Lenders to tighten screws on investors, mortgage brokers

By in Australian Property

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By Leith van Onselen

Leading banking analyst, CLSA’s Brian Johnson, believes that Australia’s prudential regulator, the Australian Prudential Regulatory Authority (APRA), will further tighten capital requirements for investor mortgages. From The Canberra Times:

APRA noted this week Australia was one of several countries where housing investor loans received the same capital treatment as owner-occupier loans, and that this would be the subject of future review.

The comments were contained in an obscure document published on the Basel committee website, in which APRA responded to a review of its implementation of the Basel III rules…

It said it allowed these banks to treat investor loans the same as owner-occupied loans, “whereas a literal reading of Basel III paragraph 231 limits this treatment to owner-occupiers”…

Mr Johnson, a veteran bank analyst, told clients the paragraph probably “implies the concessional capital treatment on investor home loans will be increased”.

Any such increase in capital requirements would be significant for banks, because investor loans account for about 35 per cent of all mortgages in the country…

While other analysts say banks have raised most of the capital required by regulators, Mr Johnson believes the big four banks still have a $30.6 billion capital shortfall. He said the latest comments from APRA suggested this figure might be higher still.

Meanwhile, The AFR is reporting today that “nervous lenders” have begun to apply loan-to-value ratio (LVR) caps in some of the “nation’s richest postcodes” due to growing concerns about falling prices. Mortgage brokers are also being warned about large cash incentives and discounts being offered by developers of off-the-plan apartments:

 “There are growing fears that some lenders could be over-exposed to potential higher rates of default,” said Christopher Foster Ramsay, managing director of Capital Home Loans, a mortgage broker.

‘Blacklists’ of suburbs considered ‘high risk’ are also being reviewed – and extended – by lenders to protect their balance sheets against loan defaults if house buyers breach their loans.

The above tightening of capital requirements and lending criteria represents yet another link in the chain of macro-prudential styled measures that began last year when APRA first introduced its 10% ‘speed limit’ on investor loan growth and boosted its bank serviceability requirements such that an interest rate ‘buffer’ of at least 2% above the loan rate must be applied, with a minimum ‘floor’ assessment rate of at least 7%.

APRA also last year announced an increase in capital requirements for Australian residential mortgage exposures under the Internal Ratings-Based (IRB) approach used by the big four banks and Macquarie. From mid-2016, the average risk weight of residential mortgage exposures using the IRB approach will increase to at least 25% from an average of around 17% currently. This means that the average capital held against the Big Four’s mortgage book will have to rise from less than 1.5% currently to 2%, with Australia’s biggest mortgage lenders – Westpac and the CBA – most affected (see below chart).

ScreenHunter_12058 Mar. 17 07.38

All of which means that the big banks will have to reduce the amount that they lend towards housing, other things equal.

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