Regulators led by APRA have launched an immediate clamp down on home lending to investors, especially via interest only loans. In a statement issued Friday morning APRA said it had written to all Authorised Deposit Taking Institutions (ADIs) informing them of the tougher rules.
The latest move is a recognition that the crackdown launched in December 2014 had run out of steam as investor lending soared in the closing months of 2016 and into January of this year.
APRA also told ADIs that they will be especially looking at so-called ‘warehouse’ facilities where funding arrangement are put in place to finance lending by third parties. Macquarie Group is one of the biggest in this areas, although the financial press has been full of reports in recent months of new start ups in this area who borrow from smaller banks (many foreign, as happened before the GFC) and set up these ‘warehouses’ to on lend to actual borrowers with the mortgages then bundled up and sold into the securitised mortgage securities market to raise more funds.
This is the so-called ‘white’ mortgage market. Housing finance data released on March 10 for January showed a renewed surge in lending to investors and a fall in finance to owner occupiers, especially first home buyers. The Bureau of Statistics figures showed the proportion of home loans taken out by investors has climbed above 50% again, after having at first slipped to 44% in the wake of tighter scrutiny by APRA.
Lending to investors grew 27% in the year to January, well above APRA’s 10% benchmark set in 2015.
In fact the ABS figures revealed that real estate investors borrowed $13.8 billion in January, more than the $13.6 billion that was lent to owner occupiers. Of this, only $1.2 billion was lent for building new homes. The last time this happened was in late 2014 and helped trigger the first crack down on interest only loans, investor lending generally (they mostly use interest only loans).
APRA’s crackdown comes five days before the April Reserve Bank board meeting next Tuesday which is due to discuss the bank’s half year financial stability review.
The bank made it known in the minutes of the March board meeting that it grown more worried about the lending surge, especially to buyers and developers of apartments, and that it no longer believed the baks were following supervisory guidelines in some areas of lending.
The RBA warned “Recent data continued to suggest that there had been a build-up of risks associated with the housing market….. Borrowing for housing by investors had picked up over recent months and growth in household debt had been faster than that in household income. Supervisory measures had contributed to some strengthening of lending standards.” Dropped from that paragraph which was in the February minutes was this sentence “some lenders were taking a more cautious attitude to lending in certain segments.”
That, along with a speech by Michelle Bullock, the central bank’s overseer of the Australian financial system and its stability on March 14 where she warned the bank was ready to crack down on lending practices if needed, signalled that regulators were about to tighten lending controls.
Pleas from a nervous Federal government for action (while Messrs Turnbull and Morrison did nothing to correct the root causes of the ending bow out – the leverage borrowings by super funds, negative gearing and the 50% capital gains tax discount for property investors) added to the pressure on regulators to act
So on Friday APRA released its letter detailing the latest so-called macropudential controls said it wanted to see all lenders impose on mortgage lending, especially interest only loans. It said it wanted lenders to;
“(L)imit the flow of new interest-only lending to 30 per cent of total new residential mortgage lending, and within that: place strict internal limits on the volume of interest-only lending at loan-to-value ratios (LVRs) above 80 per cent; and ensure there is strong scrutiny and justification of any instances of interest-only lending at an LVR above 90 per cent”
It also wants lenders to “manage lending to investors in such a manner so as to comfortably remain below the previously advised benchmark of 10 per cent growth; review and ensure that serviceability metrics, including interest rate and net income buffers, are set at appropriate levels for current conditions; and continue to restrain lending growth in higher risk segments of the portfolio (e.g. high loan-to-income loans, high LVR loans, and loans for very long terms).
APRA Chairman Wayne Byres said in a statement detailing the letter’s contents that APRA believes the 10% benchmark for growth in lending to investors “ ontinues to provide an appropriate constraint in the current environment, balancing the need to continue to moderate new investor lending with the increasing supply of newly completed construction which must be absorbed in the year ahead."
“APRA expects ADIs to target a level of investor lending growth that allows them to comfortably manage normal monthly volatility in lending flows without exceeding this benchmark level.”
But he said additional supervisory measures, particularly in relation to the high level of interest-only lending, “are warranted.” Mr Byres said: “Our objective with these new measures is to ensure lenders are recognising the heightened risk in the lending environment, and that their lending standards and practices appropriately respond to these conditions.”
He said that said lending on interest-only terms represents nearly 40 per cent of the residential mortgage lending by ADIs – “a share that is quite high by international and historical standards."
“APRA views a higher proportion of interest-only lending in the current environment to be indicative of a higher risk profile. We will therefore be monitoring the share of interest-only lending within total new mortgage lending for each ADI, and will consider the need to impose additional requirements on an ADI when the proportion of new lending on interest-only terms exceeds 30 per cent of total new mortgage lending.
"APRA has chosen not to set quantitative limits in relation to serviceability assessments at this point in time. However, APRA considers it important that borrowers retain some level of financial buffer to allow for unexpected events, especially for borrowers that have high levels of indebtedness.
"APRA will therefore continue to scrutinize serviceability assessments, and ADIs continue to need to advise APRA should they propose to change their existing methodologies or policies,” Mr Byres said.
"APRA has advised ADIs that it is also monitoring the growth in warehouse facilities provided by ADIs to other lenders. These facilities allow lenders to build a portfolio of loans that will eventually be securitised. “APRA would be concerned if these warehouse facilities were growing at a materially faster rate than an ADI’s own housing loan portfolio, or if lending standards for loans held within warehouses are of a materially lower quality than would be consistent with industry-wide sound practices,” Mr Byres said.
“He said that APRA also continues to monitor the prevalence of higher risk mortgage lending more generally, including lending at high loan-to-income ratios, lending at a high loan-to-valuation ratios, and lending at very long terms or with long interest only periods (e.g. beyond 5 years),” the letter said.