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.

CBA Tightens Mortgage Serviceability Requirements

From Australian Broker.

The Commonwealth Bank of Australia (CBA) has announced a series of changes to its mortgage serviceability criteria and reporting standards.

From 10 June, the bank has changed its serviceability calculations for all new owner occupied/investment home loan or line of credit applications.

For those taking out a new mortgage who already have an existing CBA home loan, line of credit or business loan, the bank will assess the ability to pay through an interest rate buffer of 7.25% p.a. or the current interest rate plus 2.25% p.a. minus any existing rate concessions (whichever is higher).

For customers with an existing owner occupied/investment, line of credit or business loan with an external financial institution, CBA will apply a service loading of 30% to the current repayment amount.

The change brings CBA in line with the other majors.

Amendments have also been made regarding reporting standards with CBA now required to collect the following tax residency information from all customers:

  • The name of all countries where the individual is a tax resident
  • The Tax Identification Number (TIN) for countries other than Australia where the individual is a tax resident or a valid reason for not providing the TIN

These changes came into effect on 9 June and are included in the bank’s home loan on-boarding application form. CBA-accredited brokers can view a webinar that provides an overview of the associated alterations.

Finally, the bank has also released a fact sheet on repayments and customer scenarios to help brokers explain the difference between P&I and IO mortgages and why P&I repayments benefit mortgage holders.

“As Australia’s largest lender, Commonwealth Bank is committed to consistently delivering the best customer experience for home buyers, as well as meeting our responsible lending obligations,” a bank spokesperson told Australian Broker. “As a responsible lender, we constantly review our products and services to ensure we are maintaining our prudent lending standards and meeting our customers’ needs both now and in the future.”

Westpac Tightens Mortgage Lending Policy

Westpac has joined the bandwagon as from 5 June, the bank will reduce the maximum LVR on new and existing interest only lending to 80%. This change will apply across the board to owner occupier and residential investment loans, equity access loans and special borrower packages such as Medico, Industry Specialisation Policy, Sports and Entertainment, and Accounting, Law and Executive Sector loans.

Westpac will also no longer accept new standalone refinance applications for owner occupier interest only home loans from an external provider, effective from 5 June. Internal refinancing for owner occupiers will still be permitted for interest only loans, subject to maximum LVR requirements and customer suitability.

Principal and interest as well as residential investment interest only refinancing will not be affected.

Westpac will continue to waive the repayment switch fee for those wishing to move from interest only to principal and interest repayments. Premier Advantage Package customers can switch at any time with no additional costs. For fixed loans however, certain break costs may apply.

Westpac said in a note to brokers:

“We are committed to meeting our regulatory requirements, and ensuring we are lending responsibly and in the best interests of our customers. We regularly review our polices and processes based on a number of factors such as the impact of regulatory requirements and the economic environment,”

“These changes will help us continue to meet our regulatory requirements and apply responsible lending practices in assessing a customer’s ability to service existing and proposed debts.”

Non major eases lending policy for FHBs

From Australian Broker.

Teachers Mutual Bank (TMB) and its divisions UniBank and Firefighters Mutual Bank have announced softer lending policy guidelines for first home buyers.

Effective from 18 May, the lender has made changes with regards to genuine savings requirements which reflect recent policy changes by Genworth, the bank’s LMI provider.

“Where deposit funds/savings have not been held for the minimum term of three months and satisfactory rental payment history is used to mitigate the genuine savings requirement, the First Home Owner Grant (FHOG) may be accepted to contribute to the 5% savings/deposit requirement,” the bank said in a broker note.

This follows from new underwriting guidelines from Genworth, effective from 16 May, which include the FHOG as an acceptable source if true ‘genuine savings’ cannot be found. All funds required to complete the loan application – deposits plus settlement disbursements minus the grant – must be shown at time of the mortgage application.

Genworth’s new conditions place responsibility on the lender to ensure the borrower is eligible to receive a FHOG at the time of the application.

“We are pleased that the changes proposed will further support first homebuyers realise their dream of homeownership,” TMB said.

ANZ tightens interest only lending portfolio

From Australian Broker.

ANZ has announced changes to its interest only loans in compliance with government efforts to reduce banks’ exposure to this type of asset.

The bank announced that effective May 29, the maximum interest only period will be reduced from 10 years to five years to allow “investment lending to align to the maximum for owner occupier lending.”

According to an announcement on the company website, this new provision will apply to all ANZ home loan and residential investment loan products.

It will also waive the renegotiation fee for customers who want to shift their interest only to principal and interest repayments, applicable to the same above mentioned products.

Meanwhile, the bank will apply a minimum rental or board expense of $375 per month to residential investment loans to borrowers who are not currently occupying their own homes. The fee will be charged to residential investment loan products and equity manager accounts, the bank said in its announcement.

