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The systemic concentration of loan portfolios in residential mortgages poses prudential and financial stability risks, said APRA as it proposes changes to authorised deposit-taking institutions’ capital framework.
In a discussion paper released yesterday (14 February), APRA highlights how residential mortgage lending poses risks not only to households and individual ADIs – but to the broader banking sector.
“Addressing the systemic concentration of ADI portfolios in residential mortgages is an important element of the proposals,” it said, adding that the proposals seek to target higher-risk residential mortgage lending.
APRA noted that residential mortgages as a share of ADIs’ total loans have increased significantly, from just under half to more than 60%.
“While losses incurred on residential mortgage portfolios in this period have been limited, this level of structural concentration poses prudential and financial stability risks, particularly in an environment of high household debt, high property prices, weak income growth and strong competitive pressures among lenders,” it said.
Households, ADIs and the broader banking sector are vulnerable to economic shocks in such circumstances, it said.
APRA proposes to segment residential mortgage exposures into the following categories with different capital requirements for each:
• loans meeting serviceability requirements made to owner-occupiers where the borrower’s repayment is on a P&I basis;
• loans meeting serviceability requirements made for investment purposes or where the borrower’s repayment is on an interest-only basis; and
• other residential property exposures, including those that do not meet serviceability requirements.
Martin North of Digital Finance Analytics said that APRA has finally recognised the risks in the system from excessive risk-taking in the mortgage sector.
"The focus on serviceability is appropriate, and was flagged last week from Wayne Byers as their strategic replacement to the 10% and 30% caps. This a more calibrated response," he told Australian Broker.
"If you think back from say two years ago, when there was little differential pricing between OO and iNV loans and IO versus P&I loans, the gamut of pricing has now grown significantly, so some will benefit and some will pay more."
He said this offers an opportunity for mortgage brokers to assist borrowers, and could be good news for those with the right tools to analyse serviceability.
The prudential regulator has focused on investment and interest-only loans and the need for appropriate capital requirements for these product segments.
It cites the fact that investment loans have not been tested in a nationwide downturn and the growing proportion of highly indebted households that own investment property as reasons for looking into investment loans.
“Importantly, regardless of historical loan performance, APRA’s view is that there are potential systemic vulnerabilities to the financial system created from high levels of residential mortgage lending for investment purposes.”
APRA also sees the significant share of interest-only home lending as a structural feature that increases the banking system’s risk profile. It said that interest-only borrowers face a longer period of higher indebtedness, increasing their risk of falling into negative equity if housing prices fall.
Asked for its comment on the proposals, Suncorp said the discussion paper on Basel 111 reforms proposes significant changes and at first glance extends well beyond residential mortgages.
"The team is working through the implications and in the meantime Suncorp continues to receive the benefits from operating as an advanced bank," said a company spokesperson.
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