Forensic analysis
Back in my auditing days in London, as a trainee I had to do my tour of duty in the forensic accounting department.
It's one of things that sounds a little bit exciting, and the people were great, but being involved in a fraud investigation I never found to be much fun.
Naturally, everyone is on edge - even people that have no reason to be - and the accounting concept of materiality doesn't apply in the same way.
Anything could prove to be material, so every transaction must be investigated on a painstaking, line-by-line basis.
Notably the process becomes almost as important as the result, and invariably the investigations drag on for months as ever further documentation and explanations are sought.
Pendulum swings tighter
I've spoken before about the concept of the credit cycle as a pendulum, rarely stationary in an a neutral position, and instead typically swinging towards too loose or too tight.
The AFR has reported more than once this week on the forensic analysis of mortgage applications, including borrowers with substantial 30 per cent deposits being refused a loan for having Netflix account membership, or for using Uber Eats.
I've also come across high income earners with low debt turned being down for a loan because they'd previously signed up for a credit card to earn loyalty points.
Here's how respected industry experts are reporting what they're seeing, and that one key word keeps coming up: forensic (check out the link - auditing of $20 expenses! Crazy times).
Nobody wants to see reckless lending, but this level of analysis would have to be short-lived.
Checking $20 payments is adding nothing worthwhile or of any value when lenders are already using a default assessment rate of 7.25 per cent.
If you're borrowing at a 4 and being stress-tested at a 7, who cares if you watch Netflix?
The way the forward-looking indicators such as money growth and building approvals are tracking we may not see mortgage rates that high in half a generation, let alone in the half a decade or so it takes for borrowers to make inroads into their loan and for incomes to increase.
I think back for a moment to when I bought my first home in Sydney.
Under today's rules I might well have been refused a loan despite having a strong income and secure employment, since like a lot of people in my twenties in Bondi I ate takeaways and...well, we didn't have Netflix back then, but going to bars, cinemas, and restaurants would've featured prominently.
My lender acknowledged that my spending profile after I bought a home would adjust accordingly, and the risk of mortgage arrears was always minimal.
Arrears in focus
Non-conforming and low-doc loans were rightly recognised as a risk area during and after the financial crisis, and standards here have been tightened accordingly, with arrears today at the lowest level in history.
Note that 30+ day mortgage arrears for investors are tracking comfortably below the level seen for owner-occupiers, at about 1.2 per cent (ironically the recent increase here is at least partly due to tightened lending to portfolio investors with multiple interest-only mortgages).
And in the supposed problem states of New South Wales and Victoria 30+ day arrears for all mortgages are only about 1 per cent.
The wrap
With many mortgages now taking up to six weeks or more to be processed the housing finance figures to be released this week for the month of October could yet post a small bounce as applications lodged a couple of months ago finally flow through.
That said the median market forecast is for another modest decline; and that's following on from an exceptionally weak result for September.
Investor credit growth has already been crunched to the lowest level on record.
More detail on the figures for October tomorrow.
