Déjà vu...all over again
A familiar story popped up in the news once again this week, about loans being written to investors in China without appropriate checking of documentation between 2013 and 2016.
Nothing new, here, though - in fact it was a well-known issue that was shut down some years back, fortunately with few arrears arising.
As you might imagine the media is absolutely loving the Royal Commission tidbits, and I guess it's pretty easy to believe that there are systemic issues when the same story keeps getting rehashed over and over again.
Conversely, today it's become not at all straightforward to get a mortgage in Australia.
Borrowers must be able to pass serviceability at mortgage rates of a minimum 7¼ per cent, which is the equivalent of up to 13 (thirteen!) interest rate hikes away for many borrowers.
Far from rate hikes on the horizon, the cash rate futures implied yield curve is now inverted, and realistically we aren't going to see meaningful moves higher until incomes are also rising solidly.
Meanwhile living expenses are being scrutinised, queried, corroborated, and re-checked...and to a truly absurd degree in some cases.
There was even a story in this weekend's Sydney Morning Herald about a borrower being pulled up for spending on a takeaway kebab.
I wish I could say this was story a beat-up, but this kind of silliness accords very closely with what I've seen first-hand too. Shish!
Lending in 2019?
All such tweaks to markets will have consequences; some intended, some otherwise.
For example, there has been an orgy of investment lately in Hobart as investors shifted focus to the cheapest capital city market with higher yields, yet very few apartment projects or attached dwellings are being supplied under prevailing conditions.
On the positive side markets do appear to be adjusting reasonably well to the significant and rapid structural changes to interest-only lending, while there were some tentative signs of nascent wages growth.
Although there will always be some exceptions in a $7 trillion housing market, it's not as though loans have been made to borrowers that can't afford them - arrears have gone nowhere for more than a decade, despite the great interest-only reset.
Low-doc lending volumes and arrears have also been squeezed to the lowest in history.
Investor arrears are comfortably below system as interest-only borrowers have either prepaid mortgages, or used offset accounts and buffers.
Some arrears have flashed up in Western Australia after half a decade of recessionary conditions in Australia's resources economies; but in the two 'problem' markets of Sydney and Melbourne, 30+ day arrears are tracking at about 1 per cent.
The Reserve Bank noted again over the past fortnight that it has no solid handle on how much household leverage is the 'right' amount, which begs the question 'why the overkill?' (especially when what has worked to date has, according to its own Bulletins at least, managed just fine?).
Will common sense prevail?
Whether common sense prevails on mortgage processing in 2019 remains to be seen at this point.
The problem with forensic investigations is often that nobody knows when or where they ought to stop.
An old rule of thumb was that mortgage brokers might need up to a dozen hours of dedicated processing time to work through all of the the paperwork and associated queries on applications.
But in some cases this has blown out by a factor of three as nervous lenders return again and again with incrementally dafter enquiries.
This can become problematic when you have a market system that relies on processing normally being turned around within an expected timeframe.
By way of an example, conditional mortgage approvals are typically expected by all participants in a transaction to become unconditional within 14 days from the contract date in Queensland.
In some recent cases lenders have shaken their heads and audibly inhaled through pursed lips, before suggesting dates for going unconditional in the middle of January next year.
Unsurprisingly, plain vanilla transactions are now falling over like wounded Arsenal players in the 6-yard box, it's gumming up the market, and in turn putting valuers on edge too.
Nanny state risks
My two penn'orth (assuming anyone cares for it):
There's absolutely nothing wrong with the policies that have been introduced; they just need to be applied rationally.
Take a read of the practice guidance and you'll almost certainly agree.
One area of mortgage processing that quite obviously needs to mature is the treatment and categorisation of living expenses, whereby recently incurred discretionary, entertainment, or luxury spend is being lumped in with essentials and then pored over with an almost comical level of scrutiny for what are ultimately 30-year loan products.
Paranoid lenders have become unduly fearful of making 'mistakes', in some cases are unsure what is expected of them, and therefore are over-compensating with their forensic analysis.
My reading of the practice guide is that lenders should make reasonable enquiries into risk, buffers, income, debt commitments, service coverage, housing costs, living expenses, and retain appropriate supporting documentation.
Nobody should have an issue with that, for such checks and balances lie at the core of a stable financial system.
But the pendulum has swung far beyond reasonable enquiries to paranoid, panicky, and in some cases almost pathological.
And having initially reduced financial stability risks, the lack of liquidity and confidence is now materially increasing them.
For the time being people and businesses still want to borrow, so give them the credit they need!
---
Addendum
The ALP announced at its conference that it would splash $6.6 billion on subsidies for landlords to supply affordable housing over 15 years, whereby rents must be offered at 20 per cent 'below market value' (whatever that means) in return for $8,500 per annum in landlord subsidy.
The devil is always in the detail with such policies, and to date there is none, but at first blush it smells like NRAS Mk II.
