When responsible lending becomes a credit slowdown

So APRA cites the need to counter the previous environment of high and rising household debt, subdued income growth, low interest rates and rising prices, combined with a loosening of loan underwriting standards. Yet it’s now the continuing impact of regulatory changes on the housing market – potentially seeping into the broader economy – that is what is worrying just about everyone but APRA.

CoreLogic predicts falls of 18 per cent to 20 per cent from peak to trough in Sydney and Melbourne house prices. Some other analysts are suggesting the falls will be more like 25 per cent.

Spectre of a credit squeeze

There are many reasons for this, including curbs on foreign investment and a lack of demand, especially from investors. But it still means the spectre of a credit squeeze is hanging heavily over the outlook for 2019. There’s certainly no evidence of any pick up in mortgage borrowing – more the reverse.

According to APRA’s report, the overall rate of credit growth for housing has remained broadly stable, indicating its measures “have not had an undue impact on credit availability”.

However, it also acknowledges “trade-offs” for the reduction in risk. It says there has been a notable shift in housing dynamics more recently, which “by some accounts has in part been driven by some lenders adopting a highly cautious approach to lending”.

Indeed. Rather than being able to rush approvals through within a few days, for example, the time frame at even the most efficient big banks now drags out over several weeks at least . And if there is even the most minor technical error in the paperwork, the whole process has to start again.

Individuals or couples who would not have had the slightest difficulty in getting a substantial loan are now subject to much rigorous testing of family budgets. There is absolutely no discretion allowed – such as the ability to take into account the willingness of responsible borrowers to alter some of their spending habit after taking on a mortgage. It’s not quite back to the old days of having to spend years developing a relationship with the banking manager and demonstrating a long-term record of saving. But details of everything from Netflix charges to restaurant bills is analysed and added up in the negative balance.

This caution is compounded by the need to follow “responsible lending laws” as overseen by the other regulator, the Australian Securities and Investments Commission.

What’s in it for them?

The overall level of bad debts, including on residential mortgages, remains extremely low in the banking sector. But the royal commission’s spotlight on individual hardship cases and some potential breaches of responsible lending laws means individual bank employees and managers have a lot more reasons to say no rather than yes. What’s in it for them to take any risk?

So despite the insistence from banking head offices and from Canberra that banks want to lend, the money isn’t flowing too smoothly in practice.

In Westpac’s case, things became even more complicated after the Federal Court threw out a proposed $35 million settlement between it and ASIC over the bank’s failure to properly vet some mortgage applicants. This was after the bank sometimes used a standardised default “Household Expense Measure” to help determine eligibility for loans rather than higher expenses they had actually declared.

According to Westpac – and statistics – this HEM measure is efficient and doesn’t result in any decline in the ability to service loans. But because it wanted to avoid yet more negative publicity, Westpac belatedly agreed it had breached responsible lending laws in thousands of cases. Unfortunately for the regulator, this made no sense to the judge who refused to rubber stamp the deal. He said the settlement was either inadequate if there really were such breaches or unreasonable given the uncertainty about whether such lending did actually constitute a breach. It’s back to court in May.

And all this is before Kenneth Hayne delivers his report on misconduct in the financial services sector and his recommendations on how to fix it – and in a far less benign global environment.

Treasurer Josh Frydenberg says the government wants credit to continue flowing on fair terms for all consumers. Let’s wait to see how that works out this year.

APRA chairman Wayne Byres. Luis Enrique Ascui

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