ASIC wants banks to stop or augment their use of the Household Expenditure Measure (HEM) but the banks have expressed their disdain in new submissions to the regulator released today:
WBC: “Accurately verifying basic and discretionary living expenses using transactional account data is currently not feasible and in Westpac’s experience, would be of limited value.”
NAB: “This is not as simple as checking a customer’s declared figure against a line item in a bank statement.”
ANZ: “We estimate that if such a review was conducted manually by a bank officer across three months statements for two accounts, it would take approximately two hours.”
CBA: “CBA has consistently expressed its concerns with tools that extract information from customers online banking platforms. CBA believes such services to be highly risky … CBA believes the risks associated with such tools are often unknown or unclear to the customer”
What on earth is a bank’s role if not to assess the credit worthiness of borrowers? What happens when you don’t do it? This, from Endeavour Equities:
1. Downgrading our outlook for residential property in 2019; expecting peak to trough falls of 25-30% – the worst since 1890.
i) We are downgrading our outlook for residential property in 2019 with peak to trough falls of 25-30% – the worst since 1890. We expect -10 to -15% % in 2019 in addition to falls of -15% in 2018.This means 2014 vintages will see significant losses while many from 2015, 2016 and 2017 will experience negative equity.
ii) Key insights from Endeavour’s 2018 Report “Credit Crunch 2018 as HEM/ NonPrime Bubble Busts” of June 2018 are driving credit and property prices into a major slump. The key revelation that emerged late 2018; all (or almost all) mortgages were based on the HEM as a default from 2012 to 2016, and this has driven a Non-Prime bubble in terms of DSTI ratios.
iii) The key driver of our current property price downgrade is the late 2018 revelation (ASIC vs Westpac) that Westpac and likely other ASX banks did not collect, or certainly did not input, actual borrower expenses into loan serviceability calculators. Instead they applied their own downwardly biased HEM expenses of $32k at all income levels as the default or policy driven input. This upwardly biased Debt Service to Income ratios by 10-15%+. We note ASIC has alleged that this has made all such loans irresponsible lending (all 260,000 mortgages written to 2016 in Westpac’s case).
iv) We expect a continuation of the 2018 Credit Crunch well into 2019 as the HEM/ non-prime bubble busts due to the combined impact of i) real expenses shifting sharply towards a ABS HES Survey reality and ii) amortization of Interest Only loans. Together these impacts are expected to hit loan borrow sizes for aggressively geared borrowers by 46%+, savaging borrowing capacity for the marginal price setter of housing in the boom to 2016 – the highly IO borrower using HEM expenses. The last phrase of this doesn’t make sense in the sentence
2. The size of the Credit Crunch will be directly proportional to the unreasonable of the HEM – very large!
i) The Size of the Credit Crunch is directly proportional to the unreasonableness of the HEM expenses benchmark. Since HEM expense estimates are unreasonably low, the credit crunch will be significant and ongoing as it is increasingly replaced with reasonable expenses that are consistent with Responsible Lending Laws.
ii) The Median Borrower on a HH income of $144k HEM understated expenses by $48k p.a. leading to loan sizes 30%+ or $380k larger than if HES based survey expenses were used. For the median debt which is owned by households on $180k+, the understatement of expenses is considerably larger – up to a total of $80k. This led to loan sizes $640k larger than if HES expenses had been used.
iii) Failure to amortize Interest Only Loans over the non IO periods in serviceability calculators has also inflated loan sizes 20-30%+
I can’t see the banks turning back the clock on the HEM in the near future but the fact that are trying tells you all you need to know the Hayne Royal Commission outcomes long term.