The Pascometer burns red on cheap mortgages

Weeoo, weeoo, weeoo.

If you’re planning on refinancing or picking up a new interest-only non-bank loans to dodge APRA curbs then The Pascometer is screaming a a warning for you today:

The Law of Unintended Consequences does not sleep. The Australian Prudential Regulation Authority’s crackdown on real estate lending by the banks it regulates is driving business to the financiers it does not regulate.

…APRA regulates deposit-taking institutions. Institutions that don’t take deposits, that fund themselves on the wholesale market such as Pepper Money and Liberty Financial, have not been required to get tougher with borrowers.

A mortgage broker has shown me a simplified real-world example of the considerable difference APRA has made for the unregulated players:

A client with an investment property worth $600,000 wanted to buy another property for $500,000 with minimal equity. APRA now requires banks to assess applications on the assumption that the interest rate on all loans is 7.25 per cent. The client had annual income of $110,000. On that basis, banks assigned the client total “borrowing power” of $624,000.

An unregulated lender, free to make  their own credit assessment, looked at the rate the applicant actually paid on the existing property – 4.5 per cent – and allowed a borrowing limit of $1.05 million.

Yes, the unregulated lender is likely to be more expensive than the deposit takers, but they make it possible to get a loan APRA won’t allow deposit takers to offer.

Pepper Group [saw] its Australian residential mortgage business soar a 36 per cent rise in new originations in 2016 to $2.53 billion. The results announcement noted system growth across the whole market had been 6.5 per cent. The company pulled up short of thanking APRA on that occasion, but co-CEO Patrick Tuttle subsequently told the AFR:

“Clearly any additional macroprudential policies imposed by APRA could give rise to increasing loan applications in the non-bank sector.”

There has been a little more activity in the RMBS market this year from last, to the end of April:

At this stage activity is on track to meet 2015 levels, a little better but hardly a boom. Moreover, there is this:

Following the news that the federal government will provide $2.6 million to the Australian Prudential Regulation Authority to “apply controls” to the non-bank sector, several non-bank lenders have said that the sector should not be worried.

In last week’s budget announcement, it was revealed by the Hon. Scott Morrison MP, Treasurer of the Commonwealth of Australia, that the financial services regulator would be given power over non-authorised deposit-taking institutions (ADIs).

While the non-bank sector is bound by responsible lending regulations, it is not currently subject to macroprudential controls imposed by APRA, such as the recent caps on investor lending growth or interest-only loans.

Several industry heads have said that the crackdown has been a boon to the non-banks, including Liberty Financial’s chief operations officer James Boyle, and — notably — APRA boss Wayne Byres.

Speaking at an event in Sydney in March, Mr Byres highlighted that regulatory efforts to tighten certain forms of credit — such as investor and interest-only home lending — have simply resulted in loans being picked up by alternative lenders “beyond APRA’s remit”.

Mr Byres explained that the most important impact of the regulator’s macroprudential measures to date –including a 10 per cent limit on investor loans growth, higher serviceability buffers and interest-only loan caps – has been to reduce the competitive pressure on banks to loosen lending standards as a means of chasing market share.

“Of course, lenders not regulated by APRA will still provide competitive tension in that area and it is likely that some business, particularly in the higher risk categories, will flow to these providers,” he said.

However, if the new APRA powers announced in the budget are passed by the Senate, the non-banks could, potentially, also be subject to similar controls.

While the details of what the oversight could look like in practice have not yet been revealed, the budget documents state that the “new powers complement APRA’s existing macroprudential power”, and the new funding will “allow APRA to collect data from these entities for the purposes of monitoring the non‑ADI lending market”.

Of course the same macroprudential controls are coming to the non-bank sector, and soon. The quote recycled from Pepper by The Pascometer is from March, pre-Budget.

