More on ASIC HEM fallout

Via Martin North:

Last week the Judge delivered his verdict in the ASIC-Westpac HEM case, essentially because of the ~260,000 loans examined in the case less than 5,000 would have potentially had their loans tweaked lower if the HEM was not used, whereas the bulk of the loans would have been bigger if HEM was not utilised in the decisioning.

I have now had the chance to speak to a number of industry players, and most have fallen into expected camps. Lenders in the main welcome the decision, suggesting that common sense has prevailed, and that ASIC was not reasonable in its interpretation of responsible lending guidelines. On the other side, consumer advocates are calling for tighter controls and suggesting that the HEM benchmarks, even in their revised form are too low – meaning that households are committed to servicing loans they cannot afford. And ASIC has commenced a review of responsible lending by years end.

But among my conversations on this topic, I found a sensible and balance view expressed by Fintech CEO Mark Jones from SocietyOne.  They of course are on the cutting edge of technological innovation through their lending processes in Australia.

Mark made the point that recently lenders have been raising their standards, but the question becomes whether a lender has to try and uncover untruthful declarations from prospective borrowers. In Australia there is no clear-cut legal obligation of borrowers to be honest and transparent in their declarations, whereas in the USA there is such a legal obligation, and in New Zealand a Code of Conduct.

He cited examples where applicants had clearly lied on loan application forms.

What is the right balance between asking in painful detail for information from applicants, some of which are unsure of their specific spending patterns, and the fact that in any case if they take a loan, they may be capable of “life-style modification”?

So, he sees HEM in the context of the broader loan assessment processes, with data from applications tested again HEM, and additional dialogue around other unusual commitments which might include school fees, alimony, and other elements.  This is all around knowing your customer.  And there needs to be a focus on both discretionary and non-discretionary categories to give a complete picture.

The systems which Fintech’s like SocietyOne use are more sophisticated and can handle the complex algorithms which reflect real life. Positive credit and now Open Banking, both of which are arriving, are helpful in uncovering critical information. As a result, there are better outcomes for customers. No lenders want to make a loan which is designed to fail! And it opens the door to more sophistication around risk-based pricing

So, in summary, the trick is to get the right balance between getting every scrap of potential data from a customer, thus getting bogged down in the detail but missing the big picture; and applying simplistic ratios which do not provide sufficient precision to spot good and bad business. And it is this balance which needs to be defined in responsible lending, to a level which passes both community expectations and the operational requirements of lenders. To that end, the debate should not really be about HEM at all!

Further clarity is forthcoming from ASIC but given the vagueness in the responsible lending laws will require legislative remedy, I very much doubt that the banks and Property Council that run SocMo will allow it.

Mortgage fraud to the moon!

Comments

  1. Strange Economics

    The government mantra is everything is good (for the tax lurked property investors and banks) so no change..
    There is no plan after the surprise election win, so just talk about items in the distant future and progress none.
    More important to fight pointless culture wars and get ever bigger casinos !

    HEM poverty line – and baked beans on toast for every meal is fine.
    Mortgage applicants are also bent the rules – 90% claimed their expenses are even lower than HEM.
    This gave 20% more mortgage credit and thus helped 20% of the boom to property prices.
    Surely they are at PEAK CREDIT now and the market can’t increase any more.

    • Wellie rumor control has it the Brexit is a boon for Brisbane RE, English replacing the Chinese our sister cities down South enjoyed.

  2. The Horrible Scott Morrison MP

    It should be the borrowers who are prosecuted for borrowing too much, not the poor banks who are just providing a public service. Responsible borrowing, not responsible lending. Prison is too good for deadbeat borrowers.

  3. No lenders want to make a loan which is designed to fail!

    Unless, of course, there is an immediate financial reward for doing so and there is little to no personal risk involved. In which case, any loan is a good loan to make, and the bigger the better!

  4. “No lenders want to make a loan which is designed to fail!”

    Actually, it’s really not that straightforward:
    – lenders are under pressure to grow profits therefore inclined to make loans rather than not. This leads to the behaviour of competing banks looking quite similar: “Well, if they’re doing it to grow revenues, we’d better do it.”
    – the entire housing market relies on credit growth to sustain existing price levels (the same for any highly leveraged asset markets), therefore starving the market of credit leads to its own vulnerabilities i.e. threatens the existing loan book
    – loans can be packaged and sold off (the risk transferred to someone else)
    – the taxpayer is standing behind the core banking system so they can afford to take many more risks than they would otherwise.

    • You’d almost swear the banking industry had secretly engineered the economic and policy framework to make it a zero risk, maximum profit game…

    • Jumping jack flash

      This.

      Very well pointed out.
      At the end of the day the banks carry little risk – is that even possible with the trillions of debt dollars they have on their books?

      it must be that way, because if you consider interest rates a barometer for risk, we have the lowest interest rates in history and the most amount of debt in circulation, ever.

