ANZ confirms mortgage credit crunch

ANZ CEO Shayne Elliott today at the Royal Commission:

So we accept that it’s conservative, in terms of it’s a relatively low level of expenditure … I think that it’s an agreed area for improvement.

It’s a piece of software called Triex which we’re developing which would allow us to analyse an ANZs customer’s actual expenditure and that sounds easy but what it does, it can identify which expenditure out of your account, which may be utility bills, which might be discretionary expenditure, etcetera. So it’s a tool that will enable us to do a better job of looking at an individual’s actual historical expenditure through an ANZ account.”

If we are successful in the rollout of our system, our usage of HEM should be fundamental to around a third of our applications in total.

We have made a commitment to our regulator that, from recollection, it is by the end of our next financial year. So later in calendar 2019. That’s my recollection.

Elliott also confirmed that the broker channel was a higher serial abuser of HEM which may have implications for policy recommendations.

As said previously, CBA was using HEM on 75% of loans and is pulling that back to 40-50%. So ANZ is being even more conservative. WBC was pinged for having as much as half of its loans inappropriately deployed using HEM.

This the credit crunch in action, with something like one quarter of loans that were formerly rubber stamped no longer available or much smaller as income and expenses are assessed properly.

That is, on top of the interest-only reset, macroprudential 3.0, out-of-cycle rate hikes on funding costs, negative gearing reform, fleeing Chinese capital and aging cycle headwinds.

Other than that, buy property!

David Llewellyn-Smith
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  1. Has there been a test case through the courts to determine whether or not the lender must assess and individual’s expenses?
    Just curious to see if the law has been tested to determine if HEM can be used at all…

    • No decent broker is using HEM anymore. Responsible lending requires that you provide a much more granular exploration of a client’s expenses rather than a simple and totally unrealistic benchmark like HEM.

  2. Hem was a scam that allowed people and banks to get away with borrowing and lending maximum amounts
    This is the reason that Joe Bloggs beat you at the auction. They had more credit given to them not because they had a better job etc etc that pays good money.
    What a scam and all with govt backing

    • Years and years ago I was wondering how people were getting these stupendous loans. I had no idea some nerd had come up with HEM and the banks took that idea and ran like the wind with it. It’s only come to light in the RC that it even existed and the banks have been abusing it to push up profits. We are as bad as places like Malaysia these days, I don’t trust the government, the media or any of our so-called trusted institutions. What a sad turn of events this country has taken.

  3. Everything is fixed now. We know a bit more about how you spend and if you can cut back 10k or so.
    Can we go back to lending 7, 8, 9 x income please?
    What? we haven’t actually cut back on the LTI ratios?
    Oh well, at least we know your spending habits.
    Perhaps we can we sell this data to retailers and other third parties?

    • Yeah. This will no doubt be gamed.

      The game will need to look different, but a path “through the system” to a 9xLTI outcome is almost guaranteed to be found. The “good brokers” who are able to do this will do well.

      • I was going to say this is a band aid solution but its not even that, its PR fluff.
        If they turn around and said, that’s it, household LTI of 4x max. they would not have to put your expenses under a microscope.
        Instead they lend out 9x and worried you might buy organic groceries.

      • ChristopherMEMBER

        If there are not enough ‘Good Brokers’ this won’t work anyway, as the system relied on a steady flow of additional cash.

    • “Perhaps we can we sell this data to retailers and other third parties?”
      If you do eftpos/credit card transactions they already have it.

    • Spot on DPM,
      LTI is the key. Even 4x household income is huge by historical standards.
      One generation- 3x main income 60 000 houses.
      Three decades later 9x household income 700 000 houses. That is intergenerational theft.
      1970-1980 no globalization, full-time jobs, and high wage inflation.
      2010’s globalization matured -no wage inflation and gig economy.

    • They’ll link your spending habits with your online health records and sell it to health insurance. Maccas 3 times a week? Yeah, 30% premium increase. Liquorland purchase of $100? Hmm, 50% increase for you!

