US job openings shrink; equities fall; IMF downgrades 2019 growth; US threatens EU; EU & China make up; Aussie lending in credit crunch; UST 10yr 2.50%; oil down, gold up; NZ$1 = 67.4 USc; TWI-5 = 72

https://www.resilience.org/stories/2019-01-17/fracking-in-2018-another-…

Sounds like an industry in trouble, to me.

Just guessing, but probably because you are using IE. Microsoft themselves have abandoned that browser. Download and use Chrome or Firefox. We didn't remake the new version on interest.co.nz compatable with outdated browsers. Sorry.

Brave browser...auto ad-blocking...free...Interest perfectly formatted.

How quick would you approve a loan application, if a) you have been made responsible for the truth and accuracy of an applier's statements on income and expenses, and b) you could go to jail if you get it wrong?

FYI, in March 2016, APRA reviewed bank lending across many banks and inconsistent industry practices were found in debt serviceability assessments. As a result, they issued APG223 in February 2017.

It is interesting reviewing the speech in March 2016 when it was given, and reviewing that same speech today in light of current property market conditions, and property market price trends. When there were rapidly rising property prices in March 2016, little emphasis was given to this speech, yet in the current environment of falling property market prices, many are now taking notice as the tightened credit conditions are impacting them directly in some way. This speech was the earliest signal to astute investors that the credit environment was changing and likely to tighten.

Here are some excerpts of some of their initial findings before APG223 was issued.

"The results of the first exercise showed that it was not uncommon to find the most generous ADI was prepared to lend 50 per cent more than the most conservative. We found this disparity was particularly the case for our hypothetical investor borrowers. Even for owner-occupiers, however, we saw ADIs willing to lend at levels ranging from 5x to 6.5x gross income. This was surprising since, with mortgage comparison sites and on-line calculators now readily available and mortgage insurers providing some oversight, one might expect to see reasonable consistency in how loan applicants are assessed."

Our analysis of the results focused primarily on ADIs’ assessment of income, expenses, and the calculation of debt servicing.

On the income side, the largest difference we saw across ADIs was the discounting or ‘haircut’ applied to non-PAYG income, including rental income on investment properties. Wage and salary income is typically given full value, but other less certain sources are generally subject to haircuts.

At the time of the first exercise in late 2014, some ADIs were applying no haircut (i.e. accepting these income sources at face value) whereas others were applying discounts of 20 per cent or more to reflect uncertainty and other costs. In the case of rental income, bearing in mind the cost of real estate fees, strata fees, rates and maintenance, not to mention periods of vacancy, the 20 per cent norm that we observed did not seem particularly conservative. All ADIs are now applying at least minimum haircuts on uncertain income sources, and some have gone further to apply larger discounts to rental or other income. Figure 4, showing the net allowable income relative to total gross income, illustrates that there is still some variation in discounting of income for NIS purposes across ADIs, but overall the approaches are more conservative than in the first survey.

Some ADIs also include anticipated future tax benefits from negative gearing on a rental property in the calculation of allowable income. We did see a few ADIs applying more aggressive interpretations in this regard, where negative gearing tax benefits increased the possible loan size for one of our hypothetical investor borrowers by up to 10 per cent. More prudent practice is not to rely on negative gearing to get a borrower over the line.

On the expense side, the major differences across ADIs seen in the original exercise related to whether the ADI used a benchmark living expenses measures, such as the Household Expenditure Measure (HEM), the customer’s own reported expenses, or a more targeted calculation of the benchmark5. Most people have a hard time actually estimating their own living expenses, so the customer-declared figure may not be particularly accurate. However, the basic benchmark measures are also simplistic; scaling expense assumptions to the borrower’s income level (and potentially other factors including geography) is a more realistic and prudent approach.

Figure 5 shows the increase in expense assumptions in many of the ADIs; about half of the ADIs in our exercise were still using the basic HEM, but others have moved to implement more sophisticated approaches or are in the process of doing so. At a minimum, all ADIs now reflect the customer’s declared living expenses where these are higher than the benchmark.

Estimation of interest and debt repayment costs is the other key area where practices differ across ADIs. In this respect, I will focus on the interest-rate applied in the assessment, as well as other parameters such as the assumed amortisation term.