      At face value, with these parameters, it must be good times all ’round then, eh? Boom times ahead. Any minute now…

    • Per the PIIGS and U.K. – American examples… it seems creating risk and selling soon after, rather than holding it till maturity had a lot to do with it, not that investors played their part, but hay …. information arb and young go get’er try hards seeking to impress seem to create uncertainty which can not be risk evaluated.

      Furthermore considering 95%+ of new business fail in 3 to 5 years, a persons job tenure is about 4 years equating to around 11 jobs in ones productive years, endemic wage theft, with the cherry on top of youth indebtedness entering the job market, how the bloody heck is some mathematical – physics model supposed to evaluate risk. I mean what was the outcome of VaR when human agency over rode its portended utility, not to mention the lipstick on a pig action …

  5. Jumping jack flash

    “…households are committed to servicing loans they cannot afford.”

    Like houses, affordability is just relative.
    Everything is affordable if the bank gives you the money with which to buy it.

    While it is more accurate to say that the debt used to buy the house is unaffordable (because by definition the house was bought, therefore it was affordable) but even then, unaffordable by what measure? HEM?

    I reckon most households are doing it way tougher than what would be defined by HEM at the moment.

  6. Fcuk me, everything seems depressing right now. The forces of darkness appear to be prevailing.

    • +1 on that.

      The bear case is back to putting everything on a global shock. (And while history suggests one will inevitably happen eventually, it may not take the form people expect, and may or may not spell doom for Straya).

      • Narapoia451MEMBER

        Dunno about all on a global shock. There is a recession coming to Australia regardless. Construction and trades employment is going to collapse along with the apartment market. Iron ore down, no wage growth, retail collapsing, mortgage stress and delinquency rising. The tipping point from per-capita to just straight recession is not far off.
        That could be enough, even in the absence of an external shock but add one in and it gets scarier.

      • Gezzz pepz ….. what part about capital cramming down nations for cheap labour and asset prices for the rinse and repeat escapes some – see Hudson … after senior bond holders are life lined ….

      • Narapoia, in the absence of a global shock, I’m not entirely sure about that.

        – iron ore prices are still relatively high and keeping the budget full of cash
        – that cash can be deployed as stimulus to the housing market
        – housing market in recovery should see consumer spending come back.

        The above could well be strong enough to overcome the construction bust.

        The bear case now needs a global shock and fall in commodity prices I think.

      • Narapoia451MEMBER

        I know ore prices are relatively stable now – but the current spike was an accident. Where is the demand to maintain the price as Brazilian exports ramp up?

        Cash can’t be pumped into the housing market in any form other than increased access to debt. Maybe the government throws more absurd subsidies/grants etc out there and brings back full on mortgage fraud and tries to pay with it with temporary and dwindling mineral royalties. The Liberals have proven themselves stupid enough to try it. Spring will tell us if there is enough demand in the market to take on the debt if it is on offer. My feeling is that debt has reached saturation – mortgage lending growth is low, and there is not sufficient laundered chinese money coming into the market to pump up prices like pre 2017.

        Point 3 is dependent on points 1 and 2 in your line of reasoning (though housing stimulus could be from the LNP saddling up on debt not mining cash). However, in a scenario where house prices only stabilise, will that we enough to get people spending if their wages aren’t growing and disposable income continues to decline?

      • The economics of your case are entirely reasonable. I just fear there’s a difference between what should happen and what will happen.

        “Maybe the government throws more absurd subsidies/grants etc out there and brings back full on mortgage fraud and tries to pay with it with temporary and dwindling mineral royalties.”

        Yes. That is what I think they will try.

        And while I agree the outlook is for falling IO prices, we are still quite a bit higher than the prices projected in the budget. So prices have to fall a long way before the budget is in trouble. Until then we could stimulate.

      • Narapoia451MEMBER

        “The economics of your case are entirely reasonable. I just fear there’s a difference between what should happen and what will happen.”

        Hah, amen to that.
        I do realise that there’s every possibility people are dumb enough to launch back into another round of tulip mania. My gut feel is that the wheels are finally going to come off though. The current govt is too incompetent and corrupt to manage the situation even if they were actually trying to, rather than just kick the can down the road by further inflating an asset bubble. Seems like a tipping point. An external shock will seal the deal, but even without it I think it’s odds on a recession in Aus.

  7. Geez, what a tragic state we’re in. Isn’t it basic common law that when people sign something they are holding it out to be true.
    Surely we don’t need statute to enshrine truthfulness, or people’s versions of it.
    Yes life circumstances vary and statements are made at a point in time etc etc, but gross misrepresentations of fact – such as we have seen by borrowers, brokers and lenders – aren’t yet acceptable.

    • Thus is the conundrum of lender and borrower … yet the lender is not forced into lack of fiduciary duty for not assessing the facts first hand let alone currant labour economic realities. Did any U.S. etc bank people end up in the dock after what was a shocking case of public fraud [waves at Wells Fargo for instance].

      For that matter would so many seek credit had not wages and share of productivity diverge and underwriting standards find the lower depth of Dante’s hell.