Is APRA finally biting on high LVR loans?

dfa

The AFR carries a story today about Suncorp cutting back high LVR loans:

With regulators pressuring banks not to cut credit standards amid fierce competition for customers, new chief executive John Nesbitt said on Thursday the bank was trying to be a “wise, calm head in a pretty hot market”.

Suncorp, Australia’s fifth-largest bank, has recently made a significant cut in its writing of new mortgages with loan-to-valuation ratios of 90 per cent and Mr Nesbitt said it was being careful towards loans with LVRs between 80 and 90 per cent.

“We’re particularly mindful that where the market is sitting today, you’ve got a low interest rate environment, it’s inevitable, given global ­markets and where the Australian yield curve is positioned, that rates are going to go up,” he said in an interview.

Actually, it’s inevitable that rates go lower but let that slide (I can’t vouch for 30 years after all). It’s not impossible that one banker may choose to be more prudent than others in a heated cycle, it happens occasionally, but finance theory generally suggests that all banks lend as much as possible all of the time, so we may be seeing the hand of the regulator here, with Suncorp deciding to lead for the brand benefit.

Comments

  1. If its APRA, it will be visible across the market.

    Whilst I believe that higher considerably higher capital should be allocated to high LVR loans. I don’t believe rules that eliminate are the solution.

    Serviceability ratios are more important to tighten as they have a much more direct effect on house prices and reducing systemic risk

    • GunnamattaMEMBER

      Would you care to comment on the sort of circumstances which would prompt Suncorp to make such a move, and how likely those would be to be replicated elsewhere? ..beyond APRA I mean (genuine Q)

    • Peter was suggesting there was intervention in the market by regulators but not a industry wide approach but case by case which he thinks is a LVR limiter but behind the scenes. Paraphrasing here but that’s roughly his comment.

      If that is true and APRA have called in on Suncorp, I can’t help but feel that is poor policy where they are creating distortions in the market. If they believe Suncorp need to reigned in they should be doing it to all of the banks in a blanket manner to ensure a level playing field. That’s if it is APRA and not Suncorp doing it unilaterally of course.

      Peter?

      • I regularly deal with Suncorp. There is absolutely NO confusion on this point, APRA have gone to every lender and tightened their lending criteria.

        It’s important to understand that although to most people banks all look the same, they actually aren’t, they all have their market strengths and areas they prefer to avoid, so it’s not a one size fits all regulation that seems to have been implemented.

        Instead they have audited each lenders systems and made changes where they thought necessary for that particular client demographic and risk profile.

        I know this because every lender has told me much the same story and the changes implemented directly affect my work.

        Capacity to service any proposed loan is absolutely paramount these days. There is no work around.

        Lenders are moving away from financing the LMI cost on 95% loans, so equity has moved from a minimum of 5% to about 8%. That may not seem much but on a $500K house it’s an extra $15K and buyers notice that. It’s hard for people on low wages to save the extra while they are still paying rent.

        There have been no press announcements that I’m aware of but the changes are real.

      • “Capacity to service any proposed loan is absolutely paramount these days”

        Hmmm, must I again recount my tale of how the NAB would lend me 8-9x my joint income? Hardly an isolated case either, in our circle of friends I know two other couples who own homes they can’t afford to live in (rent them out and –ve gear).

      • Yes please do and at the same time supply full pay slips, other income sources, proposed rental incomes, credit card details, savings account statements, loan contracts for any vehicle and equipment finance, Centrelink statements confirming any benefits that you or your spouse are entitled to, and a copy of your credit file.

        Only then can an evaluation of your narrative be made. Otherwise we could be discussing an unemployed dwarf on disability allowance being granted $5M to buy a waterside mansion.

        No offence davel but I’ve listened to these stories for decades, and the ones like “the bloody bank wouldn’t lend to them and they are such deserving people”

        Whenever I have investigated them the facts never align with the narrative.

      • Obfuscation, Peter. The only thing different about my circumstances (apparently), is that we own both our cars and have no other loans. We own a property overseas, but its equity is only 90k or so.

        NAB offered to lend us $1.9M. The interest on this loan (at a reasonable rate, not the lowest) would be more than 50% of our take home. You can do the maths.

        My own observation since I moved to Aus is that lending standards are very questionnable. This just confirmed that.

