More on NCCP (Updated)

I first mentioned National Consumer Credit Protection back in early January when I suggested it could have an effect on the housing market.

This certainly reads like it should improve credit standards, especially if any of these things were actually allowed previous to this new legislation; and we applaud this legislation if this is the case. However, if that is true then this is pretty terrible news for lenders and the housing market because it just adds to the other lack of drivers for new debt issuance

I then mentioned it again a couple of times in February when the first pieces of anecdotal evidence began to appear. During discussions about this legislation on MacroBusiness it became obvious that it was having little effect on personal finance except to annoy the people who had to deal with the paperwork.  This was expected because issuers of personal finance ( such as car loans ) were always concerned with the clients ability to “actually” repay a loan, because the value of the secured asset was normally expected to depreciate.  It turns out that the same is not true for the housing finance market.

This week some reports have appeared in the media that show the NCCP legislation is not only affecting loan issuance but the lending industry itself.

Residential property prices peaked in 2010 and will continue cooling over the next six months as big mortgage brokers report a 20 per cent drop in loan numbers.

Aussie Home Loans managing director John Symond said its new loan volumes had plunged 20 per cent in the past four months because the housing market was soft.

He said Aussie had kept its five per cent share of the market and, until December last year, usually settled $1 billion worth of new home loans a month.

“The general consensus is the market is down around 20 per cent in volumes,” Mr Symond said in an interview with AAP.

“Housing generally throughout the country is definitely in a cooling stage, swinging towards a buyers’ market particularly for properties above $700,000 or $800,000.”

Australia’s housing market is past the peak of the cycle and will probably continue to soften over the next six months, he said.

“The cheaper prices close to the city – prices up to $600,000 or $700,000 – are still quite good because you’ve got first home buyers and small investors vying for those properties.”

He said competition between brokers had not intensified despite a host of post-global financial crisis mergers and acquisitions in the sector making the industry more concentrated.

Mr Symond’s comments came as Market Intelligence Strategy Centre, a research group for big lenders and brokers, reported a 27.4 per cent drop in the number of mortgage broker groups in the 12 months to December 2010.

The number now stands at 138, down from 190 previously after the most recent corporate transaction was Firstfolio acquiring South Australian Club Financial Services in December last year.

That followed Mortgage Choice’s acquisition of aggregator Loan Kit in November 2009 and National Australia Bank’s acquisition of Challenger Financial Services Group’s aggregator business the same month.

The need to comply with requirements under the National Consumer Credit Protection Act would encourage more consolidation, Mr Symond said.

and this from Friday.

Have you noticed that the banks are getting tougher on lending?

You could be excused for thinking that it has something to do with the Global Financial Crisis, but it has more to do with the National Consumer Credit Protection Act.  The Act came into force earlier this year and among many things is supposed to make the lender responsible for verifying the customer’s financial situation and their capacity to pay without ‘substantial hardship’.

The bottom line is that if you are over 45 and can’t demonstrate how you will be able to repay a 30-year loan, then there is every likelihood you will get knocked back. With doubt about future price growth, your guarantee that you can sell the property if you fall on hard times is no longer a comfort to banks.

I met with the owner of a large financial planning firm this week who told me that a growing number of property owners are facing the reality that their homes are now worth less than what they borrowed. The perils of the 100 per cent loan!

Mortgage Choice compliance and corporate standard manager Tim Donahoo points out in Money Magazine that some borrowers who were given pre-approval at the end of last year find they no longer qualify because of the tighter regulations.

Those most at risk of being knocked back are older borrowers, self employed, pregnant women, retirees looking to reverse mortgage as a solution and even those with high credit card debt.

It seems that my earlier predictions of this legislation were correct. It will be interesting to see if there is any pressure to repeal this legislation if the housing market contracts further.

Update:

It seems I was too slow with my “repeal” talk. As noted by the comments below, ASIC has very recently made some significant changes to its regulatory guide.

The problem is that these updates seem to be a complete “rollover” by ASIC which now make me wonder why anyone even bothered with the legislation in the first place.
On Page 5 of the regulatory guide it states that the point of the NCCP Act is:
The primary obligation is to conduct an assessment that the credit contract or lease is ‘not unsuitable’ for the consumer: see Section C. A contract will be unsuitable where either:
(a) it does not meet the consumer’s requirements and objectives; or
(b) the consumer will be unable to meet the repayments, either at all or only with substantial hardship.
Yet after the latest update two very significant additions have been made to the guidelines.