The focus on affordable rentals will be welcomed, and in some cases it might mean that families can rent a better quality of home than might otherwise have been the case.
The challenge with all such affordable housing programs is that it's very difficult to turn a bad investment into a good one with a subsidy, and the end results are often underwhelming.
Still, policy should be judged on merits, so let's see what they come up with.
Far from rate hikes on the horizon, the cash rate futures implied yield curve is now inverted, and realistically we aren't going to see meaningful moves higher until incomes are also rising solidly.
Meanwhile living expenses are being scrutinised, queried, corroborated, and re-checked...and to a truly absurd degree in some cases.
There was even a story in this weekend's Sydney Morning Herald about a borrower being pulled up for spending on a takeaway kebab.
I wish I could say this was story a beat-up, but this kind of silliness accords very closely with what I've seen first-hand too. Shish!
Lending in 2019?
All such tweaks to markets will have consequences; some intended, some otherwise.
For example, there has been an orgy of investment lately in Hobart as investors shifted focus to the cheapest capital city market with higher yields, yet very few apartment projects or attached dwellings are being supplied under prevailing conditions.
On the positive side markets do appear to be adjusting reasonably well to the significant and rapid structural changes to interest-only lending, while there were some tentative signs of nascent wages growth.
Although there will always be some exceptions in a $7 trillion housing market, it's not as though loans have been made to borrowers that can't afford them - arrears have gone nowhere for more than a decade, despite the great interest-only reset.
Low-doc lending volumes and arrears have also been squeezed to the lowest in history.
Investor arrears are comfortably below system as interest-only borrowers have either prepaid mortgages, or used offset accounts and buffers.
Some arrears have flashed up in Western Australia after half a decade of recessionary conditions in Australia's resources economies; but in the two 'problem' markets of Sydney and Melbourne, 30+ day arrears are tracking at about 1 per cent.
The Reserve Bank noted again over the past fortnight that it has no solid handle on how much household leverage is the 'right' amount, which begs the question 'why the overkill?' (especially when what has worked to date has, according to its own Bulletins at least, managed just fine?).
Will common sense prevail?
Whether common sense prevails on mortgage processing in 2019 remains to be seen at this point.
The problem with forensic investigations is often that nobody knows when or where they ought to stop.
An old rule of thumb was that mortgage brokers might need up to a dozen hours of dedicated processing time to work through all of the the paperwork and associated queries on applications.
But in some cases this has blown out by a factor of three as nervous lenders return again and again with incrementally dafter enquiries.
This can become problematic when you have a market system that relies on processing normally being turned around within an expected timeframe.
By way of an example, conditional mortgage approvals are typically expected by all participants in a transaction to become unconditional within 14 days from the contract date in Queensland.
In some recent cases lenders have shaken their heads and audibly inhaled through pursed lips, before suggesting dates for going unconditional in the middle of January next year.
Unsurprisingly, plain vanilla transactions are now falling over like wounded Arsenal players in the 6-yard box, it's gumming up the market, and in turn putting valuers on edge too.
Nanny state risks
My two penn'orth (assuming anyone cares for it):
There's absolutely nothing wrong with the policies that have been introduced; they just need to be applied rationally.
Take a read of the practice guidance and you'll almost certainly agree.
One area of mortgage processing that quite obviously needs to mature is the treatment and categorisation of living expenses, whereby recently incurred discretionary, entertainment, or luxury spend is being lumped in with essentials and then pored over with an almost comical level of scrutiny for what are ultimately 30-year loan products.
Paranoid lenders have become unduly fearful of making 'mistakes', in some cases are unsure what is expected of them, and therefore are over-compensating with their forensic analysis.
My reading of the practice guide is that lenders should make reasonable enquiries into risk, buffers, income, debt commitments, service coverage, housing costs, living expenses, and retain appropriate supporting documentation.
Nobody should have an issue with that, for such checks and balances lie at the core of a stable financial system.
But the pendulum has swung far beyond reasonable enquiries to paranoid, panicky, and in some cases almost pathological.
And having initially reduced financial stability risks, the lack of liquidity and confidence is now materially increasing them.
For the time being people and businesses still want to borrow, so give them the credit they need!
---
Addendum
The ALP announced at its conference that it would splash $6.6 billion on subsidies for landlords to supply affordable housing over 15 years, whereby rents must be offered at 20 per cent 'below market value' (whatever that means) in return for $8,500 per annum in landlord subsidy.
The devil is always in the detail with such policies, and to date there is none, but at first blush it smells like NRAS Mk II.
The focus on affordable rentals will be welcomed, and in some cases it might mean that families can rent a better quality of home than might otherwise have been the case.
The challenge with all such affordable housing programs is that it's very difficult to turn a bad investment into a good one with a subsidy, and the end results are often underwhelming.
Still, policy should be judged on merits, so let's see what they come up with.
