Genworth Mortgage Insurance warns of risky home loan deposits

The Australian 12:00am May 4, 2017

Michael Roddan

The nation’s largest mortgage insurer has warned that borrowers are scraping together deposits with credit card debt, parental loans and other forms of risky “unsecured debt” as tougher regulations force lenders to require larger deposits.

The warning comes as the prudential regulator has admitted it is unable to gauge whether some banks are writing loans to owner-occupiers or investors, potentially stymieing efforts to clamp down on rampant investor lending to derisk the housing market.

Genworth Mortgage Insurance yesterday revealed a sharp spike in loan defaults over the March quarter, with the company’s loss ratio jumping from 27 per cent to 35 per cent year-on-year. Delinquencies across the company’s loan portfolio surged 18 per cent over the same period.

National Australia Bank will today provide an update on the amount of its own borrowers nearing default as it unveils its interim results.

ANZ, the nation’s third-largest mortgage lender, this week revealed a sharp increase in the number of borrowers failing to pay their mortgages over a longer-term basis, with the number of loans where payments were overdue by more than 90 days rising 8 per cent year-on-year. Shares in the big four banks tanked yesterday, falling 2-3 per cent each, in the wake of ANZ’s admission that margins were likely to come under more pressure.

Genworth chief executive ­Georgette Nicholas told The Australian a sector-wide move to force borrowers to stump up larger deposits had “unintended consequences” across the market.

The Australian Prudential Regulation Authority recently introduced strict new limits on the loan-to-valuation ratio of certain mortgages, which means banks require larger deposits.

“We haven’t really seen credit growth come down — more ­people are using unsecured debt for cross-collateralisation to access the housing market. We’re concerned about the pressure that puts on the system in a stressed environment,” Ms Nicholas said.

“It certainly has an impact on the market. It also impacts first time home buyers as they try to access the market. They really are struggling to save a deposit.

“You see borrowers cross-collateralising with parental guarantees, and you’ve seen an increase in unsecured lending and an increase in credit card debt (used to get a deposit). All those things indicate people are using unsecured ways to get into the market.”

The warnings came amid a flood of data with ominous implications for the housing market. The Australian Financial Security Authority said personal insolvencies increased by 11 per cent in the March quarter compared to a year earlier, while a survey from Fitch Ratings showed nearly 90 per cent of bond investors believe Australia’s housing market presents a “high or moderate” risk to the credit market over the next year.

The Fitch survey said high household debt and further strong house price gains were fuelling concerns around a housing market downturn.

Citi analysts yesterday said residential property valuations may fall by 5 per cent over the next 12-18 months.

The developments follow a crackdown by APRA on riskier lending to property investors and interest-only loans. About half of all housing finance flows to investors, while interest-only loans account for about 40 per cent of outstanding housing debt — an unusually high rate compared to other developed economies.

Since APRA forced banks to charge higher rates for investor loans, the sector has reclassified more than $50 billion worth of mortgages from investor to owner-occupier.

Responding to questions on notice from a Senate economic committee hearing, APRA said the switching “highlighted that some (lenders) have not had ­sufficiently robust practices” for monitoring the status of their borrowers and the data previously submitted to the regulator was “incorrect”.

APRA forced several banks to upgrade their reporting capabilities and, as a result, “some have strengthened their procedures”.

Tasmanian senator Peter Whish-Wilson, who asked APRA if its data was accurate, said the reclassification of loans was “concerning, whether it’s deliberate or not”.

He said: “I’d be loath to see if any sort of systemic changes by the banks to loan classification were made to continue to grow loans to investors when it’s clear APRA is trying to crack down on what is potentially a very serious issue.”

The Reserve Bank’s chart pack, released yesterday, revealed a further deterioration in the nation’s household debt-to-income ratio, which has jumped to about 180 per cent. “More debt means more stress,” Martin North, of Digital Finance Analytics said.