This article is from the Australian Property Journal archive
APRA has shifted its focus to the methods and benchmarks used by mortgage lenders in gauging home loan applicants’ living expenses and total indebtedness, particularly for low net income surplus borrowers which are more vulnerable to shocks.
It follows revelations that Australian banks could be sitting on $500 billion worth of “liar loans”, with 33% of borrowers having provided lenders with incorrect information over the 12 months to August, according to financial services firm UBS.
In an address to the Australian Securitisation Forum in Sydney yesterday, chairman Wayne Byers said APRA had “certainly been more interventionist than we would normally wish to be”.
This year has been busy for the regulator, which tightened restrictions on lending practices in March in a bid to curb interest-only loans as the Sydney and Melbourne housing markets continued to heat up and household debt grew.
Byers said APRA felt the net impact had been clearly positive for the financial system, with interest-only lending. The proportion of interest-only loans among new loans is down to around 23% following a sustained period of 40% to 50%, and ADIs’ interest-only loans are outstanding have fallen by almost so 7% to $36 billion as a number of existing interest-only borrowers move to principal and interest payments.
“We will need to continue to devote a large portion of our supervisory resources to housing in 2018. The broader environment of high and rising leverage, encouraged by historically low interest rates, requires ongoing prudence. It is easy to run up debt, but far harder to pay it back down when circumstances change,” he said.
The UBS data showed average applications understated expenses and liabilities by between 10% and 12%, with some as high as 30%, and banks are they underestimating the probability of defaults and losses in the event of a housing downturn.
According to UBS, ANZ Bank was the worst affected with 45% categorised as “liar loans”.
NAB recently fired 20 bankers and punished another 32 staff upon discovering around 2,300 home loans were issued to offshore investors without correct information since 2013.
Byres said APRA is paying particular attention to lending with a low net income surplus, which is the measure of a lender’s assessment of the monthly surplus income borrowers would likely have left over, after taking into account living expenses, debt repayments, with some buffers.
“Low NIS borrowers are obviously vulnerable to shocks. Over recent years we have been challenging lenders to ensure that their serviceability methodology is robust, and includes adequate conservatism to ensure that borrowers are not unduly exposed if their circumstances were to change.”
Low NIS lending has moderated over the past few quarters, although Byres said there is still a reasonable proportion of new borrowers that have limited surplus funds each month to cover unanticipated expenses, or put aside as savings.
He highlighted that measures of NIS are dependent on the quality of the lender’s assessments of borrower living expenses, and typically use a higher point of the borrower’s estimate of their expenses given their incentive to understate them.
“Put simply, if living expenses are underestimated then measures of NIS are overstated.”
Benchmarks are often based on the Household Expenditure Measure, which includes some scaling for different income levels, and Byers queried whether it always provides a realistic assessment of a borrower’s genuine expenditure needs given it “reflects a modest level of weekly household expenditure for various types of families”.
“The use of benchmarks as the primary means of measuring living expenses operates to protect against instances of borrowers underestimating their expenditure. However, the prominent use of any type of benchmark within credit assessments only emphasises the importance of that benchmark being realistic.
“From APRA’s perspective, we would like to see the industry devote more effort to the collection of realistic living expense estimates from borrowers and give greater thought to the appropriate use and construct of benchmarks in instances where those estimates are deemed insufficient.”
The regulator is also looking at a lenders’ knowledge of borrowers’ financial commitments and total indebtedness, noting that loan-to-income ratios are limited because they do not capture the borrower’s total debt level.
“Many other countries have used credit scores and positive credit reporting for some time as a means of sharing information and conducting comprehensive credit assessments. In Australia, other financial commitments remain something of a blind spot for lenders.
However, Byers said the government’s recently-announced move mandatory comprehensive credit reporting, beginning from 2018, would facilitate a switch from LTI to debt-to-income metrics and strengthen credit assessments and risk management.
“This will undoubtedly be a positive development for the quality of credit decisions,” he said.
Meanwhile, APRA will be seeking to collect data from non-ADI lenders in order to track aggregate trends in lending activity, but Byers said it would be not used to supervise individual lenders.
“Indeed, we are keen to distance ourselves from any perception we are responsible for the activities of any individual non-ADI lender, or for protecting their investors. To be absolutely clear, we have no intention of taking on that role,” he said.
“Our focus is very much on the aggregate.
“For those of you uncomfortable at the thought of APRA supervising non-ADIs, let me assure you the feeling is mutual.”
Australian Property Journal
