Superficially at lea st, the regulatory clampdown on property investment is going pretty much to plan.
In the past six months, the extraordinary growth in investor lending has been reined in.
But one area of the game that has surged of late is the amount of business being written by brokers and third-party providers who have not had to deal with the heightened scrutiny from regulators out to de-risk the D-SIBs, or domestic systemically important banks.
While the banks have duly been towing the regulators’ line, their increasing dependency on brokers for home loans is again raising questions about risk, with almost half of major bank approvals now coming through these channels.
UBS bank analyst Jonathan Mott has raised the issue, arguing brokers and third-party originators could be the “weak link in the chain” of the new era of tighter regulatory scrutiny.
“This is a potential area of risk should some of these applications not have been subject to the same scrutiny as banks’ internal origination,” Mr Mott said.
The Australian Prudential Regulatory Authority (APRA) told banks to tighten up the debt servicing requirements on property lending, particularly for investors, in May last year.
The big four banks responded by reducing the loan-to-value (LVR) ratios, meaning investors needed substantially larger deposits to get a loan, or borrow for something less ambitious.
Generous mortgage discounts to investors were removed and the tap was tightened on interest-only loans — a favourite tool of the negative gearing set — turning a flood into if not a trickle, then a modest flow.
A few months later, the banks hit borrowers where it really hurts, raising rates while the rest of the world — including the Reserve Bank — contemplated easing conditions.
While the ‘out-of-cycle rates increases were largely about boosting the banks capital buffers, from the regulators’ point of view they had the doubly satisfying impact of slowing investor demand.
The recently released credit data for January shows investor lending is now growing consistently below APRA’s 10 per cent “speed limit”.
Reclassification of home loans clouding the risk picture
The APRA data found overall housing credit grew by 0.5 per cent in January, edging the annual growth rate down from 7.5 per cent six months ago, to 7.3 per cent.
Owner-occupier lending grew at 0.6 per cent — or 6.9 per cent over the year — the fastest growth rate since late 2010.
Investor lending still grew, up 0.3 per cent for months, but the annual growth rate of 7.9 per cent is the slowest in about a year.
But this is somewhat clouded by the banks and their customers suddenly discovering a whole lot of investor loans were in fact owner-occupier loans.
Another $1.4 billion of investor loans were reclassified to owner-occupier in January, taking the total over the past six months to more than $35 billion.
However, the size of shift from investor to owner-occupier is leading to greater scepticism of the quality of credit statistics and whether they are giving an accurate picture of the supposed de-risking of the market.
Leading up to Christmas, the apparent slowdown in investment-property lending almost exactly offset the pickup in owner-occupied loans, leaving the impression that borrowers and brokers were changing their behaviour in designating the purpose of a mortgage.
Mr Mott said it is understandable some existing customers are reclassifying themselves to avoid higher interest charges as their circumstances have changed.
“However, there is increasing evidence new customers may be stating their loan is for an owner-occupied property to circumvent the additional imposts on investor borrowing, especially through the broker channel,” he said.
“Some of these behaviours may be difficult to stem, particularly in third-party distribution networks.”
Certainly there are good reasons to shop around with the brokers.
While the Big Four maintain a fairly settled rate structure, there is plenty of price action going on through broker channels.
The rate comparison website Mozo found there is a noticeable trend in recent months with variable rates creeping up and fixed rates more likely to be selectively cut.
While there continues to be a significant differentiation between owner-occupiers and investors, Mozo’s product data manager Peter Marshall says there is no clear pattern and a fair bit of movement on rates and offers among the smaller players and brokers.
“The big four tend to be more considered with rate changes,” Mr Marshall said.
Mozo’s February “Banking Round-up” found the large broker Aussie Home Loans made a number adjustments to rates, including reducing investor rates for LVR’s between 80 and 90 per cent, while another owner-occupier product was edged up.
Mr Marshall said while some of the smaller players are winding back premiums for investors, others are not.
“It depends where each lender is with its owner-occupier versus investor mix,” he said.
“Variable-rate investor premiums tended to go up, while fixed-rate investor premiums tended to go down, including two lenders who reverted to offering owners and investors the same fixed rates.”
Big banks tightening lending while brokers face greater scrutiny
Mr Mott said APRA’s property statistics showed there had been a general tightening of mortgage underwriting standards by the big four.
“Interest-only loans have fallen as a percentage of flow to 39.5 per cent from a peak of 48 per cent in June 2015 and high LVR lending continues to trend down,” Mr Mott said.
“[However] mortgage broker originations have grown substantially, now accounting for 47 per cent of approvals in the December quarter.
“This has loosely tracked a rise in upfront commission rates over the same period.
“With all banks seeing significant flow through this channel and price competition, ASIC (Australian Securities and Investments Commission) is undertaking a review of the mortgage broker industry.”
Mr Mott said the behaviour of brokers around investor and owner-occupier lending and the origination of the loans may be one of a number of areas of interest for the regulator.
ASIC inquiry to look at broker remuneration
The ASIC inquiry was commissioned by Assistant Treasurer Kelly O’Dwyer late last year in response to the Financial System Inquiry chaired by former Commonwealth Bank chief executive David Murray.
The inquiry will largely study the remuneration structure of the broking industry.
A particular focus will be the role of the heavy weighting of upfront commissions driving sales and whether they are encouraging risky lending and distorting the market.
But, as ASIC points out, while brokers must do their due diligence on loans, the banks are not absolved of responsibility by accepting a risky loan written by a third party.
ASIC and APRA would take a dim view of whether the blurring of definitions and reclassification of loans is just a sales trick leading to further rises in household debt and more risk.
If that is the case, expect another round of tougher rules hitting the banks and brokers.