Housing data revamp. Australia’s collection, analysis and presentation of key economic data on domestic home lending will be given a thorough going-over next year after an escalation in the number of times of misreporting or poor record-keeping by many lenders, large and small. Reserve Bank deputy governor Phil Lowe revealed yesterday that the question of accurate home lending data had been discussed at the highest level in recent weeks — the Council of Financial Regulators, which includes the Reserve Bank, APRA, the lead bank regulator, ASIC and federal Treasury.

Many of these problems were found after regulators, exasperated at the banks and other lenders and their aggressive lending to investors, agreed that APRA and ASIC should investigate — APRA spent the first quarter of this year and more going through the domestic home lending books of lenders large and small, while ASIC probed the fast-growing interest-only loans area. The upshot was that both found more than enough problems to cause concern and trigger fears that some lenders had little idea of who they were lending to, and whether they were meeting prudential rules and consumer law requirements.

Lowe told the conference yesterday:

“These various data problems have reinforced our view that the supervisory focus on investor lending has been entirely appropriate. And it is disappointing that some lenders’ internal systems have not been up to the task of reporting accurate data on the split between investor and owner-occupied housing loans.

“This issue was discussed at the most recent meeting of the Council of Financial Regulators, with Council members considering what steps could be taken to improve the quality of data. Among other things, it has been decided that APRA, the RBA and the Australian Bureau of Statistics will, next year, undertake a thorough review of the data collected from authorised deposit-taking institutions regarding their domestic books.”

— Glenn Dyer

So why did it happen? Good question, and there are pretty telling mistakes and errors from companies supposed to be competent enough not to make them, and to have the processes in place to pick them up soon after they were made. Clearly the two key regulators, the RBA and APRA, don’t believe what they have been told by the lenders and are continuing to search for explanations, as Lowe explained:

“While the reasons for some of these earlier errors have been identified, in other cases the reasons are unclear and lenders have not been able to provide comprehensive back data. As a result, when calculating growth rates for investor and owner-occupier credit, the RBA has had to make adjustments for what are effectively breaks in the series.”

But wait, there’s more. There’s also a second problem with mortgage lending data that has emerged over the past couple of months and has worked the other way. Lowe said this involved lenders changing the classification of loans from their initial description as investor loans to owner-occupier. As Lowe said:

“This is partly because, when faced with the higher interest rate on investor loans, some borrowers have indicated to their bank that they are not an investor, but rather an owner-occupier, and so should not have to pay the higher rate. Our liaison with lenders suggests that further reclassifications of this nature could be expected over coming months … Taken at face value, the data suggest a very sharp slowing in growth in investor credit and a sharp pick-up in owner-occupier credit. However, if we make adjustments for these reclassifications then the changes in growth rates are much less pronounced.”

In other words, regulators can’t get an accurate picture of just what is happening to home lending, especially in the core area of concern, loans to investors. Given this, and the way the banks have blithely lifted mortgage rates to investors first off, and then to all variable mortgages (around 15% of all mortgages are not impacted by the recent increases because they are made on a fixed-rate basis), it’s no wonder the central bank has a jaundiced view of the banks at the moment — especially how they are protecting shareholders from sharing in the cost of the higher capital levels required by regulators. The Reserve Bank raised many of these problems in its second Financial Stability Review, released a month ago. It is clear that many lenders have been flying blind in the biggest property boom for decades, especially in the Sydney markets. We might have escaped an almighty mess had this boom collapsed in the past year. So don’t believe the banks when they say they know what is happening in the home loan market until they can prove that they do. — Glenn Dyer

Peter Fray

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