Banks warned over lending standards
As the $1.2 trillion mortgage market heats up, an official audit of lending standards by banks and other lenders has highlighted areas where the sector could lift its game.
The warning by the Australian Prudential Regulation Authority came amid signs the housing market is starting to move ahead with prices posting their strongest quarterly gain since the end of the 2010 boom.
The national dwelling value rose 4per cent in the three months to August, the highest rate of capital gain since April 2010, right before the last boom began to fizzle, according RP Data-Rismark figures released this month. Sydney dwelling values shot up 5.4 per cent over the quarter and values in Melbourne rose 4.8 per cent.
Economists are still tipping the Reserve Bank may cut official cash rates as early as November to help spur growth through the economy as mining investment slows.
An audit of the nation's banks by APRA concluded lenders had policies in place to make sure borrowers could service their debts, but it also identified areas where banks could improve their internal processes when approving home loans.
The audit, conducted this year, assessed the debt-servicing policies used by 27 banks and other authorised deposit-taking institutions in home lending.
Some of the key areas for improvement were: banks should look more closely at borrowers' other debts; some assessments of borrowers' living expenses were too simplistic; and, in a minority of cases, some mortgage documentation was incomplete or inaccurate.
The regulator's report said it was "critical" for banks to maintain a strong focus on making sure borrowers could service their debts when interest rates rose. "Low interest rates can mask debt serviceability assessments, creating opportunities for borrowers to increase their leverage," it said.
It said banks and other deposit-based lenders needed to carefully monitor the debt-servicing capacity of their borrowers "over the duration of housing loans, not just at origination to ensure that borrowers are able to manage the transition to higher interest rates, when that inevitably occurs".
A separate article from APRA said there had been an increase in the number of higher-risk loans of 90 per cent or more of the property's value, a trend the regulator was monitoring closely.
Last month New Zealand's central bank moved to rein in a hot housing market there, imposing its limits on low-deposit-high-value house loans. Regulators often view restrictions on the amount of high loan-to-value ratio lending as an effective macro-prudential tool in controlling the housing market.
Commonwealth Bank chief executive Ian Narev recently said he did not lie awake at night worrying about how Australia's property market might respond to record-low interest rates.
Mr Narev said he had total confidence in Reserve Bank governor Glenn Stevens and the board to make a judgment on the property market.
Frequently Asked Questions about this Article…
The Australian Prudential Regulation Authority (APRA) warned banks not to let lending standards slip as cheap credit makes borrowing easier. APRA said borrowers must be prepared for higher interest rates and urged lenders to keep a strong focus on borrowers' ability to service debts.
APRA's audit of 27 banks and authorised deposit-taking institutions found lenders generally had policies to check borrowers could service their debts, but it identified areas for improvement in how banks applied those policies and managed internal processes when approving home loans.
APRA flagged that some banks needed to look more closely at borrowers' other debts, that some assessments of living expenses were too simplistic, and that in a minority of cases mortgage documentation was incomplete or inaccurate.
APRA says low interest rates can mask debt serviceability assessments and create opportunities for borrowers to increase leverage. It stressed lenders should monitor borrowers' debt-servicing capacity over the full duration of housing loans, not only at origination, to ensure borrowers can cope when rates rise.
Yes. RP Data‑Rismark data in the article showed national dwelling values rose 4% in the three months to August — the strongest quarterly gain since April 2010 — with Sydney up 5.4% and Melbourne up 4.8%, while the mortgage market is about $1.2 trillion.
APRA noted an increase in higher‑risk loans with LVRs of 90% or more and said it was closely monitoring that trend. The article also points out regulators sometimes use limits on low‑deposit, high‑LVR lending as a macro‑prudential tool to cool housing markets.
Economists were tipping the Reserve Bank might cut official cash rates as early as November to help spur economic growth as mining investment slows. APRA's point is that periods of low interest rates can mask how affordable loans really are, so lenders must stay vigilant even if rates fall.
Commonwealth Bank CEO Ian Narev said he did not lie awake worrying about how Australia's property market might respond to record‑low interest rates and expressed total confidence in Reserve Bank governor Glenn Stevens and the board to judge the property market.
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