APRA demands more details on mortgage borrower income
Australian Financial Review Oct 25 2016 1:12 AM
Duncan Hughes, Jonathan Shapiro
APRA is proposing to force residential mortgage lenders to extract more detailed information on borrowers' incomes and expenses and to toughen the requirements for interest only loans and property investments in self-managed super funds.
In its latest consultative paper the regulator also raises the need to resolve future flash points for the property sector, such as payment of commissions by lenders to mortgage brokers, which account for about half of sales, and on-site versus desktop property valuations.
The consultative document is an attempt to plug potential gaps and to increase awareness of problems that might be created by changing market conditions, particularly in booming Melbourne and Sydney property markets, an Australian Prudential Regulation Authority spokesman said.
He warned of a "significant gap" in the regulator's ability to monitor risks and lending practices because of a more than three-fold increase in the number of lending institutions since its original guidelines were introduced eight years ago.
APRA repeats recent warnings about the need to probe property buyers about their ability to eventually pay the principal on long-term, interest-only loans because of concerns that changing buyer circumstances, or rising interest rates, could impact their ability to repay. In recent weeks many lenders have stopped aggressively going for market share by trimming margin discounts and tightening terms and conditions.
It also encourages lenders to toughen lending criteria, particularly serviceability, and rely less on the Henderson Poverty Index, which though adjusted for inflation, might not capture the borrowers' income and expenditure.
There is also more advice to lenders' management on improving "checks and balances".
But banking consultants claim APRA continues to miss the point about the biggest risks in the system from possible defaults because of growing borrower difficultly servicing big loans when income and investment growth is static.
"This is too little too late," warns Martin North, principal of Digital Finance Analytics, a consultancy to banks and financial service companies.
"It's flogging the industry with a wet leaf."
His warning comes as new research reveals mortgage default rates are likely to continue to rise over the next 12 to 18 months, despite record low interest rates.
Highest risks are Western Australia and Queensland mining areas with central business districts in Melbourne, Sydney and Darwin also under growing pressure, the Digital Finance Analytics survey finds.
APRA has issued a new guidance for residential mortgage lending that includes some changes to the way banks collect and report on mortgages to senior management, including boards.
It has also issued draft guidelines and expects to finalise the revised guidance early next year.
For the first time the regulator raises the "unique" operational, legal and reputational risks from lending to self-managed super funds for property investments, which is estimated to be about 4 per cent of the $662 billion sector.
Thousands of SMSF investors have been sold property, often from commission-paid, off-the-plan sales staff for developers, with the sales pitch that it would provide capital growth and income.
A source at one of the major banks said the prudential regulator had informed them that it would 'formalise' the work it had been conducting with the bank over the last two years. While the change in standards was not material, the banks will now be required to provide additional information to APRA, which may in turn publish more information.
Under chair Wayne Byers, APRA has taken a vigilant and proactive approach to the build-up of housing risks. The prudential regulator conducted loan assessment tests on the banks to find varied and lax standards that Byers described as "enlightening and, to be frank, a little disconcerting in places,"
In December 2014 amid concerns about a rise in lending to property speculators, APRA imposed speed limits to slow the pace of investment lending growth to 10 per cent. The so-called macro-prudential measures also included loan serviceability tests.
Regulators say the measures have helped to lift weakening bank lending standards, which posed a potential threat to financial stability as interest rates fell to record low levels.
"Risks to financial stability from lending to households have lessened a little over the past six months, as serviceability metrics and other lending standards have continued to strengthen and the pace of credit growth has slowed," The Reserve Bank said in its semi-annual review of the financial system, published earlier this month.
The RBA said this was evident by a decline in the share of new mortgages with loan-to-values above 90 per cent to its lowest level since 2008, and a decline interest only loan to around its decade average.