Australia’s banking regulator has shed further light on the problems with the explosion in housing credit over recent years, confirming it had found some lenders did not have “sufficiently robust practices” when it came to distinguishing between investors and owner-occupiers.
In answering a question on notice from a Senate Estimates hearing, the Australian Prudential Regulatory Authority said its investigations into loan classification at the nation’s banks had prompted updates to processes as well as shown some previous data was plain wrong.
APRA wrote to all authorised deposit-taking institutions (ADIs) in December 2014, outlining steps to ensure there were proper controls on lending practices at Australian banks, especially to investors. A “speed limit” on growth in new investor lending of 10% per year was introduced, and banks were required to show they were not exceeding this level of new lending issuance.
There was subsequently a significant change in the data on mortgage classes on issue. In a written answer provided to Greens Senator Peter Whish-Wilson that’s doing the rounds in the finance community today, APRA explained (emphasis added):
APRA’s focus on investor lending growth led a number of ADIs to assess their practices for reporting the borrower type in APRA statistical returns, as well as for other purposes. The exercise highlighted that some ADIs have not had sufficiently robust practices for monitoring the investor/owner-occupier status of their borrowers, and some data submitted to APRA was previously incorrect. APRA required review of data and upgrade of reporting capabilities where warranted. As a result, some have strengthened procedures, which has included identifying borrowers who were at one time investors and are now living [in] the property, and vice versa. This has resulted in a significant amount of switching between loan types. APRA has worked with ADIs over the last 2 years to ensure the data reported is reliable.
A major question that inevitably follows is: who were those lenders?
The reclassification of loans after the APRA intervention is evident from the published data. Back in September 2015, Business Insider published the following chart, showing the dramatic changes in mortgage loans on issue:
All of this comes amid increasing clamour for further policy action to curb the rapid house price growth seen in Sydney and Melbourne over recent years, and concerns that the cities are caught in a property bubble that could have a ruinous end.
Lindsay David, a co-founder of LF Economics and a regular commentator on risks in the housing market, said there could be implications for the credit ratings for Australian banks.
“It will be interesting to see if APRA disclose which banks provided ‘incorrect’ data and whether any penalties will be imposed by APRA.
“Anyone who thinks our regulators are tough cops on the beat are kidding themselves. There was no mathematical way that banks walked away from lending to property investors the way the data suggested they did. There is a strong case that the credit ratings agencies will need to re-evaluate the mortgage books of the Australian banking system. Because right now they are selling securities to institutional investors that may not be of a quality that the banks claim them to be.”