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.
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 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.
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 loanhowever, 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’.
What a joke !! Why did they even bother in the first place ?