Intense scrutiny of personal and household spending is expected to become a mainstay of the home loan application experience, as the banks move to ensure that borrowers can meet their obligations.
The increased and intense surveillance on expenses has been gathering momentum since the Australian Royal Commission into the financial sector was set up in 2017.
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And according to CoreLogic research analyst Cameron Kusher, borrowers should not expect the release of Commissioner Kenneth Hayne’s recommendations this week to bring any relief.
“Potentially we are in the early stages of a new normal for home lending where borrowers should expect a lot more scrutiny on their expenses and servicing capacity,” Mr Kusher said.
He said the tight credit environment, which has been the primary driver of less housing market activity and weakening home values, looked set to stay but not worsen in the wake of the release of the recommendations.
“Lenders will be focused on operating within responsible lending guidelines and regulators will be vigilant for any breaches of the rules,” he said.
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“Lenders who stray outside of the rule book should expect to receive the full extent of penalties.”
Mr Kusher said he was not expecting any substantial changes in the current housing market trends, but over the longer term, owner occupiers will gain back some of the ground lost to investors in recent years.
“Our macro view is that home values will continue to trend lower through 2019 and into 2020,” he said.
“As housing affordability gradually improves and owner occupiers continue to benefit from lower mortgage rates relative to investors, we are likely to see an organic shift towards owner occupiers comprising a larger share of the market than what we have seen over recent years.”
Overall, Commissioner Hayne’s final report was nowhere near as severe as what most were expecting, Mr Kusher said.
“There were no additional recommendations that borrower credit assessment should be tightened further, and perhaps surprisingly, the HEM (Household Expenditure Measure) hasn’t been ruled out as a valid benchmark for assessing borrower expenses, implying credit availability is not likely to worsen any further,” he said.
The recommendations around remuneration of brokers have been the most far reaching for the finance sector and prospective borrowers.
The Commissioner has recommended the removal of broker commissions, starting with trail commission, but ultimately moving towards a ‘fee for service’ model that would be paid by borrowers.
These trail commissions, famously described by Commissioner Hayne as “money for nothing”, are ongoing payments made by banks to brokers for the entire life of loans.
“Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?” Mr Hayne said in his report.
“It cannot be that they are deferred payment of fees earned earlier when the amount paid as trail depends upon the length of the life of the loan. And it cannot be that they are a fee for providing continuing services given there is no obligation for the broker to do so and no evidence of it being done.”
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Mr Kusher said that while the Federal Government has not completely accepted this recommendation (accepting the removal of trail commissions but not yet endorsing the changes upfront broker commissions), the opposition has stated it would act on every recommendation from the final report.
“Should these changes be made, we can expect a significant reshaping around the way borrowers engage with lenders and obtain finance,” he said.
Latest industry benchmarking figures from Comparator show that 59.1% of home loans originated over the September quarter were via a mortgage broker, which was a record high, Mr Kusher said.
“With such a complex array of mortgage products and with interest rates varying substantially across the product and borrower types, it’s understandable that the majority of borrowers would seek support to navigate their way through what’s available,” he said.
“Whether the same proportion of borrowers would be willing to pay for these services directly is unknown.
“Transactional costs are already a major impediment to participating in the market. On top of raising a deposit, borrowers are faced with the high cost of stamp duty as well as conveyancing, building and pest inspections, removalist costs etc.”
For smaller lenders and non-bank lenders, where mortgage broker originations generally comprise a much larger share of loan originations, any changes to the structure of broker remuneration has more significant implications.
“We should expect these lenders will move swiftly towards digital channels and online mortgage fulfilment in an effort to reduce their reliance on broker originated loans,” Mr Kusher said.
“Any changes will obviously come at a significant expense to these smaller lenders.
Arguably, the larger lenders will see a rise in their share of mortgages originated through direct channels, which implies a lower cost base and potentially less competition.”