Westpac drops mortgage lending standards

Earlier this month I warned of the unintended consequences of increased bank competition. This article described how the intensification of competition for mortgage lending in Australia from the mid-1990s caused credit standards to drop and offshore borrowings to explode. The resulting increase in the availability of credit arising from this increased competition, combined with unresponsive housing supply, has caused the housing bubble that Australia experiences today, with housing affordability now near all time lows.

Just when you thought mortgage lending standards in Australia couldn’t get much lower, Westpac has announced possibly the most irresponsible relaxing of lending standards by a major bank ever seen in Australia.

Today, Banking Day reported the following from Westpac:

Rent Equals Savings for Westpac:

One year’s worth of rent payments will count as savings at one Westpac brand.

Westpac is changing its treatment of savings, through St George.

Defining one year’s rent payments as being equivalent to savings widens the target market for the bank’s home loans, including plenty of genuine prospects.

Dean Rushton of Loan Market yesterday publicised the shift in credit standards.

Rushton said St George will accept rent as a form of savings for a home deposit if there is evidence of a minimum of 12 months’ continuous satisfactory rental history and the property is leased through a licensed property manager.

He applauded the stance in an email yesterday.

“Australian lenders require a percentage of the purchase price – normally a five per cent minimum – to be saved for all loans, but it is extremely difficult for people paying the exorbitant rents customary these days to save money.”Rushton wrote that “we expect other lenders to follow suit.”

I love the way that Rushton attempts to sell this as a housing affordability measure when it is obvious that, if widely adopted, the extra funds available to borrowers under this scheme would get quickly capitalised into house prices, making homes even less affordable for younger Australians. What’s worse, a large chunk of the funds used to underwrite these loans would need to be borrowed from the wholesale debt markets, resulting in a even heavier reliance on unstable offshore funding by Australia’s banks. Australia’s financial stability would be significantly weakened as a result.

As Delusional Economics once said:

Affordability is the measure of a cost relative to income. It is not a measure of how easy it is to go into debt. Buyers are “priced out of the market” because prices are too high relative to incomes, not relative to the home loan they can receive from a lender with dodgy standards. Lowering credit criteria or shovelling incentives at people will do what it did last time. Create false short-term demand, push up prices that will then create an even bigger problem. What do we do next? Offer 125% LVR loans?

Lowering LVRs will in no way lead to more affordable housing, it will simply mean that more poor fools go into debt in the belief that they are on the road to riches while paying over-inflated prices for an asset that is already oversupplied.

Australian banks under the guidance of the RBA should be attempting to slowly deflate the Australian market to remove the massive systematic risk it now presents the country. It seems to have got so big now that the banks feel the need to constantly misinform and fudge figures to keep it going.

It seems Australia’s banks have learned nothing from the Global Financial Crisis, in particular the dramatic housing crashes experienced in the United States, Ireland, Spain, and elsewhere. You would hope that Australia’s ‘conservative’ and ‘well-run’ banking system would have studied these markets in depth, learned from their mistakes, and implemented more prudent and sustainable lending standards.

Anyone still seeking to understand the damage that can be caused by intense banking competition and lax mortgage lending standards are encouraged to watch the below video extracts from the excellent Irish documentary “Freefall”.

When will Australia learn: WE ARE NOT DIFFERENT!

  

Comments

  1. Leith,

    Fin Review today abt the excellent work bank treasurers do sourcing funding…covered bonds is their latest and this is the demand they will meet with them…

    This new lending may well lead to the blow-off top that is all that I believe has been missing… with a China slow-down in 2012, were all Mayans now!

  2. Financial Follies

    This is absolute lunacy from Westpac. How the hell can rent which has already been paid and not coming back count as "savings"? Sometimes I feel like I'm living in an alternate universe…

  3. So that means i can save a bigger deposit by renting a more expensive house! Is it April 1st again?

  4. I wonder how much time this action buys the banks their continued growth..then what.

    With 'Freefall', cut and paste Australian counterparts, good to go.

    I'm not an economist, but i assume the banks are aquiring the funds from overseas. All it needs is China to "soften", commodities dip, AUD sold off, debt obligations increase, income reduced and see you on the other side.

  5. Double FHBGs, 105% LVR loans, interest-only mortgages, spent money – saving … what is next?
    “Promise-deposits” and “Farmville income”

    No subprime here!

  6. I thought a few months Westpac was trying to reduce its market share in the home loan market because of its excessive exposure? Or was I misinformed?

  7. J Mako,

    No need to shrink their resi loan book when they can dump the risk onto "My best little mate, the Australian taxpayer." (Sir Les Patterson)

  8. I remember an article only a few months ago stating Gail Kelly may have been rembered as one of Australia's worst CEO's from her time at St George if Westpac hadn't bought them. Apparently St George were severely over lent on residential housing and it was only that Westpac took them over that covered up this fact.

  9. Leith,

    Just be careful you’re not jumping to the wrong conclusion here. I don’t think Loan Market’s press release was explicit enough. Are rental payments really going to be deemed part of the deposit? Or are rental payments going to be treated as satisfying the current “genuine savings” requirements when credit scoring an application?

    As an ex-mortgage broker, I am familiar with the tightened credit policies introduced by the Lenders Mortgage Insurers after the GFC. LVRs were reduced from 95% to 90% (10% deposit now required “of which 5% must be genuine savings”). In other words, the 10% deposit could not come entirely from the sale of a car, gift from parents, FHOG, etc. Now 5% MUST be verifiable “GENUINE savings”. Proof is supplied by way of a savings account statement over a minimum of 3 months showing steady savings and no “windfall” credits.

    I may be wrong but perhaps what St George is saying is they will now accept rental history in lieu of savings statements as proof of the applicant’s “ability to save/service” when credit scoring an application. The applicant would still need to come up with the full deposit but it no longer has to be “genuine savings” (e.g. mum and dad could gift it to them) as long as they have an unblemished rental history.

    What the credit department is looking for is evidence the applicant has the capacity and propensity to save (or make rental payments). If they can’t save (or make their rent on time) they pose an obvious credit risk – they probably won’t pay the mortgage either!

    I would double check this before accusing the Banks (or more like the mortgage insurers!) of raising LVRs. I can’t see how it’s in the insurers’ interests!!

    As I said, I’ve recently retired from the industry (want to be as far away from the Australian property market and financial sector as I can when the sh*t hits the fan!) so I no longer have access to St George’s credit policy to verify.

  10. It's nice to know how competition for mortgage lending in Australia is going on right now. Because Westpac drops mortgage lending standards, it would definitely affect the whole industry in the country.