Responsible Lending Obligations (RLO) might be our best bulwark against the Australian property bubble bursting, according to leading credit ratings agency S&P.
The ratings agency has released a report that suggests that the RMBS market, which underpins funding for lenders across Australia, has resisted the surge of potentially risky borrowers into the market because of an increase in lending standards.
RLOs have been debated in Parliament in recent months, with the government pushing for them to be loosened, but according to S&P, it is the higher level of regulatory oversight from APRA that has allowed for a large number of first home buyers to be supported by the market without a drop-off in RMBS standards.
“In response to the different grants offered by the government aimed towards first home buyers, we did see a lot of them rush into the market and for a period, they did comprise a high proportion of new lending,” explained Erin Kitson, RMBS analyst at S&P Ratings.
“That has happened before. Quite often governments will use home owner grants to get first home buyers into the economy, particularly into new build properties, because that has multiple stimulatory effects in terms of creating construction jobs.”
“That method has been used before – after the financial crisis, home owner grants were used for the same broader fiscal purpose.”
“From a credit risk perspective, when we look through an RMBS lens, we apply a higher assessment of risk to first home buyer loans because they don’t have the credit history that people who have been in the market for a while have.”
With higher portion of first home buyers can also come a higher portion of so-called ‘junk mortgages’, where people who have not demonstrated their creditworthiness get home loans that otherwise they might not have received, creating a situation similar to that which cause the subprime mortgage crisis in the United States and ultimately contributed to the GFC.
According to Kitson, however, lending standards have built a structure where first home buyers can enter the market without as much incumbent risk.
“In terms of comparisons to the US subprime, I don’t think that is the case here, and that’s underpinned by the lending standards here,” explains Kitson.
“In the RMBS sector, we have a mix of lenders, from major banks to non-banks and right through to regional banks. It’s quite a cross section of lenders who use securitisation as a funding tool.”
“Certainly, since 2014, lending standards have generally improved across the RMBS sector. That’s been in response to increasing regulatory prescriptiveness.
“By that I mean specifically APRA’s guidance: APRA has become more proscriptive in its guidance around mortgage lending and what it expects to see in debt serviceability calculations.”
“There’s the 2.5% interest rate buffer, to make sure that borrowers are being assessed on the expense side on the basis of expenses being an index along with the declared expenses of the borrower.
“There has been a number of improvements and increases in prescriptiveness in terms of what regulators expect in debt serviceability and assessments undertaken by mortgage lenders.”
“In response to that, what we have seen is greater convergence across lenders in line with those regulatory expectations.”
“That’s really important in terms of our Australian context: our household indebtedness is on the higher end of international comparisons, and given the environment that we’re in where interest rates are going to be lower for longer, clearly that puts a lot of upward pressure on house prices.”
“It’s really important that those lending standards, which have been improving over time, are maintained so that the ongoing stable performance that we have seen in mortgage arrears across the Australian market is sustained.”