RG 209.69 – Under the National Credit Act, it is presumed that, if a consumer will only be able to comply with their financial obligations under the credit contract by selling their principal place of residence, then the consumer could only comply with those obligations with substantial hardship, unless the contrary is established: see s118(3), 131(3), 142(3) and 156(3). The effect of this is that where a consumer establishes that they could only meet the repayments by selling their home, then the onus is on the credit provider or credit assistance provider to establish that the credit contract is ‘not unsuitable’. The law allows credit providers and credit assistance providers to exercise judgement in the application of this requirement.

So now even when the person cannot “actually” afford the new credit the credit provider can use their economic crystal ball to decide that they can. To top it off  is this example on Page 25

Example 7 –  A female consumer applying for a 25-year principal and interest home loan to purchase a new home is currently employed and can demonstrate capacity to meet repayments under the proposed loanhowever, she is 55 years old and intends to retire at age 65, with a post-retirement income insufficient to meet repayment obligations without substantial hardship. As it is likely the consumer could only meet her financial obligations post retirement by selling the home, it appears at first view that the presumption in s118(3) applies and, as a result, the loan would be unsuitable.
The lender’s inquiries about her requirements and objectives, however, reveal that she has planned for her future change in financial circumstances and, at the point that she can no longer comfortably afford repayments, intends to sell the home and downsize. She does not wish to purchase a smaller home until this time, however, and also considers the home she is currently purchasing has greater potential to appreciate in value in the years before she has to sell it. Given her expressed intent, if her likely equity position will be such that she can readily pay the outstanding balance of the loan at the time of the planned sale, it is reasonable to assess the loan as ‘not unsuitable’.
Maybe it is just me, but that entire example seems to be exactly what the legislation was intended to stop, that is, people being given loans they couldn’t actually afford based on ONLY the assumption that property values will increase in the future. The entire application is deemed “not unsuitable” because the consumers current place of residence is considered to have the “potential to appreciate in value”, yet without that assumption there is no way the consumer could “reasonably” meet their financial obligations.

What a joke !! Why did they even bother in the first place ?

Comments

  1. If this Act is repealed or modified doe that mean we can vote for a new party at the Federal elections?

    The Bankers Party.
    Cut out the middleman politician.

  2. “The cheaper prices close to the city – prices up to $600,000 or $700,000 – are still quite good because you’ve got first home buyers and small investors vying for those properties.”

    That says it all really – when the director of a major mortgage provider thinks 600k to 700k is first home buyer territory, then the people at the top have completely lost the plot on responsible lending. Despite my libertarian leanings, this legislation obviously could not have come soon enough.

    • I have libertarian leanings as well, since when does piecemeal legislation assist any market?

      Then again is that the libertarian view?

      I doubt it.

      “Libertarianism includes diverse beliefs and organizations–all advocate either the minimization or the elimination of the state, and the goal of maximizing individual liberty and freedom.”

  3. the lego is irrelevant at this point just political musterbating. they know prices are to big for 1st time buyers and will correct without the crappy lego.
    if people decide to borrow and speculate then its on them and those who lent no? A politian knows how to collect taxes, coudnt run a corner milk bar.

    • You can bet there has been a fair degree of lobbying by the Mortgage Finance Industry and the Banks in the background. But what sort of strings have to pulled to get ASIC to bend the rules?

      Who is tainted and can they be “outed”?

  4. I have already started hearing of mortgage brokers either going broke or significantly downsizing. Whilst I think the NCCP may have had some good effects (other than that pointless paper shuffling) I honestly think there are better ways of raising lending standards.

    Minimum LVR’s for one, along with a maximum percentage of income spent on the home. As well as plenty of other ideas that have been brought up.

    Hell, I’d be happy with the NCCP if all we needed to do was an income and expenditure analysis of the applicant, one extra form. But, in some cases, there can be 6 additional forms, most of which say exactly the same things as the others. Talk about pointless.

  5. better lending standards ey? LOL who are the smart 1’s who allow negative gearing? The blind are trying to lead the blind?
    If you wanted better “regulation” you could just as easily make the down payment 50% couldnt you? Although then people would have to save, and seeing that real wages are at 1973 or so levels the only way to make them feel “wealthy” was with an illusion. Sold down the river for illusions…..

