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

From Mortgage Professional Australia.

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

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

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

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

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

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

Methodology and sample size

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

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

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

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

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

UBS involvement in Australia and fines

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

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

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

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

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

What is the industry doing to respond?

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

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

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

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

Damn Lies and Statistics

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

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

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

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

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

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

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

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

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

Westpac facing ASIC loan assessment allegations

From Australian Broker.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Westpac Tightens Mortgage Underwriting Some More

From The AFR.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The LTI Light Is Dawning!

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

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

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

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

 

St George closes net on IO loan switching

From Australian Broker.

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

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

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

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

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

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

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

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

From Moody’s

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

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

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

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

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

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.