BOQ joins macroprudential retreat

Cross-posted from Martin North’s DFA blog:

Bank of Queensland Limited (Bank of Queensland) has improved its lending practices following ASIC’s concerns about the way it assessed applications for home loans.

ASIC was concerned that Bank of Queensland was using a benchmark figure, the Henderson Poverty Index (HPI), to estimate the living expenses of consumers applying for home loans, rather than asking borrowers about their actual expenses.

In ASIC’s view, the lack of enquiry about actual expenses, and reliance solely on HPI (which is used as a measure for estimating the minimum amount of money families of different sizes need to cover basic essential needs) was not consistent with responsible lending obligations imposed by the National Credit Act.

Bank of Queensland has updated its home loan application forms to obtain more information about a customer’s living expenses. The bank will carry out an assessment of the suitability of a loan using the higher of either the living expense figure supplied by the customer or an appropriate benchmark figure.

ASIC notes that the bank will continue to review the circumstances of borrowers who go into hardship or default to ensure that they have not been disadvantaged by a loan provided prior to the change in policy.

ASIC Deputy Chairman Peter Kell said, ‘This outcome is part of ASIC’s ongoing focus on the lending industry’s compliance with responsible lending laws.  Lenders must carry out inquiries to determine whether a credit contract will be unsuitable for a consumer. Using benchmark figures such as the Henderson Poverty Index alone to estimate a consumer’s financial position is not sufficient to meet this requirement.’

In November 2014, ASIC updated Regulatory Guide 209 Credit licensing: Responsible lending conduct (RG 209) to clarify that credit licensees cannot rely solely on benchmark living expense figures, and must also make inquiries about the borrowers’ actual living expenses.

ASIC acknowledges the co-operation of Bank of Queensland in resolving this issue.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Bank of Queensland has updated its home loan application forms to obtain more information about a customer’s living expenses. The bank will carry out an assessment of the suitability of a loan using the higher of either the living expense figure supplied by the customer or an appropriate benchmark figure.

    and they call this prudent lending?
    This is no much different than no-doc prudency

    • It’s completely different in my opinion… they still have to provide income documentation.

      What are you suggesting living costs should be based on if not the higher of the poverty index or those provided by the borrower?

      • this should be very simple, bank looks into income and savings over the past few years and that makes it easy to calculate living expenses = income – saving – rent (if FHBs)

      • Does any mortgage lender anywhere in the world go to these lengths? Not that I’m aware of. It would be very hard to perform this “simple” measure as many people have various accounts across various banking institutions, have once off costs, have once off incoming payments, may juggle accounts between more than 1 person…

        I don’t think your comparison to no-doc loans is reasonable and think the methodology you’ve suggested for measuring living costs is unworkable and unreasonable.

      • this used to be normal back when (usually small) creditors used to care, they would do this unofficially just by looking into numbers and making decision.
        Practically it’s very simple to do, income from tax return and savings from whatever borrower reported (bank statements, etc.). If a borrower is not willing to report some savings that’s fine, he is less likely to get loan and less likely to get bigger one.

        I was not saying that these loans are same as no-doc, but rather that this policy is very similar, blindly trusting a borrower about his/her ability to repay mortgage is a policy used in no/low doc lending.

        Accepting false expense numbers affects ability to repay the loan the same way accepting false income numbers do.

        e.g. an alcoholic or a drug addict or a gambler or …, who spends $300 pw on his addition declares on application that his life expenses are only $400 pw would have the same effect on his ability to repay mortgage as if he declared his income to be few hundred dollars higher.

      • flyingfoxMEMBER

        Not just blindly trusting but in many cases couching the borrower to get “the best outcome”.

  2. flyingfoxMEMBER

    We’re heading into dangerous territory especially if the ATO also starts cracking down into foreign purchases.

  3. arescarti42MEMBER

    Where does the army of mortgage brokers fit into all of this?

    I thought half the problem was mortgage brokers deliberately falsifying loan application documents with the quiet support of the banks.

  4. I read somewhere that every crash in history starts with a tightening of credit. This appears to be right on target.

    • When I lived in the US, just before the Crash, the radio kept playing an ad that ran “Bad credit? No credit? No problem!”

      They stopped playing that ad after the GFC

    • It’s logical.
      Banks also see some red flags, but by then, it’s too late.
      The people who are locked in on 2-3 properties on average 500-600K each, will try to flip these properties to new people for 700-750K in 2017+ but the banks wont be able to loan these people the 700-750K, instead will be maxed out 450-550K, so now the people with 2-3 properties who speculated and wanting to cash out will panic and will accept the “tax” savings via negative gearing as a win and sell the house the same price they bought it. But the market will be flooded… so a more desperate person, especially those who are losing their jobs will take 10-20% off so that they can get out of the market ASAP…. this will spread. Then you have a market where house have fallen 30-40%… some people holding on houses with negative equity.

