In one of the first instances of a regulator beginning to find their feet after the Royal Commission delivered its final report earlier in the month, the Australian Securities and Investments Commission (ASIC) has started calling for change in the home loans market.
ASIC and other regulatory bodies were criticized in the Hayne report for not flexing their muscles enough, saying they were too willing to go along with bank recommendations rather than try and fix the issues at hand.
As the dust settles from the initial release of the report and banks and legislators discuss their next steps, ASIC have already been calling for the way major lenders are approving home loans to be altered, with new guidance on the way.
Since the news of the inquiry, and its many revelations, broke last year there have been plenty of concerns that the housing market is in trouble, and tightening of home loan approvals is likely to add more fuel to the fire.
This is partly because poor instances of home loans were being given out in the first place, with interest-only mortgages being one of the worst offenders for putting homeowners in precarious financial positions.
There have also been many cases shown in the last year where people have over-declared in their earnings statements, which has made it easier for them to get access to a higher level of mortgage.
Most banks have been known to use what is called the Household Expenditure Measure to determine who they should approve loans for, but this may not accurately track all spending compared to the actual declared earnings of the one applying for the loan. This can mean they are offered a rate they cannot easily pay back without dramatically cutting back on spending elsewhere.
ASIC has already taken Westpac to court over how they are using HEM, and although the hearing has yet to be held, they are expected to then push for legislative measures if they lose out in court.
Whatever outcome is taken from here is likely to indicate how they will deal with the other banks who are using HEM to measure the earnings of a customer before granting loans.
They are thought to be delivering this new guidance in the hopes that the banks will voluntarily change their stance on the issue, and are considering using their regulatory powers as a last option. One of the problems with HEM at present is that it was discovered that all of their assessments through the mechanism show all applicants assessed by this were classed as being in the bottom quarter of all spenders in Australia.
With the commission inquiry revealing nearly half of all mortgage applications were relying on HEM to decide whether to give approval or not, it may not be surprising that ASIC wants to stamp out such behavior. However, they are yet to get any valid figures from banks on what this has changed to since.
The regulator clarified that their issue with HEM was that it missed out on a number of factors that should be included in any calculations, as “mortgage payments, non-government school fees, alimony and maintenance, HECS-HELP payments and some medical fees and charges” were all exempt from HEM classification. ASIC said these other aspects needed to be included when banks were approving home loans, otherwise some of the underlying problems that caused the inquiry would continue to exist.