to creditors to convene a meeting of creditors to be held by 29 March 2017.

Genworth Changes Recognition of Premium Revenue

Genworth Mortgage Insurance Australia Limited (Genworth today advised an expected greater fall in Net Earned Premium.

ASIC had raised concerns about the basis used by Genworth to recognise premium revenue in the financial reports for the year ended 31 December 2016 and the half-year ended 30 June 2017 having regard to the pattern of historical claims experience in earlier underwriting years.

Genworth said that it has finalised its annual review of the premium earning pattern (also known as the “earnings curve”). The review process included a detailed evaluation and recommendation by the appointed actuary and supporting work and recommendation by independent reviewers.

The change to the premium earning pattern will negatively impact Net Earned Premium (NEP) by approximately $40 million, and as a result 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction

The modified premium earning pattern reflects an expectation of the future emergence of risk based on a consideration of all identified relevant factors, but principally:

losses from mining related regions, which form the majority of the incurred cost of the last 2 years, continuing to occur at late durations; and

improvements in underwriting quality in response to regulatory actions, along with continued lower interest rates, extending the average time to first delinquency, while continuing to be beneficial to overall loss levels.

The change will have the effect, in aggregate, of lengthening the average duration of the period over which Genworth recognises its revenue by approximately 12 months. It also has the effect of introducing a third separate earnings curve for business written in 2015 and later. The change however does not affect the total amount of revenue expected to be earned over time from premiums already written.

The two earnings curves that comprise the previous premium earning pattern were first introduced in 2012. The last time the Board approved a change to the premium earning pattern was in September 2015, with this change applied to the financial statements in the third quarter of 2015. The Company conducted an annual review of the earnings curve in 2016 but no change was made to the curve based on the information at that time.

The modified premium earning pattern will be applied to the recognition of revenue in the income statement for the fourth quarter of 2017 and in subsequent reporting periods. The Company’s Unearned Premium Reserve (UPR) balance of $1,087 million as at 30 September 2017 remains unchanged. As was highlighted in the half year (2 August 2017) and third quarter (3 November 2017) results announcements, any change to the premium earning pattern has the potential to change the Company’s 2017 full year guidance.

The change to the premium earning pattern will negatively impact Net Earned Premium (NEP) by approximately $40 million, and as a result 2017 NEP is expected to be approximately 17 – 19 per cent lower than 2016, instead of the previous guidance of a 10 to 15 per cent reduction.

Based on preliminary estimates, the Company expects the full year loss ratio to remain between 35 and 40 per cent as the NEP reduction is expected to be partially offset by the fourth quarter incurred loss expectations, and preliminary estimates of the Outstanding Claims Reserves as at 31 December 2017 which currently reflect more favourable recent incurred loss experience.

The change to the premium earning pattern is expected to have minimal impact on Genworth’s regulatory solvency ratio which is expected to remain above the Board’s target capital range of 1.32 to 1.44 times the Prescribed Capital Amount as at 31 December 2017. The Company has completed an on-market share buy-back to a value of approximately $50 million and following this announcement intends to continue the
buy-back for shares up to a maximum total value of $100 million, subject to business and market conditions, the prevailing share price, market volumes and other considerations.

The Board continues to target an ordinary dividend payout ratio range of 50 to 80 percent of underlying NPAT and will continue to evaluate other capital management opportunities.

The Company notes that this full year outlook is based on preliminary expectations and recommendations that remain subject to completion of the year end process, including the external audit, market conditions and unforeseen circumstances or economic events. The Company expects it will be in a position to provide guidance for the 2018 financial year at the time of announcement of its 2017 full year financial year results.

Genworth notes that it has had discussions with ASIC about the premium earning pattern. The modification to the premium earning pattern announced today was determined following the outcome of Genworth’s annual review. In particular, Genworth believes that the premium recognition pattern as applied to prior released financial statements was the correct pattern to apply in respect of those financial statements. Genworth does not intend to restate financial statements already released to the market.

ASIC notes the decision by Genworth Mortgage Insurance Australia Limited (Genworth) to change the recognition of premium revenue in its upcoming financial report for the year ending 31 December 2017.

Genworth has announced that the change will negatively impact net earned premium by approximately $40 million and as a result net earned premium for the 2017 year is expected to be approximately 17-19% per cent lower than the 2016 year, instead of previous guidance of a 10 to 15 percent reduction. The change affects the recognition of revenue for the fourth quarter of 2017 and subsequent reporting periods. The unearned premium liability at 30 September 2017 remains unchanged.

What To Do When The Interest-only Period On Your Home Loan Ends

There is a sleeping problem in the Australian Mortgage Industry, stemming from households who have interest-only mortgages, who will have a reset coming (typically after a 5-year or 10-year set period). This is important because now the banks have tightened their lending criteria, and some may find they cannot roll the loan on, on the same terms. Interest only loans do not repay capital during their life, so what happens next?

Our friends at finder.com.au have put together this guide for households in this position, authored by Richard Whitten*.

Interest-only loans offer borrowers several years of very low mortgage repayments. However, there is always that fateful day when the interest-only period ends, and if you’re not prepared for that moment, it can really hurt. It’s a serious problem, with almost 1 million Australians already facing mortgage stress.

Many borrowers aren’t even aware of what it will mean financially when their loan switches from interest-only to principal and interest repayments. This makes interest-only loans a risky product, and it’s the reason why the Australian Prudential Regulation Authority (APRA) has been cracking down on interest-only lending.

Borrowers with interest-only loans need to be prepared for the day that their loan reverts. When that day comes, borrowers have three options.

Extend the interest-only period

You could try to extend the interest-only period. If you’ve crunched the numbers and you realise that you cannot meet the increased cost of principal and interest repayments, this could really help.

Of course, this is not a good position to be in and your lender could easily refuse your request. However, they probably don’t want to lose you as a customer, and if you’re facing genuine stress, it’s in both of your interests to come up with a solution.

But keep in mind that the bank always wins. Interest-only loans cost borrowers more in the long run compared to principal and interest loans and extending the interest-only period only adds to your overall mortgage costs.

Switch to the principal and interest period

You could opt to do nothing and your loan will revert to principal and interest repayments. However, you should definitely review your loan and your financial position before this happens. Make sure you calculate your new repayment amount so that you’re not caught out.

There are several advantages to this option: it requires the least amount of effort and by repaying the principal of your home loan you’ll finally be moving towards paying off your debt.

It also means that you’re building equity in your home. If you think about the equity in your home as a form of savings, those enormous monthly repayments don’t seem so bad.

But you do have one more option.

Refinance your home loan

You’re a customer, after all, and you’re not locked into your home loan. You could try to negotiate a better rate with your current lender or you could refinance to a completely new lender. This allows you to either switch to a new interest-only loan or find a principal and interest loan with a lower interest rate or better features.

Be sure to compare your interest-only options carefully and read the fine print on both your current loan and the one you’re planning to switch to. You might have to pay various discharge or early exit fees to leave your current home loan and application or establishment fees to begin your new one. You’ll need to balance these upfront costs with the potential long-term savings that come with a lower interest rate.

And as with most things in life, you just need to do your homework.

*Richard Whitten is a member of the home loans team at finder.com.au. His role is to explain all the complexities of the home loan industry in ways that help consumers make better life decisions.

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.