  6. Who needs to repeal when you have ASIC?

    Seems Commissioner Peter Boxall went to water when confronted with the story of a 59 year old women with $20,000 in super who couldn’t get a home loan.

    Said he We are concerned by reports of older borrowers whose employment will reduce, or cease, before the end of the loan term, being refused loans,”

    “The new responsible lending requirements in the National Credit Act are an important protection for consumers, but they should not be an inflexible barrier to credit for any segment of the population, and should not prevent consumers obtaining credit that they can reasonably afford.”

    Looks like the banking pond scum are going to run the line that it is your human right to enjoy a foreclosure in a few years!

    http://www.news.com.au/money/property/asic-gives-banks-green-light-to-relax-loan-rules/story-e6frfmd0-1226044315633

  7. Should be called the “She’ll be right” policy.

    Just because there’s no calculated way to repay the loan doesn’t mean that they shouldn’t get one – after all, it worked so well for those American NINJA’s.

  8. it is reasonable to assess the loan as ‘not unsuitable’

    Of course, over time, a more nuanced approach could well allow a category of ‘likely to be not unsuitable’.

    Regrettably further economic deterioration may lead to a status of ‘unlikely to be not unsuitable’ while moving forward …

  9. “She considers the home she is currently purchasing has greater potential to appreciate in value in the years before she has to sell it”

    Since when did what a borrower “considers” become grounds for assessing their loan? I’m sure everyone who applies for a business loan “considers” their business sure to be a roaring success…

  10. What the big print giveth, the small print taketh.

    First corrupt the vocabulary-Lenin.

    This is both ominuous and dangerous.

    The banks have over reached in the debt arena, mainly in housing and derivatives.

    The government has over reached on its reliance on housing and property.

    Both are way in over their heads.

    Jobs are not guaranteed, as the financial panic has shown.

    There is one source of funds out of their reach-pension funds.

    This is a backdoor, white ant strategy with populism written all over it.

    Good cop, bad cop. Both desperately need the funds to keep the ponzi going.

    The government will allow it ,as long as the government is covered from blowback. Risk in the public arena has been transferred to the banks, further out the curve. Don’t blame us ,we put the NCCPA in place to prevent this. There is the lock.

    Bankers don’t care what you call them as long as the word rich or wealthy is in there somewhere.

    Asic has provided the banks with a backdoor key to the lock.A toothless paper tiger whore. Just another fall guy in the scam.

    How much do you have in super? Oh, good! That should be enough to service the housing loan portion remaining.

    Easy. Do the sums. How much morgtgage debt? How much in super?

    Gotta give it to those Keynesian bankers and politicians-we owe it to ourselves and in the long run we are all dead. (Thanks Stevens and Swann-the SS).

    Your economics, your bankers , your politicians… you deserve everything you get.

    The housing industry as the parrot syndrome. A 24 carat cage but no water or birdfood. Only a mirror so you can see the f..wit that put you in this prison. Polly wants a cracker, Polly wants a drink but unfortunately the only words Polly knows is -Polly wants a loan.
    Psycho conditioning of the masses-Pavlov’s dog.

    Government guarantees for banks, covered bonds, rmbs.

    Extend and pretend until the SHTF. Then government will go into crisis management mode ( no one could have seen the GFC, no one could have seen the flood coming, etc.) and allow the tapping of superfunds. On a temporary basis, or hardship case, which we all know will be permanent open slather once commenced. The Irish Government set the precedent on this.

    Game, set and match. Private incomes, the commodities (hard and soft) income, and both superannuation principle and income. All to go down the debt hole.

    Say it ain’t so. Unfortunately, I can’t- the people have an IQ smaller than their shoe size and the attention span of a mayfly.

    Bronzed Aussies into battered ANZAC’s and the housing/debt industry into the mausoleum industry.

    Farewell to the Pharaohs of the Great Southern Land. Tombs made of financial millstones.

  11. DE I think you’ve pointed out what we bankers would call a “loophole” in the legislation.

    Could be the result of lobbying or an honest oversight.

    However, my read of the wording in the regulatory guide is that this ends up making the borrower responsible for the loan (based on her view on property prices in Example 7). The idea of the legislation I would have thought was to transfer the responsibility to the lender.

    I’m surprised.

    On a general level, I’m amazed how gullible and financially illiterate even highly educated people can be (including my loved ones, I might add).

    So part of the fault is the customer’s for getting the stupid loan. Can’t blame the bank for letting you borrow when you thought you could pay it back and make some money for yourself.