      Some people will say the “demand” will beat the supply so the price wont drop much. But the banks new policies will prevent your typical 50-70K income earner on purchasing a 500K house.

      Those with 100-200K savings can take advantage and snatch houses worth 500-600K now for 350-400K..

      The “rich” wont be affected financially much. They dont put all their eggs on 1 basket. They’ll cop the 200-300K losses they have on 2-3 of their properties but take it as a “bad” year. They will have other investments that will absorb the losses.

      But for the mums and dads and retiring boomers… especially the ones who speculated on getting a clean 300-400K profit off their properties might be in danger.

      • When they say “300-400K profit”, they never take interest paid, stamp duty, agent’s commission on sales and other expenses into account.

        Oh, and the phrase “opportunity cost” flies over their head.

      • Banks are in over their heads every bit as much as the mug punters they over lent to.

        ” Banks need home loan lending growth to make their business work. ” from Martin North.

        This so called tightening will NOT happen.

    • Tighter credit is absolutely what caused the property downturn in the US. If people had been able to access the credit they had pre-crash, there would have been no crash. Sounds weird but thats what happened.

      Still an issue today. Many properties can be bought (assume 10% deposit) for less than you can rent them for, and that with a 30 year fix. What stops prices appreciating is the far tighter credit conditions than used to exist.

      But we have a LONG way to go with tighter credit in Aus before this effect takes hold.

  5. That is utterly appalling. That a bank was lending up to a level which would see the borrower in poverty is shocking even to me.

    • I can’t seem to find the comments but I remember a few discussions here at MB a year or two ago about using the HPI as a benchmark for expenses. Based on what I remember, I’d be surprised if BOQ was the only one who was doing so.

  6. LabrynthMEMBER

    So, does that mean any borrower who took a loan out with BOQ prior to the changes has an out if they default on their mortgage?

    “ASIC notes that the bank will continue to review the circumstances of borrowers who go into hardship or default to ensure that they have not been disadvantaged by a loan provided prior to the change in policy.”

    So can the customers of BOQ walk into the bank and drop the keys off, re-course free?

    Sounds like something very familiar. Time will tell, only when the economy is in the gutter do all the mistakes of the boom come out of the woodwork.

  7. Guys, I’ve been in the financial advice industry since 2005, and have seen a lot of lending over that time. I was fresh in 2006 and at the time it felt like it was raining money. Investment LOCs, Low Docs, Margin Loans, Leveraged Products, it was easy, banks where throwing around money. Doomed to fail but easy.

    In my opinion people are over stating the ‘ease’ in which banks lend money today. This is not 2006-7, the banks are doing their due diligence, they are assessing at a high interest rate (IO loans assessed on P&I terms, etc). I think the property market is expensive, and in some cases drastically overpriced, but I don’t think this is due to bank practices. Yes low interest rates play a part, but not loose lending. For a handful of professions they go easily to 90% LVR with no LMI, but in this case they are really relying on the personal guarantees given by the income earner.

    I’m interested to know why most on MB assume the banks are freely throwing around funds?

    PS: I am not, and never have been, employed by a bank.

    • Random PunterMEMBER

      > I’m interested to know why most on MB assume the banks are freely throwing around funds?
      For me it’s mostly anecdotal. Friends, colleagues, and assorted jerks love talking up the fact that they’ve just “invested” in housing, so making a reasonable guess at their income it becomes a simple exercise to hunt down sales data and back calculate to figure out what kind of outrageous fortune has been obtained from the banks and what the monthly payments look like.

      • “assorted jerks”

        hahah I love it. I bet its the old ‘get on the ladder mate’ type of crap.

    • flyingfoxMEMBER

      Hmm lets start a list:

      1) Random trolls through the property forums brings up some absolute gems.
      2) The BoQ statement above.
      3) The exercises APRA did that led to the current changes.
      4) The fact that the bonuses of everyone from the teller to the head hancho is linked to how much debt they peddle.
      5) The fact that every time I walk into a branch I am preapproved for something or another. I have repeatedly got laughed at for not taking personal loans.
      6) The fact that no modelling actually takes the equity supporting these loans into account.
      7) The fact that Sydney house prices are approaching 1M.
      8) The fact that I have been personally told twice to put down loans from parents as gifts.
      9) The fact that under conservative modelling most of these multi million dollar loans will never be able to be paid off.

      the list goes on …

      • 1) Random trolls through the property forums brings up some absolute gems.

        If you’re referring to me mate, get a grip.

        2) The BoQ statement above.