      • To be fair Davel, that $90k probably goes a long way towards covering their expected loss given default, even on $1.9 mil and they’ll make you take out mortgage insurance anyway, so that even if you default and your house price drops 20% they don’t lose.

        Essentially, lending to you is still almost risk free as long as you have income greater than the payments, and some history of paying back loans, and of course, there’s no major shocks in the market.

      • @ davel,

        I’ve just run some numbers on two people earning $90,000 each, no children, no negative gearing, no other liabilities or assets and the best that I can get is $1.3M

        Most lenders are about $1.2M

        A credit card or children would reduce the outcome considerably.

        The property overseas would add nothing even if it’s positively geared. The return would be adjusted down twice, once to allow for costs and then again to allow for forex variations.

      • o/o

        An IP would have the advantage of the rental income plus the NG but the disadvantage of ongoing rental cost. Nevertheless given realistic market rental income it would increase the available loan.

        If you could give me a buying price, a rental return and a rental cost I can complete the exercise if that is what you want.

    • invest-magicMEMBER

      Even serviceability ratios mean jack$.

      There is no protection in extremistan!

      The only way to fix this issue is to keep the risk with the banks. Equity holders and bond holders can wear it. Depositors should have a choice if they want to be creditors and merely use banks as a custodian (bailment).

      No RBA lender of last resort.

      The rest will take care of itself. Need to get rid of the moral hazard. When your a$$ is the line, behaviour will change.

      Fat chance of ever bringing honesty into this game. Banks getting a free ride on us.

    • This is not the hand of APRA.

      They will not regulate the market through LVR measures because of the impact it would have on small business in Australia. Most small businesses use the equity in their home to fund working capital and get access to debt.

      If there is some king of macroprudential regulation, it will come in the form of loan servacibility.

  2. It is in the interests of everyone that some limits are placed on the capacity of people to blow themselves up with debt.

    The behavioural research is clear many if not most people struggle to assess the future and their investment options with cool calm reason.

    Any number of books to read but that recent book ‘Subliminal’ by Leonard Mlodinow was disturbing if somewhat depressing.

    We place limits on most of the human vices (grog, gambling, smokes, firearms) with good reason, debt should be placed in the same basket.

    The idea that the government should encourage and promote excessive debt is bad enough.

    That they should make the expansion of debt the driving economic force and guarantee those debts and the businesses that supply them is madness.

    Lets hope APRA grow a pair.

    • Silly me I always thought that excessive debt (aka leverage) was just a subset of the vice gambling logically aided by ample quantities of the vice grog. Without large quantities of the later I’m certain the stress of a mega mortgage would kill any sober person, possibly even kill a bogan.

    • +1

      Always useful to remember humans are not rational, and the difficulties in forcing them try to be rational.

  3. May be one bank understood the magnitude of the risk (I.e. all the eggs in one basket (mortgage)?

    APRA is a toothless tiger. Guidelines don’t do anything.

    • carlosthedwarf

      One bank isn’t enough to cause a change in behaviour though, they will just go to one of the big 4 who will happy to shower them with debt.

  4. @Pfh007
    “We place limits on most of the human vices (grog, gambling, smokes, firearms) with good reason, debt should be placed in the same basket.”

    +many

    • Yes! Debt is a cancer. The influx of credit into a market forces all other consumers to also take on debt, whether they like it or not. Want a place to live? Now you have to deal with inflated prices. Want to get an education? Get indebted. Etc etc. This actively and aggressively destroys the quality of life of all citizens.

  5. Sent link to this article to my son, the mortgage broker.
    His response; “… the answer is yes. They have been for sometime, but it has taken a while for them to get the banks to act. They started with the smaller ones and are tackling the bigger ones now.”

  6. Further to above (from the coal-face).

    “APRA has been forcing the banks to change their policies by looking at their percentage of high LVR lending and demanding a certain amount of capital be retained to buffer them in the event of larger than expected losses. Of course the banks don’t want to hold the extra capital because it’s not making them money. So they are offering lower rates for lower LVR lending to try and change the percentages. This seems strange to me as it doesn’t change the dollar amount of the lending in the High LVR range so why should reducing the percentage change the dollar amount of capital being held as a safe guard. I guess they are using the income from the lower end of the book to offset the required capital.

