Will APRA neutralise the mortgage free radical?

From the SMH:

All banks and lenders will be visited by the Australian Prudential Regulation Authority (APRA) in the first three months of 2015, and if risky practices are identified, they face increased scrutiny.

…”This is a measured and targeted response to emerging pressures in the housing market,” he said.

“These steps represent a dialling up in the intensity of APRA’s supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual authorised deposit-taking institutions.

“There are other steps open to APRA, should risks intensify or lending standards weaken and … we will continue to keep these under active review.”

We shall see if this is still “wet lettuce” regulation or not. Mac Bank is currently growing investment mortgage lending at 107% per annum off a smallish base. Nonetheless, this is ridiculous and the free radical must be neutralised behind APRA’s 10% line in the sand. If only that is achieved then the marginal investment borrower will be crimped.

David Llewellyn-Smith
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  1. Sign of the times and a little bit disappointing that Australia’s only real investment bank has thrown in the towel and become a mortgage pimp. But a guess its previous business model was no better. Maybe it always was a pimp… Flogging off whatever is popular at the time.

  2. Are they doing anything about brokers pushing interest only loans. In particular, encouraging first home owners to take out interest only investment loans first and move in later?

    Who cares if loan growth is restricted to “JUST” 10%.

    • IO loans don’t allow borrowers to borrow more, in fact it reduces borrowing capacity.

      You are parroting a myth.

      • Yes please elaborate. Also if you could enlighten us on why they’ve suddenly become a lot more popular (and why the authorities have noted this as a concern).

        Any alternative explanations?

      • Andy, all loans must service to zero over the amortised period. That is the P&I period of the loan.

        If a borrower asks for a 30 year period with a 5 year initial interest only period, then that reduces the amortised period to 25 years which increases the monthly repayment amounts that are used in the serviceability calculation, which reduces the size of the loan available to them.

        It is counter-intuitive I know, but I hope that explains it.

      • Yes that makes.

        The repayments later on will be higher and the serviceability test is on that higher amount.

        You would then expect much lower interest only loans as prices and mortgages keep heading up.

        Why is the opposite happening?

      • @ melbourneguy – I think the growing popularity is due mainly to a far better informed group of investors entering the market and that’s mainly Gen Y. Think of the difference in information available now online to 20 years ago when hardly anyone even had an internet connection.

        Back then only people who consulted their accountants knew how to maximise their tax deductions, but now everyone is an online expert or they read the “tips’ from multiple website.

        It’s also become a bit of a strategy for young couple to ask for I/O for the first couple of years to err on the conservative side as they get used to what is a new experience for them.

        All loans with initial I/O are recorded as I/O loans even though the maximum I/O term is 5 years.

        Investors are usually allowed (subject to good loan conduct) to reset those I/O periods twice which is 15 years I/O in total.

        PPOR borrowers are only allowed to reset once (total 10 years I/O) subject to loan conduct and very importantly the bread winners age.

        I’m quoting CBA policy above, but they are the market standard.

        The only true I/O loan is a Line of Credit and I can’t even remember the last time someone asked for one.

      • @ jaybone – loans have to service on existing incomes – it’s an “as is where is deal”

        I had a case recently where a good client with a lot of spare money wanted a low LVR loan to buy, but he and his wife have taken 12 months off to travel with written job offers on the table, but the banks won’t talk to them until they resume work. Not even an alternate lender would take the application.

        It’s not a wet lettuce leaf at all.

      • You have wrong (creditor) view on this.

        When I said ” the only way to make mortgages (and house prices) grow” I was referring to borrowers willingness to get into higher debt.

        Everyone knows that there are almost no limitations in amount of credit banks are willing to provide to borrowers (except some LVR rules). In extreme cases everyone can still get lowDoc and NoDoc loans at will.

        LVR rules are not limiting mortgage growth because house prices are going up, so the only limit is imposed by stagnation in people’s income and ability to meet repayments.

        IO loans give people opportunity to take higher mortgages counting on future income growth. They also think that even if income stays low or even falls they will be able to sell with nice capital gain.

        so bottom line is that IOs are just obscured version of US style adjustable-rate mortgages with low honeymoon rates for first 5 or so years. IOs are not different to these subprime loans in any way and ultimately they will lead to the same outcome: people losing homes on masses.

      • doctorX said –
        “In extreme cases everyone can still get lowDoc and NoDoc loans at will.”

        I’m sorry but that’s just wrong and it’s been wrong for a very long time. Only someone who can prove they have a genuine business can get a low doc loan now and no doc loans have been dead for years.

        To get a low doc loan you need genuine business bank account statements showing a flow of income and expenses as any trading enterprise would have, as well as BAS returns supported from ATO portal printouts. This is not an exact method of determining income but it does filter out all the non-compliant borrowers who got low doc loans in the past, and it give the lender some basis to determine what they anticipate an income to be.