        The banks are slowing loan growth, it’s like they are applying a slight handbrake given APRAs concerns. APRA is obviously concerned about overheating due to finance. I suggest something else is driving the prices. Home lending is not increasing anywhere near the rates it used too. Check ABS data.

        3) The exercises APRA did that led to the current changes.

        Fair enough. I am only telling you what I have seen. In the last few months I’ve probably seen applications for a combined $15-20M of borrowing secured against properties. To me it is vastly different from 2006/7, vastly. Back then I saw banks ignore investment lending in their serviceability calculations, doing low docs, etc. That was crazy, now it’s different.

        4) The fact that the bonuses of everyone from the teller to the head hancho is linked to how much debt they peddle.

        Granted it’s a motivation but, as I’ve said, I’m not seeing loose lending.

        5) The fact that every time I walk into a branch I am preapproved for something or another. I have repeatedly got laughed at for not taking personal loans.

        Big deal. Are you saying you can’t service what you’ve been offered?

        6) The fact that no modelling actually takes the equity supporting these loans into account.

        It does to the extent the banks are not lending more than the ‘value’ of the property. Also given some of these market moves bank valuations are behind market price at the moment.

        7) The fact that Sydney house prices are approaching 1M.

        Yep, crazy. As I’ve said finance growth doesn’t justify the price growth we are seeing. In my opinion there’s more to it (say foreign capital?)

        8) The fact that I have been personally told twice to put down loans from parents as gifts.

        Yes this happens. What is it really a gift or a loan? Have your parents taken a charge over the property? Have your parents borrowed the funds? If so it’s already secured against an asset and assessed on their incomes. Sure, tell your missus and the courts it’s a loan for asset protection purposes but a lot of the time it is essentially a gift, or early access to inheritance.

        9) The fact that under conservative modelling most of these multi million dollar loans will never be able to be paid off.

        They’re assessed on P&I terms at around 7 – 8% interest.

        I think what most people base this issue on is anecdotal.

        I agree with a few of the points about fundamentals. I’m CFA qualified, I’ve done fundamentals to death. The question is what are the fundamentals? It’s subjective to say the least.

        In my opinion, in some markets (Camberwell, Glen Waverley, etc, etc) things are beyond hot at the moment. I’ve seen properties worth $1.4M at the start of the year getting more than $1.8M now. I’m considering selling at the moment, truthfully if it wasn’t for some ongoing planning being done I would consider it more seriously. The property has risen (apparently) 100% in 26 months. Clearly I don’t think this is normal. My point is that I don’t think it’s the banks driving this by reckless lending. I think, more likely than not, it’s foreign capital. When will it stop? I have no idea, but it wouldn’t be pretty if it slowed suddenly.

        One of the biggest potential disasters if the Chinese money stops is areas like Southbank, Docklands, etc. These apartments sold very easily off the plan. The primary market is (was) extremely liquid (check the number of sales booths at Box Hill Centro) but the secondary market is much more shallow. Imagine what would happen if some offshore holders were forced to sell into a shallow market….

    • ‘………in this case they are really relying on the personal guarantees given by the income earner’

      Is this where you cough up a kidney in the event you lose your job? What does it mean and moreso what is it worth beyond the paper it’s written on?

      • Jimbo,

        the personal guarantees I’ve seen (some over SMSF loans also) usually involve the client having a lot of insurance. Life, TPD, trauma, IP. Etc. In any case I’ve personally only seen this done (traditional LVRs breached and PG relied upon) for those in the 7 figures. So in these cases they could afford the loan, but the LVR limits were breached. THe banks applied a more agressive repayment schedule for the first few years of the loan (to get it back to a ‘normal’ LVR). In effect it’s a bit like unsecured lending albeit at much better rates.

    • “they are really relying on the personal guarantees given by the income earner.”

      Verifying income is the lenders fiduciary responsibility, regardless of claims made by the applicant.

      Skippy… The securitization process is the key driver here, profit taking in the short term on long term risk, that and bonuses are riding on it.

      • flyingfoxMEMBER

        The securitization process is the key driver here, profit taking in the short term on long term risk, that and bonuses are riding on it.

        Skippy strike again

      • FF,

        If you read Wray and Black tho its not “”securitization” in of its self, that is at issue, its the people exploiting it for personal gain.

        The problem now is its directly attached to the moeny supply and capital formation, too tweak it to hard through “any means” could adversely affect the money supply, shades of 08 cubed.

        Financial and monetary EOD on an epic scale and some nutter with their back to the wall… might just go MAD….

        Skippy…. everything is infected…. sigh….

    • The practices may not be flawed but the fundamentals they are based on are flawed.

      Interest only loans – we’re one of handful of countries that offer it. Valuations based on market price and not fundamentals? Good grief to the bank lending 1M for a shoebox if the deluded market says so.