Loan reclassification questioned in $51bn switch

by Miklos Bolza05 May 2017
New data from the Reserve Bank of Australia (RBA) has shown some concerning data about the bank reaction to tighter regulatory controls on investment lending.

RBA’s credit aggregates to end of March show that $51bn worth of loans have been switched from investor to owner occupier with $1.2bn of this occurring in March alone.

With the current balance of investor loans sitting at $577bn, these changes account for nearly 10% of the total loan book, said Martin North, principal of Digital Finance Analytics (DFA).

“This is being driven by the fact that incrementally the interest rate costs of an investment loan are significantly higher now than owner occupied whereas previously there was almost no difference. Maybe people cared less about getting the classifications right back then,” he told Australian Broker.

Pressure from the regulators is also likely to be behind these changes, especially with agencies such as the Australian Prudential Regulatory Authority (APRA) looking so closely at investment loans.

Additionally, internal systems inside the banks have historically been poor at identifying the purpose of the loan to start with, he said.

“That was partly because the origination processes were pretty similar depending on whether you were an investor or owner occupier. Of course, now that’s beginning to change but there’s still work behind the scenes that the banks need to do.”

“This is a problem. If you think you’re trying to manage the market from a regulatory standpoint with data that’s wobbly, you don’t quite know what target you’re shooting at.”

North said he had seen individual loan applications that should have been for an investor yet were classified as owner occupier.

“Sometimes, that’s because it was easier for the person to get one type of loan over another and the whole underwriting processes were a bit floppy and flaccid.”

While these standards have been tightening over the past few months, North said that APRA was still concerned about the underwriting processes of the banks.

“Loan classification is another one of those areas where there are probably issues in the underlying underwriting process. There are also probably issues in the databases that the banks are using. It’s also confounded a little bit by the fact that borrowers may start living in an owner occupied property which was for investment and vice versa.”

There are systemic issues in terms of how banks’ internal systems work, he added.

“Historically, I’ve seen mortgages go through five, six, eight systems through the process of origination. Essentially some of the internal systems and processes inside some of the lenders are pretty wobbly. In fact, some were using spreadsheets as part of the process which is highly manual.”

North said it was important to consider whether there are sufficient checks and balances in place to ensure investor loans are actually being written as investor loans with the same for owner occupier loans.

Second, there had to be appropriate checks and balances for when a borrower wants to switch from one type of loan to the other to ensure this is done for the right reasons, he said.

Related stories:

Tighter lending restrictions could backfire

RBA refocuses on need for strong lending standards

APRA to hone in on residential lending

COMMENTS

  • by Ed Ridge 5/05/2017 9:19:51 AM

    I will come out and say what Mr North won't and that is there is no way any of those figures are anywhere near correct. OO v's Investor how would anyone know, the lender doesn't and that's who you are asking? How many people took out an OO loan only to rent out the property either straight away or later on? Who has an OO loan but uses AirBnB? Unless the borrower actually tells the lender, and then the lender has a system to note it (doubtful at best) then it's all just hot air. These discussions are a waste of time and the media is lapping it up and Mr Byers looks as though he is having an impact when he is not. The Australian housing market and the discussions around it are getting out of hand and I feel there is a big shake up coming, sooner rather than later. My fear is that the ball will start rolling and will get out of control as the truth comes to light. Buckle up the ride could prove bumby.

  • by Cubeman 8/05/2017 9:19:32 AM

    Some lenders have done it this way, but I think a fairer way would be to give borrowers a time frame to advise IF the property is O/O and or change from I/O to P&I without fee or penalty rather than the blanket approach that has been applied.