ASB swaps low equity fees on high LVR loans for low equity margins

Borrowing

ASB introduces specific low equity margins in place of varying fees on high LVR home loans, blames RBNZ

17th Feb 16, 10:34am by Gareth Vaughan

ASB is introducing a low equity margin, or LEM, on residential mortgages with high loan-to-value ratios (LVRs) from February 23 in place of a low equity fee, or LEF.

The bank says all new "residentially secured" lending where the LVR is greater than 80% will have a low equity margin added to the agreed loan interest rate. The LEM will vary by LVR as per the chart below.

In a letter to mortgage brokers, ASB's head of third party banking, Marc Oliver, said the new LEMs reflect the costs associated with high LVR lending.

"These include increased capital adequacy requirements on high LVR lending imposed by the Reserve Bank of New Zealand," Oliver said.

ASB's existing LEF applies when a borrower borrows more than 80% of the property’s value. The bank says calculation of the LEF excludes all other capitalised fees and charges and is non-refundable. The LEF is assessed by the borrower's LVR, with the LVR calculated as total borrowings divided by the total value of the secured property. Thus the fee varies and the move to a margin is effectively a flat "fee" approach.

However, a table on ASB's website - which it says estimates LEFs - touts a 0.25% LEF for a loan with an 80.01% to 80.99% LVR, 0.33% for an 81% to 82.99% LVR, 0.50% for an 83% to 85.99% LVR, 0.65% for 86% to 87.99%, 0.75% for 88% to 90%, and 1% for a 90.01% or higher LVR.

Under the LEM system, ASB says after at least six months customers will be able to apply for a reduction to a lower LEM band or removal of their LEM where an updated valuation and/or where the current loan balance indicates a LVR reduction. The bank also says it'll proactively review LEMs on customer's loans regularly and reduce or remove them where the current LVR indicates this is appropriate.

ASB grew home loans by a net $1.086 billion, or 2.43%, in the December quarter to $45.671 billion. The percentage growth outstripped the 2% increase recorded by Reserve Bank housing sector credit data. ASB's home loan market share was up to 21.8% at December 31 last year from 21.7% at June 30.

There's more background on the LEF & LEM issues here.

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13 Comments

by sharetrader | 17th Feb 16, 11:41am 1455662493

about time interest rates started to reflect some kind of risk instead of one size fits all

by Stephen Hulme | 17th Feb 16, 11:53am 1455663223

Unsecured depositors need a fit for purpose regulator demanding risk adjustment for unpublished bank capital risk weights against residential mortgages. If they turn out to be close to the 16% weighting prevailing in Australia the margin must be automatically raised to compensate for the risk.

by kiwichas | 17th Feb 16, 1:05pm 1455667508

Yeah, the banks are lending out 10=20X their worth, they are more leveraged than their flippin borrowers
http://www.interest.co.nz/saving/bank-leverage
I can demand a higher interest rate on my deposit @ ASB to reflect the risk; but I can't get it...

by Andrewj | 17th Feb 16, 1:10pm 1455667824

They have some decent sized loans in the dairy sector that must be 'under performing', watch this space. When I say decent, I mean decent, something to be proud of as a rural lender unfortunately not the only player.

by Gareth Vaughan | 17th Feb 16, 12:35pm 1455665704

Stephen, last I looked the risk weights on residential mortgages at NZ's big four banks started from about 25% at ANZ and ranged up to about 32%, 33% at the others. There is some regulatory work going on in this area both internationally and in NZ so things could change too.

by Stephen Hulme | 17th Feb 16, 1:13pm 1455668031

The RBNZ Governor claimed as much at the last Financial Stability Report press conference. Where can one obtain the figures you quote?. As I understand it smaller banks are stuck with 35%, while the Australians can work out and self impose their own capital punishment under Basel 3. It didn't work out well for the depositors in Australia where they now carry most of the capital risk, but do have recourse to a guarantee scheme.

by Gareth Vaughan | 17th Feb 16, 1:23pm 1455668635

They are in the general disclosure statements. Yes, all the other banks - Kiwibank etc - are at 35%, just the big four below this due to what's called the internal ratings based approach that they're allowed to use.

by Stephen Hulme | 17th Feb 16, 1:32pm 1455669156

Thank you. 25% of the mandatory 8% tier one capital demand doesn't leave much room for error, if residential properties join the realm of collapsing asset values.

by rjn1 | 17th Feb 16, 12:01pm 1455663680

I agree, this is a step in the right direction. What about the other side of the coin - should they not publish high-equity discounts? It's very hard to gain visibility of these and really, you just have to rely on your lender/broker raising your rate demands up the flagpole high enough, so in that regard, you're somewhat at the whim of your lender's networking abilities (thankfully, mine is rather well connected!).

by Machiavelli | 17th Feb 16, 12:06pm 1455663997

Agree. But it won't happen. Even with a long-term bank relationship, good equity and significant interest payments (read bank income), until you play the banks off against each other you don't get the best deal.

by rjn1 | 17th Feb 16, 12:14pm 1455664458

True, although if you prove over a few negotiations to be a squeaky wheel, while remaining a 'loyal' customer, you can generally get away without explicitly threatening to move banks (provided you have specific rate demands that are defensible based on the current market and competitive appetite).

by kiwichas | 17th Feb 16, 3:36pm 1455676600

Sense at last from the Fed?? this guy could get fired for thinking.... what we all thought at the start of the GFC.

The US Federal Reserve's newest policymaker and a former point man for the government's bailout of the financial industry has called on lawmakers to take radical action to rein in banks and protect taxpayers.
In his first speech as head of the Minneapolis Fed, Neel Kashkari, a Goldman Sachs executive before he worked at the US Treasury, urged Congress to consider "bold, transformational" rules including the breaking up of the nation's largest banks to avoid bailouts.
Kashkari indicated that his work at Treasury, where he managed a key part of the banking and auto industry bailouts during the financial crisis of 2007-2009, helped inform his current view.
A set of regulations introduced since the crisis, known as Dodd-Frank, did not go far enough, he said in prepared remarks that straddled the line between the Fed's policymaking remit and political advocacy.
"Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all," Kashkari said, arguing that the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to the US economy.
He urged lawmakers to consider breaking up large banks into "smaller, less connected, less important entities" and took a swipe at existing rules for winding down failing banks should they run into difficulty amid a weak global economy.
"I am far more sceptical that these tools will be useful," Kashkari said, adding that "we won't see the next crisis coming."
He said Congress should consider compelling banks to hold so much capital that they "virtually can't fail," in effect treating them like public utilities.

The above from Stuff today; I like the call for banks to have so much capital they can't fail; I think that would add a lot of stability if it could be applied, and not necessarily world wide even..

by SmoKey | 17th Feb 16, 10:40pm 1455702047

Neel Kashkari has blindsided his ex-bosses at Goldman Sucks and the Treasury. A refreshing change in his thinking and ability to be bold with expressing them. And coming as it does when he is with a regional Fed is significant in that it goes against the grain of the Federal Reserve which has been more on the side of the Big Banks. Will be interesting to see how this plays out or whether it is snuffed out soon by the powers that are.