Australian banks’ transition to Basel 4 regulatory requirements could come at a cost to mortgage brokers, as a result of new income and debt serviceability calculations which could be required by lenders.
According to the J.P. Morgan Australian Mortgage Industry Report (Vol 21), the Basel 4 proposal requires borrower debt serviceability levels to be calculated on a dynamic basis – that is, a borrower’s income generation needs to be tracked subsequent to loan approval.
Speaking at the release of the report, J.P. Morgan banking analyst Scott Manning told Australian Broker
that this could come as a cost to brokers as it is logistically difficult for mortgage brokers to undertake without access to transaction level details of the borrower, unlike a bank can have access to.
“It becomes a lot harder for a provider where the mortgage is originated through a mortgage broker [who] may not necessarily have that deposit account to track the income associated with the serviceability,” he said.
“…[I]n some way the ultimate provider of that credit would need to get comfortable that they can get information around the ongoing serviceability of [the borrower], and so brokers would have to look to effectively ensure they can provide that to the bank to meet those obligations.
“So, whether that be through a contractual element, whether that be through continual monitoring, or whether that be as technology changes through a live feed, such as the peer-to-peer guys are using in Yodlee for example. Any of that will ultimately cost more than what they are currently doing, so it is ultimately saying that there will be a higher cost to comply with that specific requirement.”
However, Manning says this doesn’t mean that brokers – who now account for 51.9% of total new home lending – will have to give up some of their market share. In fact, brokers may be a key beneficiary of increased churn in the market, especially in refinancing activity.
According to the report, if Basel 4 mortgage risk weights are to be determined by LVR, and valuations are to be held constant at the point of origination, this could provide an opportunity for a new lender to originate on a ‘dynamic LVR’ basis.
For example, when a customer is looking to refinance a mortgage, a new lender may consider the current market value of the property, whereas the existing lender cannot. This creates an advantage to a new lender if there has been significant property price appreciation to the point where the LVR falls into a lower bracket.
“I can see brokers playing a role of increasing importance if they do have the appropriate tools in place to identify when they’ve last refinanced a customer and what that dynamic LVR would be to then create the opportunity for a conversation to then refinance,” Manning told Australian Broker