No sign of mortgage stress – yet

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No sign of mortgage stress, yet as regulators tighten screws on mortgage lending

By Tim Boreham, Editor-in-Chief, The New Criterion

With Sydney’s average stack now worth over a million dollars – with a broken drain as the only view of the water – it’s a safe bet that the next financial crisis will have something (or all) to do with the lodging.

Last week Federal Treasurer Josh Frydenberg and the powerful Council of Financial Regulators signaled a crackdown on the insanity that was unfolding.

This followed the International Monetary Fund’s warning that the burning housing market threatened financial stability, with the august body recommending “macroprudential” measures such as ceilings on high debt-to-income loans and loan ratios. -Evaluation.

The Australian Prudential Regulation Authority (APRA) responded on Wednesday by increasing the cushion rate – the assumed interest rate at which lenders must assess a borrower’s ability to pay – from 2.5% to 3%.

Take into account the pandemic blockages of the marathon and the unemployment that follows and it is no wonder that policymakers are worried.

When it comes to ASX-listed home lenders, there is no sense of a looming crisis, but avoiding one will require more deft credit assessment practices, such as a much closer examination. “lying loan” requests.

But it’s often OK until it isn’t.

Mortgage specialist Resimac ((RMC)) nearly doubled its net income to $ 107.6 million in the 12 months to June 30, helped largely by bad debt charges falling to $ 2.7 million from $ 22 million previously.

The owner of Homeloans.com.au, Resimac raised a specific allowance of $ 5.43 million – 0.04% of the loan portfolio of $ 13.8 billion, compared to $ 6.06 million (0.05 %) one year ago.

Unsurprisingly, prime mortgages fare better than the “specialist” category (these are loans that traditional lenders won’t accept, but can still be a good risk with the right treatment).

Resimac CEO Scott McWilliam said that while there has been a slight increase in the number of troubled claims, it’s not like 12 months ago and the mood is “rational”.

In its annual figures, Freedom Financial ((LFG)) said customers representing just $ 84 million in assets were subject to Covid-19 partial payment agreements, up from $ 1.133 billion in the previous June.

Home loans represent 71% of Liberty’s total loan portfolio.

Liberty’s bad and bad debt expense fell to almost nothing, thanks to the reversal of previous provisions that were not needed.

Fresh out of its initial public offering in May, Pepper Silver ((PPM)) notes that a year ago more than 12,000 customers requested a payment break. By August, the number had dropped to 173 – so few that you could almost name them individually.

“It’s quite different,” says CEO Mario Rehayem.

He believes customers are much better informed about what a refund “vacation” really means: like a normal vacation, they won’t last forever and will eventually have to be paid for.

“Before there was a rush for the phone, [with borrowers] thinking they might lose their refunds and not have to pay them back, ”he said.

It also allows more customers to have a decent savings buffer to fall back on, so that they cannot enjoy leisure and travel activities.

“Before Covid, household savings were between 2% and 2.5% (of disposable income),” says Pepper CFO Therese McGrath.

“The Australians have really got their finances under control and the rate has gone up to 20% and we are still between 11 and 13%. “

In the (first) half of June 2021, Pepper’s loan losses were 0.28% of the loan portfolio, an improvement of 9 basis points. Mortgages make up $ 11.3 billion of Pepper’s $ 14.3 billion loan portfolio – 79% – with asset financing (mostly vehicles) making up the rest.

“Historically, our loss performance has been good because of the disciplined way we issue credit,” Reyahem said.

“We have great performance, but historically we have it too. “

At the top, the experience of Commonwealth Bank ((CBA)) emulates that of non-banks, but with even lower losses.

The only Big Four bank to have a June balance date, the nation’s largest mortgage lender reported a full-year loan impairment of $ 554 million, or 0.07% of the $ 817 billion loan portfolio. the bank’s dollars, up from $ 2.518 billion previously.

Home loan arrears amounted to $ 134 million, up from $ 1.034 billion previously.

The bank’s overall provisioning for bad debts stands at $ 6.2 billion (1.63% of the portfolio) against $ 6.4 billion previously.

In its third quarter credit quality update, Westpac ((WBC)) – the second-largest mortgage lender – reports 90-day mortgage delinquencies at 1.11% of the pound, up from 1.62% a year ago.

We’ll have a better idea when Westpac, ANZ Bank ((ANZ)) and National Bank of Australia ((NAB)) report their full numbers for the year up to September 30.

On the progress reports to date, there won’t be anything too big, hairy, and scary – or not yet anyway.

On a pessimistic note, the hefty profits on the aforementioned lenders are unlikely to be repeated if there is an explosion in defaults from such low levels.

On the bright side, lenders use data to assess claims in a more personalized way, rather than accepting or rejecting customers using cookie-cutter metrics.

Data-driven metrics should also help lenders avoid the problems of the past. Pepper, for example, is paying close attention to areas and local government industries affected by Covid and will not lend to buyers of high-rise apartments or lifestyle properties such as hobby farms.

Hopefully lenders’ high tech tools are top notch, because when (not if) interest rates rise, their stress tolerance assumptions will be strained.

Over the past month, shares of Resimac, Pepper and Liberty Financial have fallen by -18%, -11% and -3% respectively, while the broader market has lost around -4%. CBA shares actually gained 3%, although the bank is often ridiculed as the most expensive building company in the world.

It is a moot point whether investors are correctly sniffing out the growing distress in the mortgage belt, or if this is another false alarm and stocks are a value buy in what has been a sector. covered with teflon for so many years.

Disclaimer: Under no circumstances have there been any inducements or similar inducements made by the company mentioned to IIR or the author. The views here are independent and have no connection with the core research offering of IIR. The opinions expressed here are not recommendations and should not be taken as general advice in terms of stock recommendations in the ordinary sense of the word.

The content included in this article is not by association the point of view of FNArena (see our disclaimer).

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