  4. Basically. Australia seems to have been able to push personal debt levels against mortgages up through a variety of subterfuges including:

    > the risk weight models the Big 4 have been able to use to achieve their lovely leverage ratios
    > the government guarantee for banks that the public barely notice
    > the ability to approve loans at inflated income to loan rations due to poor regulatory oversight

    One of those has now been removed it seems. It’s hard to see how this is not a structural change so we’d expect a permanent leg down on house prices that would need to replaced with some other subterfuge or credit largesse policy offering.

    • The Bendigo Bank chairman was very clear (albeit diplomatic) on the first two items earlier today. With a listen.

      • I’ll try find the relevant section. Was he referring to it being an unfair advantage for the Big 4 or that it has lead to some sort of pressure to be bad?

      • Jay Mc – it was at the very beginning of his testimony, when he was providing an overview of what he’s seen in the evolution of the Australian financial system in his 30 years as a Bendigo director.

        His schtick is obviously that the big banks are advantages, but he was subtle about it at that point. He also talked about the resulting flood of “cheap money”…. and how housing was chosen as the vehicle to drive the Australian economy post-GFC

  5. Is he standing by his comments that Australia is a series of different markets, therefore his portfolio is low risk? All 5 capitals down this month. It was also Michael Burry’s thesis on USA, stating the idea of different markets was baloney.

    • He is an idiot. It’s not 5 markets. It’s 500 markets – each suburb is special.

      There is actually an argument that it is 15,000,000 different markets – each house is special.

    • darklydrawlMEMBER

      Indeed Jspitzer, one thing that was crystal clear from the US research (or at least from the folks who profited big time by shorting the market) was the only driver was rising property prices tied with easy credit markets. Soon as prices stopped rising and/or credit tightened the whole ponzi would fall to pieces. All the other markers were largely fluff and inconsequential to the outcome. Based on that data these folks went hard shorting the market when it started to crack (indeed many of them were too early, but still did ok in the end).

      So who you going to trust – Folks who bet against the market using research and won big time, or people whose pay packet depends on property staying afloat?

      Mr Burry personally made around USD$100 Million betting against the housing market. Where as the ‘idiots’ all went down with the ship.

    • Before someone won, plenty lost. You can make the same genius case for Clive Palmer. The big take home from the GFC is that concept of a market is laughable.

  6. ‘Elliott also confirmed that the broker channel was a higher serial abuser of HEM which may have implications for policy recommendations.’.

    Nah couldn’t be right. Those brokers who don’t eat unless they’re signing contracts would never be more promiscuous with the credit surely. They’re such fine, upstanding, honest folk who just happen to get things across the line more frequently (100% of the time). Consider them problem solvers.

  7. Jumping jack flash

    “This the credit crunch in action, with something like one quarter of loans that were formerly rubber stamped no longer available or much smaller as income and expenses are assessed properly.”

    It depends on how you look at it. Credit crunch implies a lack of credit. This isn’t the case, there’s still heaps of credit, just not available to anyone. I’m sure our banks have no problems getting credit from their banks.
    It is simply a better examination of borrowing ability, rather than using cookie-cutter HEM.
    The effect is generally the same, but does that make it moot?

    If banks took into account people’s actual expenditure rather than simply asking a few general questions in line with the HEM, then I reckon 90% of loans that were and still are given out would not be.

    Indeed, this used to be the case. Debt used to be incredibly difficult to get and everything was analysed in detail by the manager before they would hand it out, and then the amount they handed out was generally less than what was asked for.

    Closing the debt door and locking the debt junkies inside has several advantages over waiting until the banks’ banks rock up and forcibly break up the party. The major one being that the price of the banks’ debt is maintained and our interest rates don’t rise and cause catastrophe.

    This assists the banks towards their goal of a slow melt – if in fact that is still their goal, and I don’t see why it wouldn’t be. In fact the RBA recently said “no rate rises forever” – which actually means “no rate rises until the debt is repaid”. It makes perfect sense to pause debt issuance, citing tighter lending standards, to draw a line in the sand, and allow some time for it to be repaid.

    After that, rates will rise. They must rise, they simply aren’t taking into account the risk properly, and what we have now is the result.

  8. Shayne Elliot did a bait and switch (if anyone else noticed): When pressed about the role of brokers he said it should be passed into law that they act in the best interests of their clients. Sounds reasonable enough, except the Brokers are the agents of the Banks and it has been established in case law.