Changes to ANZ’s loan provisions is in keeping with the regulatory initiatives geared towards bringing down banks’ exposure to interest only loans to 30%, according to a report on news.com.au.

The report also said that the bank will “crack down on customers failing to chip into their principal and also hit those with loan to value ratios higher than 80%”

The Affordability Conundrum

We have highlighted the rise in mortgage stress. We identified rising mortgage rates, underemployment, higher costs of living and flat incomes as causes of stress. But we need to stop and ask how come more households are under mortgage pressure than ever?

After all, lenders should have been operating with at least a 2.5% buffer between the mortgage rate offered and the rate they use for affordability assessment, and they should be looking at the household spending to ensure they can afford the loan. Failure to do this would make the loan “unsuitable” and under the lending provisions if loans were not made in compliance with the responsible lending provisions, the borrower can dispute the loan.

Mortgage stress should just not be as high as it is these guidelines were followed. Whilst interest rates have moved from their lows, thanks to out of cycle rises, (which in sum for owner occupied borrowers amount to around 30-40 basis points, whereas interest only loans, and investor loans are now 75-100 basis points) are still well within the 2.5% mortgage affordability rate buffer.

To try and unpick this, we have been looking at real household expenditure budgets from our core market model (using our surveys and other data), and comparing this with the standard Household Expenditure Measure (HEM) used by the banks.

HEM is based on more than 600 items in the ABS Household Expenditure Survey (HES). The HEM is calculated as the median spend on absolute basics (food, utilities, transport, communications, kids’ clothing) and the 25th percentile spend on discretionary basics, which includes expenses like alcohol, eating out and childcare. Non-basic expenses, for example overseas holidays, are excluded from calculations.

The National Consumer Credit Protection Act regulations say that whilst banks may use a HEM to guide the analysis, they must still do more complete analysis and validate the expenditure profile by looking at statements and other evidence. Relying on HEM is not sufficient.

Whats interesting about this is that APRA said last year:

On the expense side, the major differences across ADIs seen in the original exercise related to whether the ADI used a benchmark living expenses measures, such as the Household Expenditure Measure (HEM), the customer’s own reported expenses, or a more targeted calculation of the benchmark.   Most people have a hard time actually estimating their own living expenses, so the customer-declared figure may not be particularly accurate. However, the basic benchmark measures are also simplistic; scaling expense assumptions to the borrower’s income level (and potentially other factors including geography) is a more realistic and prudent approach.

About half of the ADIs in our exercise were still using the basic HEM, but others have moved to implement more sophisticated approaches or are in the process of doing so. At a minimum, all ADIs now reflect the customer’s declared living expenses where these are higher than the benchmark.

A strong alignment between the HEM calculation and the final expenses assessment might be a warning of expenses being understated.

Regulators said recently that there was often a “coincidental” alignment between HEM and actual costs, especially for more affluent purchasers.

So we obtained some HEM data for a typical household in our survey, and compared the HEM output with the data on real expenditure, using the same basis of calculation as HEM.

We found that in all states except SA, the standard HEM understated household expenditure significantly, net of mortgage payments, many were more than 10% higher. ACT, WA and NSW had the highest divergence. So did lenders make sufficient allowance to actual spending in the current low growth, higher cost of living environment?

If not, or if HEM had been used, households might have obtained a larger mortgage than could comfortably be serviced.

So, we need to ask – why the variation between HEM and reality? We suggest it may be a combination of:

  1. Households incomes being squeezed as costs rise and underemployment rises (households are not generally reassessed in flight by the banks)
  2. Banks were too generous in their initial affordability assessments and did not take actual spending sufficiently into account.
  3. Households did not fully disclose costs and banks did not fully check them out. HEM became the default.

Finally, we also looked across our household segments, and found that (no surprise) expenses of more affluent households were significant higher.

This helps to explain why we are seeing more affluent households getting into mortgage stress territory.

Should banks be obliged to review household spending patterns on a recurring basis, rather than at mortgage underwriting time? Is there  merit in the regulators looking in more detail at the extent to which all lenders (including non-banks) are compliant. We suspect some lenders have been too willing to operate on lower spending buffers to enable a deal to be done.

Borrowers of course should not borrow just because the bank says they are willing to lend to a certain level. Households should prepare their own budgets and include allowance for higher mortgage rates and rising living costs. They may get a smaller loan as a result, but they will be more secure in a rising market.

Our industry contacts suggest that many lenders are reviewing their spending assessment, and that more details and granular information is now been used. However, this may nor help those who got bigger loans in easier conditions as affordability bites.

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’.


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).