Budget to hit non-banks serviceability calculators

Behind the media noise and ho-ha about housing affordability, this budget will have some interesting future financing implications for property investors.

APRA are going to get:

1. Power to regulate non ADI's to meet their prudential practice guide.

What this means is non-bank lenders that determine their own serviceability metrics will slowly fall into line with APRA guidance. Hello Liberty.

Simply shifting risk to the shadow banking sector isn't ideal for financial stability, so now they'll have the power to address this risk and govern the non ADI lenders.

Legislation will need to pass first, but i'm sure there'll be no roadblocks to something like this. Typical process is it takes a month or two to draft it up and get it through at next available sitting session thereafter. Non banks may move in anticipation though.

2. Power to implement geographic based controls.

There must be some legislative power technicality that restricts APRA from implementing geographic based control.

This does raise questions.

APRA's clearly asked for these increased powers. I suspect their game planning Sydney and Melbourne specific controls (similar to NZ) and need legislative changes to be able to do what they may do.

What does this mean?

• APRA have game planned future measures that they can implement if required. Here's the signal at what they're looking to do. I suspect if it keeps steam rolling ahead geographic controls will be next (e.g. LVR cap for Sydney/Melbourne postcodes).

• And over leveraged property investors, solutions will close in time. If you plan on going here to continue your investing, tick tock.

Have dug out the measures for those that are interested. See below:

 

Geographic based controls = BOOM BRISBANE BOOM!

 

So ASIC will hand Liberty over to sit under APRA? How do you see that working Redom?

 

APRA have a prudential practice guideline document that guides serviceability calculations. This document is like a textbook telling banks exactly how a serviceability calculator should look like.

Most bank calculators look reasonably similar to it. Non banks have a more favourable calculator that isn't prescribed by this guideline - no one prescribes their calculator in detail.

ASIC aren't specialists here, they just have general responsible lending principle guidelines that all lenders abide by. Their guidelines aren't specific to serviceability calculators. Instead its more about how to verify peoples finances and more general about how lending frameworks should be.

APRA have no mandate to regulate non ADI's and force them to adjust their serviceability calculators to meet their guideline.

Essentially their is a regulatory gap here that allows non banks to have the serviceability calculators that they do.

I presume these powers will mean that the non banks need to follow this prudential guideline and move into line with everyone else.

 

Amazing work Redom. Thanks for the write-up.

How soon do you think Liberty might start tighten up on their serviceability?

 

I really don't see APRA easing lending criteria in locations outside of Melbourne & Sydney. That in itself introduces other over exposure risk into the market. More likely they'll further tighten Melbourne & Sydney and give lenders the option to not follow for the rest of the country. Lenders probably won't do much with it as it's difficult to manage.

If the private funders do come under APRA, they'll hold off as long as they can. They're making too much money from otherwise AAA mortgages in the meantime.

The problem with this type of restriction is it effectively eliminates a lot of risk based lending in the market. It could mean that people with certain types of non-conforming challenges such as defaults or uncommon income may be bared from the market completely.

 

Does anyone think the accc inquiry into banking pricing will comment on broker remuneration?

 

Does anyone else see the correlation between the government hitting banks with a new 0.06% tax increase but then handing control to APRA to basically wipe out the non conforming.

I'd love to be a fly on the wall in that meeting.

Gov - "So umm big4 we have bought you here today to let you know we are putting a new 0.06% tax increase on you".

Big4 - "Your WHAT? We will see about this, we are passing this straight onto the consumer".

Gov - "No you can't do that but you didn't let me finish. With the increase we are also going to be letting our wild dog APRA loose onto the non forming lenders, you know the ones who have been taking in all your profits"

*slight laugh around the room as the big4 look at their billion dollar profit statements*.

Big4 - "OK so you will hit us with an increase but at the same time wipe out a heap of our competitors. So in essence in the public eyes you will hit us but in reality by wiping them out we will in fact make even more money due to less competition".

Gov - "Yeah you nailed it, see I told you it will all work out for you guys"

Big4 - *laugh* "G u had us scared there for a second.....well what are we waiting for bring in the caviar and cristal".

 

Yeah, as usual, too late and the party seems to be drowning itself. It is comical, they do it every time, although they say scalpel now, you can still die a death of a thousand cuts

Why make these little guys the same as all the others, especially when the best known one seems to be self regulating by ever increasing the pricing - if they keep going it would have to be a fantastic, once in ten year deal to use them, they do fill a need.

 

Time for someone to incorporate an offshore lender (eg Singapore) that lends in $A so no currency risk only on Australian property with 70% max LVR so no equity risk that is OUTSIDE of APRA's controls and mandates.

I'd be very surprised if Liberty etc take this lying down. eg When did Australia become a communist country where the govt gets to determine how you make your profits.

 

The Govt and Banks have been in cahoots for as long as I can remember, well at least back to Hawkies time, everyone knows what they will do & anyone who thinks they do not have back room meetings must never have had a pay packet in cash.

 

i thought it read more like the govt handing the banks a loaded gun.

if they pass on the tax, it triggers a public outcry and justification for this royal commission.

 

Nah, that won't happen I do not think, even Labour just use this for political leverage. IMO.

 

These changes can also be used to turn up and turn down regional growth and over stimulation. The days of using rates to turn a economy up and down are finished. This makes more sense and like Redom says - Like NZ.

This could also mean the days of moving rates 0.25% to stimulate the economy may be limited. This is the new world order. Perhaps we may see less use of rates to fiddle with the economy. Not no fiddling - Just more targetted fiddling

 

Sure but if its incorporated offshore and not taking Australian retail deposits.....then APRA cant control them etc.

If I was Liberty I'd be relocating my incorporation to Singapore or somewhere similar quick smart.

Its ridiculous that APRA are overstepping here.

 

Yep there is limit to what monetary policy can achieve. It looks we have reached that limit, with dollar falling.... inflation is a risk in near term which further limits RBAs ability to cuts rates.