    There are however other factors which mean the situation looks worse than it is:

    – When assessing income banks will either

    1. Be conservative in how much of a client’s income will be used in the calculation of their borrowing capacity.

    2. and/or use a higher rate of interest (7%-8%) when working out the repayment which they are trying to prove the client can afford.

    – Construction Valuations are calculated by adding the price of the land + building contract. These values are retained in the banks records as the value for a particular property despite the fact that a completed dwelling is worth more than the sum of its parts.

    – Banks don’t re-value properties unless there is a refinance request. So a property purchased at high LVR 3 years ago might only show a few percentage points decrease on the original valuation. The actual current market value of the property is, in many cases, tens of thousands more. Also, banks limit any refinance requests to 90% LVR and $10k minimum. So if a high LVR client was to try and refinance in the first few years they would be turned away at the door (no re-valuation would be done). If the same client was upset about this and wanted to change banks, they would face having to pay the Lenders Mortgage Insurance again, this $10k-$15k cost would void any chance of them getting a benefit from refinancing, so they would be turned away again.

    – Really high LVR lending is only allowed for owner occupation. Not investment.

    The weaknesses in the current lending criteria are:

    The Cost-of-living amount used in servicing calculations is, in many cases, too low. However as most people will lie about their actual cost of living to themselves. A lender has 2 choices. 1 – demand a client provide proof of all of their costs and spend a week working out an accurate figure. The logistics of this would completely ruin, what are already difficult to manage, client-lender relationships. 2 – Use a base cost-of-living which is incrementally increased each year (this is what they do). This area will be the next focus for APRA. Auditors are already grilling lenders and brokers who regularly use the minimum cost of living figures without evidencing any investigation. Basically they are pushing for a middle ground between the 2 options mentioned above.

    In regard to all the comments about APRA being toothless etc. Clearly don’t realise the scope of the changes they have implemented. For example, Suncorp was forced a few years ago to change their funding sources from a 10% local 90% overseas mix to a 70% local 30% overseas mix. I can only assume the same pressure was put on other lenders. They have been going from the bottom of the industry to the top and back again looking for weaknesses and trying to reduce them.

    I still don’t think high LVR is the big risk (not saying it’s not a risk). The big risk is people borrowing to their maximum capacity. As mentioned earlier, high LVR is not allowed for investment purchases. If house values reduce it just means I can’t sell my home, but I am still able to meet the loan repayments and carry on.

    If my debt level is such that I can only just afford it, I can’t save money on the side to cover things like unexpected vehicle costs, can’t take proper holidays, high expense times like Christmas\Easter become significantly more stressful etc. etc. So in my view being more conservative with income calculations, using high assessment rates and increasing amounts used for cost-of-living is a more realistic risk mitigation strategy.

    While the big 4 are still technically doing 97% (including LMI) loans…. getting one approved is…. difficult.

    Many smaller lenders are now doing max 95% including LMI and are still very hard to be approved for (i.e. everything else must be very good, employment stability, residential stability, easily meeting affordability, good explanation for why they haven’t saved more).

    Commenting only in the construction of house in new developments area. Thankfully the knock on effect of tightened lending criteria is that it slows price increases. The number of deals falling over at the moment will be frightening the developers as the system is designed to have a buyer ready to go when titles are issued. So a developer only owns the smaller blocks (their product) for a minimum of 2-3 weeks. However, with the deals falling over due to tightened lending, they are forced to refund the $2k-$5k they collected as a deposit and have been using toward development costs and are also left holding a title for another few months while a new buyer goes through the process and incurring the costs involved with owning large numbers of small blocks.”

  7. Ronin8317MEMBER

    When it comes to LVR, the number is rubbery..

    My experience is from the days before the GFC, I bought my villa in 2001 after the introduction of GST with a 200K mortgage (with the 14K First Home Buyer grant) on a salary of 40K. That wasn’t too bad. In 2004, I was ‘forced’ (Asian parent..) into buying an 500K investment property with a 380K interest only mortgage from another lender. My salary was only 50K at the time!! The other 120K was obtained by taking a home equity loan from the house I bought in 2001. While the LVR on the investment property is suppose to be 30%, I actually borrowed 100%!!

    I only survived by moving back with my parent, and renting out my house.