That leads one to wonder why this factoid was left out of the piece. As readers know, The Pascometer has increasingly shut down as a contrarian mechanism on investment as MB utilised it to great effect. It became instead more of a policy-focused engine. It therefore beggars belief that the machine was unaware of the Budget shift for APRA supervision to subsume non-bank lenders. Was a rag thrown into the mechanism or is it just a missing cog?

The truth is, mortgage brokers are not really much of a “deep throat” source for jounos. I know half a dozen of them so I rang around a little and the clear consensus was that they are being smashed by APRA’s macroprudential regime. Banks are pouring on the heat for brokers to lift all sorts of credit assessments, as well as limiting borrowing amounts. Demand is materially down as well. The uniform attitude among the brokers was that we’re at or near a housing price cycle peak and right now was a very bad time to invest in property.

Weeoo, weeoo, weeoo.

David Llewellyn-Smith


  1. Another week and the same old thing. APRA chasing non-bank lenders?

    Good grief do we need any greater sign that APRA have no intention of doing anything of substance and by that I mean anything that will seriously put our inflated asset prices and the credit hose that maintains them at risk?

    The important thing to remember is that non-bank lenders at least have to acquire their investments funds from investors who want to take a punt. Non-bank lenders are not banks. They are collecting capital and applying it. They follow the lead of the banks and that lead, fully permitted, has been clear. Pump up asset prices.

    Providing the investors in non-bank property lenders are NOT the banks directly or indirectly do we really care if they want to make dud investment decisions? Pascoe reckons it is ironic that much funding for non banks comes from the real banks – ironic? That just makes my point perfectly. If there is a problem it is an ADI bank problem……yet again.

    That they still see a buck in property speculation tells you all you need to know – there is still a buck in property investment.

    Why suppress the little hungry and switched on canaries? How about regulating the big 4 banks credit creation / lending properly?

    Oh sorry of course that hasn’t worked…….just by accident of course ….the RBA really were trying so very hard to work with APRA to prevent unproductive Big 4 bank lending. Trying hard? Snort! Cutting target rates and allowing another burst of offshore lending is very very action oreientated.

    The problem we have seen over the last 20+ years has not been private parties punting with their own money.

    The problem has been that our private licensed ADIs – aka known as licensed Banks especially the Big 4 – have been directing vast amounts of bank credit to unproductive purposes.

    If anyone is still struggling with the definition of an unproductive purpose for private bank credit creation it is nothing more than something that does not directly and clearly add to the productive capacity of the economy.

    Large loans for existing residential property fits the bill perfectly. Use whatever ball and chain you like but all that was ever required was to impose lending regulations by reference to the nature of the security for the loan.

    Existing property – Borrow less and at a higher price. New property – borrow more at a lower price.

    And to make matters worse, as local appetite for unproductive credit started to fade, the local banks were encouraged/allowed to go offshore in search of even cheaper sources of funds to keep mortgages rates low and the demand for unproductive speculative loans as strong as possible.

    APRA chasing the non-bank lenders is about being seen to do something while doing nothing. Will we never learn?

  2. Pascoe doesn’t know what he’s talking about
    Mortgage brokers are busy changing people to p and I and you virtually can’t refi a loan to int only
    New int only inv home loan is 5.50%
    P and I owner occ 3.85/90
    You are a leppa if you are an investor
    100% we are at the top of the market
    Private sector mortgage debt is going to delverage by 20/30% of GDP over the next few years and public infrastructure spend will, inc
    House and unit prices are going to fall 20/30% min over the next 3/4 years

  3. kiwikarynMEMBER

    Whats the point? How much market share do these guys have – <1%? Even Macquarie said they have <2.5% share and they are a normal bank. They are also limited by access to capital, so its not like they are suddenly going to jump into 50% of Australia's mortgages or anything. So why worry about them? The taxpayer wont have to bail them out, if they go belly up it will be the shareholders who cop it.
    I suspect this is a distraction so we don’t notice that APRA is failing to properly regulate the 4 banks that control 99.5% of the market!