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Borrowers Are the Wrong Targets

The financial services regulator, the Australian Prudential Regulation Authority (APRA), recognises there is a problem with lending and is again ramping up its demands.

APRA Chairman Wayne Byres made the point late last year that the mortgage lending standards of some banks had fallen to “horribly low levels” that lacked “common sense”.

But he also conceded that APRA had been slow to act. So now it’s making up for lost time.

Crack that whip

APRA began this spin cycle by directing banks to restrict the growth of lending to property investors to 10 per cent a year and increase the amount of capital they hold against their residential mortgage exposures to between 25% and 30%, up from about 16%.

Housing loan approvals

housing-loan-approvals

Sources: Australian Bureau of Statistics, Reserve Bank of Australia

Now it is proposing new measures to regulate the mortgage broking sector even further. But its latest idea is well wide of the mark.

APRA is not proposing acting against lenders who let the standards slip, or even shaming them into changing their ways. Instead, it wants to attack the borrowers again.

Borrowers in its sights

APRA wants to force residential mortgage lenders to extract more detailed information on borrowers’ incomes and expenses. It also wants lenders to toughen the requirements for interest-only loans and property investments in self-managed super funds.

What it is asking is that lenders slug first-time buyers – who are watching their dreams get fainter with every house price increase – even harder.

Household finances

household-finances

Sources: Australian Bureau of Statistics, RBA

APRA wants homebuyers to prove they can service a 7% mortgage rate on a loan to value ratio of less than 90%, with less income being taken into account.

Interestingly, nowhere in the consultative paper does it qualify how it arrives at 7% in a low interest rate environment.

It also makes the assumption about a borrower’s income that the “prudent practice is to apply discounts of at least 20% on most types of non-salary income”. “At least” means this can be more, much more, and APRA is not specific about what “most” means, or how it arrived at the 20% figure.

But there are dangers

The regulator is concerned about rising risks to the housing market from a looming oversupply of units and the associated settlement risk. This is not unwarranted.

Mortgage arrears nationally have risen to three-year highs – with Western Australia, Tasmania and the Northern Territory at record levels – despite interest rates falling to historic lows, figures from ratings agency Moody’s show.

Furthermore, mortgage delinquencies increased over the past year in every state and territory.

Mortgage arrears are highest in regional WA

mortgage-arrears-are-highest-in-regional-wa

Source: ABS

However, the trust we once had in the regulatory and supervisory skills of governments and regulators went out the window when the banks took us to the edge of a great depression.

So the question remains, why attack borrowers again instead of the lenders?

We can only hope this consultation paper, like so many before it, gets caught up in the machinery of government and forgotten.

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