What does the HEM decision mean?

Via Martin North:

The key question now is will the banks revert to their previous practices of doing little to validate household spending patterns as part of the mortgage assessment processes. Some are already saying “buy now” with renewed vigour.

The Royal Commission revealed last year that some lenders ignored household expense data favouring the automated HEM decisioning. But on the basis of the finding, they are now in the clear.

Banks of course need mortgage lending to grow to enable their profits to rise, and in recent times that has been a problem. New lending momentum has been pretty slow.

HEM standards were tightened in July, meaning that the minimum spending benchmarks were lifted especially for households on higher incomes. Some banks have been asking for painful detail and history in lieu of using HEM, and this has slowed lending decisions but around half of loans are still approved by HEM.

We also need to link this with the APRA loosening of the interest rate hurdle which gives lenders flexibility on their decisioning (within limits).

ASIC is currently taking evidence from the industry on potential changes to responsible lending, and has said we should expect some revisions by years end. Plus they have previously stated that even if they lost the Westpac case, they would still insist that while HEM is a useful too it is not necessary and sufficient to meet their requirements.

The trouble is the original ASIC guidelines were vague, and the “non-unsuitable” formulation left significant ambiguity. This needs to be changed.

The way through this is to use debt to income ratios, something which has been in place in the UK and NZ for some time, as we know the risks of loss are greater when the Debt To Income ratios are higher.

But then the question will become, how prescriptive should the regulators be, and of course in the current weakening economic environment there will be an attempt to push lending harder.

So, my expectation is there will be some loosening of underwriting standards (which is bad) while the Banks can assume class actions relating to responsible lending will be unlikely to proceed.

I expect households will be required to certify the accuracy of their expenses, but that banks once they have that protection will be will to lending within the HEM framework.

So the bottom line is, yes, I expect more credit will be offered, the question is will households lap it up – leading to rises in prices (as credit growth and home price growth are linked), or will the weak wages growth, high costs of living and home price momentum (or lack of it) reduce demand.

The finance and real estate sector will be spinning hard to try and entice people into the market. Just remember we have the biggest debt bomb ticking away.

But the banks are also on notice now.

Amidst the court proceedings with ASIC, Westpac updated its group credit policies “to enhance the way [it] captures customer living expenses, commitments, and verify documentation.”

A Westpac spokesperson said, “We recognise sometimes it can be difficult for customers to provide a complete picture of their expenses and the enhancement of our expense categories means our staff and brokers have the opportunity to prompt customers to remind them about particular expenses they may have forgotten.”

Seems about right. Certainly won’t help contain credit. But probably won’t see it run away in the near term. But it clearly raises the risk of a return to the races longer term.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. I had a go at estimating my expenses. The bank had a go. ASIC had a go. The Federal Court had a go. We all get a go.

    • Strange Economics of IO and NG

      So now just tell the banks
      ” I forgot my expenses.” As the judge said – forget Those trips to Bali, those Wagyu steaks, that shiraz..

      If you can get a bigger loan of course you will – you have to !
      Anyway you need to as its an arms race – if the other bidder has a bigger loan (or Chinese offshore cash) you need to match them, or you will hear ” you missed out cause you wouldn’t get a proper loan”
      The Royal Commission will be forgotten by September.

    • Funny how even during the biggest down days of the steepest falls in living memory (ie last year) we never saw a down day like that. But now we see this on the upside…!

      Hahahahaha is the only possible response.

      • And this comes after the ridiculous post election one day rise of 0.48 points in the Sydney index.

        Corelogic numbers aren’t data in any commonly accepted sense of the word. They’re just making sh1t up.

  2. One of the big issues is private school fees, it’s $5k or $6k a month for say 8 years but they include in the expenses as if it’s over 30 years
    No matter what anyone says the mid higher end aspiring family now finds it very very hard to get finance I’d nearly go as far as saying the article re high end leading the bounce is done now at 3.2% p and i home open with 2.5% added on top as buffer
    It’s very marginal now
    I’d say purely based on credit prices are maxed out
    Add all the other MB items in int only reset etc etc
    We have reached the peak rebound and prices will start to continue lower into next year that’s even before the crash that’s coming into next year
    We are pushing on a string now

    • Strange Economics

      If you “forget” school fees as optional like Wagyu steak –
      you are also forgetting the super high paying job (or second job) may not be continuing for 30 years..
      Or Many spouses work a lower wage job just for the school fees. (of 30k/kid /year) then cut back.

      Then there is 3-5 years of university still to pay…(HECS or not)
      Many of the high paying jobs last 10 years, then good time contracts slow down. .

  3. John Symond was on Money News last night sooking about how all the changes post RC had murdered the lending process. There never was a problem, a few bad eggs sure, but for every falsified con job application there were millions of high quality ones apparently. And delinquencies were lowest on the planet. Don’t be fooled, we will go back to where we were, possibly stoop even lower.

    • Millions of high quality loans, eh? What’s striking when reading the ABC article about the Westpac settlement is that the vast majority of loans approved had declared expenses that were lower than the HEM. So either Westpac’s customers are a) very frugal compared to the median Aussie, b) totally unaware of their own expenses, c) purposely submitting fraudulent loan applications.

      Out of 261,987 loans approved using the HEM benchmark, 211,937 involved customers declaring expenses that were lower than the HEM — that is, below the typical household’s spending on basic goods and services, and in the bottom 25 per cent of household spending on less essential items.

      Apparently this is OK because

      In these cases, use of the HEM actually reduced the amount of money the customer could borrow compared to what they declared.

      but it’s a big red flag that there has been a lot of dodgy lending going on. Really these applications should have been pushed out for a manual assessment of actual expenses.

  4. I think the banks will still be more circumspect although it’s obvious they’re trapped by the conundrum of: reduced credit / deteriorating collateral and pushing credit / boosting bubble trade-off.

    You’re damned both ways, so may as well press the pedal to the metal and see how many bonuses can be banked before heading over the cliff. That was the GFC in a nut-shell.

  5. Judge Perram quoted “I may eat Wagyu beef every day, washed down with the finest shiraz but, if I really want my new home, I can make do on much more modest fare.”

    BWAHAHAHAHAHAHAHA what a f***ing joke

    As if he’d turn to baked beans on toast to afford a $1m shack in Rooty Hill

    Minsky here we come!!!!!!!!!

  6. In a single class action NAB has 400 K claimants In a single insolvency Westpac will suffer bigtime on the half a billion owing including to their cash-flow.

    My point is they are heading toward becoming zombie banks and quite quickly too