        Some lenders will accept a declaration from an accountant. Before you make assumptions about that, there is virtually zero chance of finding an accountant willing to risk their livelihood and have their rear end sued off them just to get a shonky loan for a client, they are professionals with far too much to lose.

        All of these things get checked. The lenders search lists of professional to ensure they exist and then they phone them to make sure the declaration isn’t fake.

        There is no “nudge nudge wink wink” and hasn’t been for a long long time

        Lending quality is far higher than people think.

      • @PF

        You are saying that to get lowDoc and NoDoc loan someone has to provide even more documents than for normal loan. Why would they still be called low and no doc than?

        BTW low doc and no doc weren’t my point anyway.

        My point is that banks are willing to provide as much credit as people are willing to take as long as LVR is too high (banks are not afraid of giving larg sums to people who may default as long as they can cover loses after default). I know a case where bank (one of big 4) approved loan with IO repayment equals 60% of couples combined after tax income leaving them only 2000 a month for all other expenses.

        IO loans are just obscure kind of adjustable loans with low introductory rate that caused property bubble in USA. Scary part is that IO in Australia are more popular than ARMs in USA in early 2000s

      • @PF that’s very interesting appreciate you explaining that. Makes sense. Has the 10% reduction in rates enabled a commensurate increase in borrowed amounts?

      • DoctorX
        Low doc loans are for business owners who have not yet had their accountant lodge their most recent tax returns. They still need to prove turnover and that they have paid their GST, employees tax and their own company tax in their normal BAS payments. Monthly, quarterly, whatever their arrangement is.

        To be honest the scenario that you gave me can’t happen, it doesn’t work mathematically for several reasons so I think someone is pulling your very receptive leg, although committing to 60% of income certainly can occur. It really depends on the circumstances.

        For someone earning $30,000 pa they can’rt afford to commit to 30% of their income as repayments, but someone earning $500,000 pa can afford to commit to 60% of their income if they choose to.

        Frankly the notion that 30% of income as a hard and fast rule is BS – it never was the case decades ago. Urban myth spread by people who don’t know. Banks used 30% as a yardstick and then looked for circumstances that might cause that to be moved up or down. They only did that because calculations were less sophisticated and all done by hand with no scope to calculate tax obligations, family size and living expenses, and special circumstances. Now they have to tools to calculate exactly how much someone can afford to repay.

        You are comparing ARM loans in the USA with I/O loans here .- may as well compare Llama’s with Arab Stallions and then wonder why their racing times are considerably different.

        Things are often not as you imagine them to be.

      • No Andy, that can’t happen until the banks reduce their rates. All current applications have to service on current rates. New rates kick in as at the 20th for most lenders.

        It will be interesting to see whether the banks do alter their assessment rate as per my post below,

  3. This is the economic equivalent of sending a strongly worded letter! reminds me of the movie ‘Team America’

    Kim Jong-il: Aw, Hans Brix!

    Hans Blix: Let me look around, so I can ease the UN’s collective mind.

    Kim Jong-il: Hans, ya-breakin’ my barrs here, Hans, ya breakin’ my barrs!

    Hans Blix: I’m sorry, but the UN must be firm with you. Let me see your whole palace, or else…

    Kim Jong-il: Or erse what?

    Hans Blix: Or else we will be very, very angry with you… And we will write you a letter, telling you how angry we are.

    Kim Jong-il: Ok, I show you around. First, move to your to reft a rittle.

    [Blix moves]

    Kim Jong-il: Rittle more.

    [moves again]

    Kim Jong-il: Good.

    [opens trap door then walks to shark tank]

  4. The measures adopted so far by APRA certainly are not “wet lettuce” but they are not quite “aggressive” either.

    Macquarie dialled back their lending during the GFC when they were forced to completely restructure and become an ADI – previously they securitised everything and used short term funding. I don’t see why they would be concerned about one bank changing their market presence and market share as long as the broader market is stable.

    APRA have recently stated that they would like lenders to use ‘assessment rates” below 7% and most lenders right now are around or just marginally below that mark although that can get technical with discounts allowed on professional products.

    Unless APRA adjust that benchmark downward in the expectation that rates will be lower for a very long time, the test will be whether banks are able to independently reduce their assessment rates to increase a borrowers ability to borrow a larger loan, or will they be forced to draw a line in the sand.

  5. These new measures are substantial, and they’re the reason the RBA was able to cut rates so low on Tuesday. The banks know they’re being watched now; they know they’re under increased scrutiny and that gives the RBA the flexibility it needs to keep cutting. It will need to keep cutting. We are going to ZIRP, but we couldn’t do that without APRA’s MP measures.