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Are lenders prepared for the complex dynamics now in home lending?

EVP

According to ABA CEO Anna Bligh, as reported by Mortgage Business, the key priorities for banks in 2021 would turn to supporting customers still experiencing financial difficulty, assisting with economic recovery, and “ensuring that credit flows into the recovering economy”.

“Over the past year, banks have cushioned the blow for their customers. Through 2021, their priority is helping customers rebuild and get ahead,” she said.

These words suggest, at least at a high level, there is awareness of the need to deal with a mix of matters.

Let’s have a look at three groups of issues and where they sit.

1. Big headlines

  • New home lending up 20%+ 
  • House prices widely tipped to rise 15% or more in 2021; 

Banks will certainly pay attention to this area…as this is where they make their money. 

2. In the background

  • Uncertainty over possible changes to responsible lending oversight … and what the rules will be

This is much more political. The Treasurer and his staff are keen to ‘address’ what they claim is a big issue constraining lending, which seems a bit of a long bow given the above headlines.

Banks will keep a close eye on this, because this is being positioned as means to reduce complexity and open up the flow of credit, ultimately reducing costs. Even if proposed changes are enacted, this is no foregone conclusion.

3. Fading quickly from sight

  • Covid-19 loan deferrals well down from a peak 10% of loans ($245B) to 0.5% of loans ($10B)

There certainly is a good news story here – the cataclysmic disaster has been avoided and as the first two headlines indicate the actual risk of loss seems to be shrinking.

That said, there remains an operational challenge as 0.5% of loans still represents a substantial amount compared to the number of loans normally not making repayments.

With a range of ‘emergency’ pandemic policies coming to an end, such as APRA capital relief and JobKeeper, we are potentially approaching the stage where tangible activity including active collection, default and mortgage in possession will need to commence – and whilst the tsunami has been avoided, there is still a significant potential for a flood of this activity.

An increase of up to 50% of a year’s total of defaulting loans could be added to the normal workload by 1 July now that the government support programs and concessional capital treatment have been wound back.

What makes this a concern is not the amount of money that could be lost, as the first couple of headlines above are likely to assist greatly in that regard, but rather the nature of the work involved in forced sales. The processes related to foreclosure, mortgage in possession and realisation of security are highly manual, full of legal and operational detail and involve specialised knowledge.

Such processes are slow, highly labour intensive, and whilst the costs are recoverable, there is material reputational risk and there is certainly no money to be made.

So, perhaps the big question is – are the banks (and all the other services involved in the foreclosure process) ready for what is coming?

Boards should be seeking assurance now that their teams are ready to avoid reading headlines about what went wrong and why customers were not dealt with as they should be in this area….or all of the progress since the Hayne Commission could quickly be undone.

Michael Hartman

Senior Manager Risk & Compliance

A dedicated practitioner who is always across the detail, Michael applies a structured approach to risk assessment, assurance information gathering, decision making and implementation to ensure execution matches intention.

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