Given the predominance of variable-rate loans in Australia, it has been standard practice to add a buffer (or impose a minimum floor rate, or both) in the serviceability calculation. This aspect is critical because it takes into account the possibility that interest rates could rise over the life of the loan.
In APRA’s letter to all ADIs in December 2014, we expressed an expectation that interest-rate buffers used are at least 2 per cent above the loan rate, with a floor of 7 per cent. This expectation was based on a view is that serviceability needs to be tested at interest-rates on a ‘through the cycle’ basis; that is, assuming interest-rates could at some point in a 30-year loan normalise to more historical average levels. It is easy to forget that as recently as 2011, mortgage interest-rates were above 7 per cent. Using both a buffer (to cover shifts relative to actual rates) and a floor (to provide a minimum benchmark) is good practice.

The interest-rate buffer has probably been an easy target for competitive pressures. Prior to APRA’s close examination, interest-rate buffers were often in the range of 1-2 per cent. The minimum floor, if there was one, was often in the range of 6-7 per cent. Some ADIs had either a buffer or a floor, but not both. Some applied the buffer to the new loan, but not to existing loans.

Figure 6 shows the change in the minimum (floor) assessment rate between the 2014 and 2015 exercises. All ADIs in our exercise have brought their assessment rates up to at least 7 per cent, and most are above this level.

In a few instances, some ADIs that already applied relatively higher floor rates have in fact, lowered these to stay ‘in the pack’, or to counteract tighter policies elsewhere in their approach. This illustrates the finely balanced nature of the serviceability calculation, where small changes in parameters can lead to appreciable differences in how each ADI perceives its own competitiveness.

The treatment of the borrower’s existing debt also has a material impact on the overall NIS outcome. Many borrowers have existing mortgages on other properties. Failing to stress the interest-rate on those loans is not particularly sensible and undermines the prudent serviceability assessment. We found that some lenders were not doing this at all, or were applying a lower stressed rate than they were to the new loan.

In practice, it is not entirely straightforward to apply an interest-rate buffer to existing debt without full information on the terms of those loans. Many ADIs do not have application processes and systems that are set up to capture all of a borrower’s outstanding loans and the rate, term and repayment schedule, and ADIs are concerned that doing so could slow down the approval process. However, reasonably prudent proxies can be devised, and in the longer-term we would expect ADIs to enhance their systems and processes to capture more complete information on prospective borrowers’ other debt.

The next chart shows the interest rate used in the serviceability assessment for an existing mortgage commitment. Here, the changes from APRA’s first exercise to our second one are even more striking. There remains considerable dispersion in the rate applied for this hypothetical investor, which results from the different methodologies used by different ADIs.

Another area that our investigations have highlighted is the extent of interest-only lending. Interest-only lending, particularly among owner-occupiers, has become considerably more commonplace in the last few years. This may be due to products that offer flexibility in repayment options (such as offset accounts) and interest-rates (split fixed/floating-rate loans). Our serviceability investigations confirmed that prudent lending criteria applied by ADIs to interest-only loans do in fact reflect the borrower’s capacity to service the repayments including the principal amortisation. However, the hypothetical borrower exercise showed that some ADIs were not reflecting amortisation over the shortened repayment term; we have since clarified expectations in this regard.

In its recent review of interest-only lending, ASIC has indicated that an interest-only term of more than five years for an owner-occupier could be at risk of non-compliance with responsible lending obligations unless there is clear demonstration of the borrower’s objectives in taking out such a loan6. APRA supervisors have also queried ADIs as to the rationale for lending to owner-occupiers at lengthy interest-only terms. More recently, some ADIs have recently moved to implement more prudent maximum interest-only periods, with five years now being more common, although a number of ADIs still offer interest-only periods up to 10 years.

In summary, the hypothetical borrower exercise illustrated a material tightening of lending standards that we believe is appropriate and reflects more sensible risk assessment practices. Between 2014 and 2015, the maximum loan sizes that could have been extended to our four hypothetical borrowers declined by, on average, around 12 per cent for investors and 6 per cent for owner-occupiers. The actual change for individual ADIs was greater, up to 25 per cent in some cases. This should not be interpreted as an indication that actual loan sizes are shrinking, however, only that the maximum allowable loan for a given borrower income profile is now more conservative.

Source: https://www.apra.gov.au/media-centre/speeches/prudential-approach-mortg…

Presumably part of the Italian push back against Germany. The EU effectively performed a coup d'etat on Italy a few years ago and installed a government of their choosing. One Italian paper ran with the heading Quatre Reich:
http://static5.businessinsider.com/image/5020d35f69bedddb1300002f-1190-…

Italians have long memories.

It seems to be a popular request. We are looking at it.  :)