No signs of mortgage stress – yet – as regulators tighten screws on mortgage lending

With an average house in Sydney now worth over a million dollars (even with a broken drain, the only view of the water), it’s a safe bet the next financial crisis will have something (or all) to do with accommodation.

Last week Australian Federal Treasurer Josh Frydenberg and the powerful Council of Financial Regulators signaled a crackdown on the insanity that was unfolding.

This followed warning from the International Monetary Fund that the burning housing market threatened financial stability, with the august body recommending ‘macroprudential’ measures such as ceilings on high debt-to-income loans and loan-to-assessment ratios. .

The Australian Prudential Regulation Authority responded on Wednesday by increasing the cushion rate (the assumed interest rate at which lenders must assess a borrower’s ability to pay) from 2.5% to 3%.

Take into account the pandemic blockages of the marathon and the unemployment that follows and it is no wonder that policymakers are worried.

ASX-listed real estate lenders

When it comes to ASX-listed real estate lenders, there is no sense of a looming crisis, but avoiding one will require more deft credit assessment practices, such as a much closer examination. “lying loan” requests.

But it often goes, until it isn’t.

Mortgage specialist Resimac (ASX: RMC) nearly doubled its bottom line to $ 107.6 million in the 12 months leading up to June 30, 2021, helped largely by the bad debt load dropping to 2. $ 7 million versus $ 22 million previously.

Owner of Homeloans.com.au, Resimac raised a specific provision of $ 5.43 million, or 0.04% of the loan portfolio of $ 13.8 billion, against $ 6.06 million (0.05 %) one year ago.

Unsurprisingly, prime mortgages fare better than the “specialist” category (these are loans that traditional lenders won’t accept, but can still be a good risk with the right treatment).

Reduced difficulty requests compared to 12 months ago

Resimac chief executive Scott McWilliam said that while there has been a slight increase in claims it is not like 12 months ago and the mood is “rational”.

In its annual figures, Liberty Financial (ASX: LFG) said customers with just $ 84 million in unpaid payments were subject to COVID-19 partial payment agreements, up from $ 1.133 billion in the previous June.

Home loans represent 71% of Liberty’s total loan portfolio.

Liberty’s bad and bad debt expense fell to almost nothing, thanks to the reversal of previous provisions that were not needed.

Fresh out of its IPO in May, Pepper Money (ASX: PPM) notes that a year ago, more than 12,000 customers requested a payment break. By August, the number had dropped to 173 – so few that you could almost name them individually.

“It’s surprisingly different,” says general manager Mario Rehayem.

He thinks customers are much better informed about what a refund “vacation” really means: Like a normal vacation, it won’t last forever and will eventually have to be paid for.

“Before there was a rush for the phone, [with borrowers] thinking they might lose their refunds and not have to pay them back, ”he explained.

More savings

It also allows more customers to have a decent savings buffer to fall back on, so that they cannot enjoy leisure activities and travel.

“Before COVID, household savings were between 2% and 2.5% (of disposable income),” says Therese McGrath, chief financial officer of Pepper.

“The Australians have really got their finances under control and the rate has gone up to 20% and we are still between 11% and 13%.”

In the (first) half of June 2021, Pepper’s loan losses were 0.28% of the loan portfolio, an improvement of 9 basis points. Mortgages represent $ 11.3 billion of Pepper’s $ 14.3 billion loan portfolio, or 79%, with asset financing (mostly vehicles) making up the remainder.

“Historically, our loss performance has been good because of the disciplined way we issue credit,” Reyahem said.

“We have great performance, but historically we have it too. “

The Big Four Banks

At the top, the experience of the country’s largest mortgage lender, the Commonwealth Bank of Australia (ASX: CBA), mimics that of non-banks, but with even smaller losses.

The only Big Four bank to have a June balance date, the Commonwealth Bank reported a full-year loan impairment of $ 554 million – 0.07% of the bank’s $ 817 billion loan portfolio. – against 2.518 billion dollars previously.

Home loan arrears amounted to $ 134 million during the period, compared to $ 1.034 billion.

The bank’s overall provisioning for bad debts stands at $ 6.2 billion (1.63% of the portfolio) against $ 6.4 billion previously.

In its third quarter credit quality update, Westpac (ASX: WBC) – the second-largest mortgage lender – reported 90-day mortgage delinquencies at 1.11% of the pound, compared to 1.62% it a year ago.

We’ll have a better idea when Westpac, ANZ Bank (ASX: ANZ) and National Australia Bank (ASX: NAB) release their full numbers for the year as of September 30.

On the progress reports to date, there won’t be anything too big, hairy, and scary – or not yet anyway.

Custom app reviews

With a note of caution, the hearty gains on the aforementioned lenders are unlikely to be repeated if there is an explosion in defaults from such low levels.

On the bright side, lenders use data to assess claims in a more personalized way, rather than accepting or rejecting customers using cookie-cutter metrics.

Data-driven metrics should also help lenders avoid the problems of the past. Pepper, for example, is paying close attention to areas and local government industries affected by COVID and will not lend to buyers of high-rise apartments or lifestyle properties such as hobby farms.

Hopefully the lender’s high-tech tools are top notch, because when (not if) interest rates rise, their stress tolerance assumptions will be strained.

Share price movements

Over the past month, shares of Resimac, Pepper and Liberty Financial fell 18%, 11% and 3% respectively, while the broader market lost around 4%.

Commonwealth Bank shares actually gained 3%, although the bank is often ridiculed as the most expensive building company in the world.

It is a moot point whether investors are correctly sniffing out the growing distress in the mortgage belt, or if this is another false alarm and stocks are a value buy in what has been a sector. covered with teflon for so many years.