Borrowers more honest with banks in wake of Hayne inquiry: UBS

The bank inquiry has achieved in a few months what regulators have been seeking for years — a clean-up in mortgage lending.

UBS says the sharp improvement in lending standards corresponds with the start of the banking royal commission. Pic: David Geraghty

The royal commission has sparked a clean up of lending standards across the $1.7 trillion mortgage system, doing in just a few months what financial watchdogs have for years been attempting to achieve.

Borrowers are now being more honest with their bank and lenders are taking longer to approve loans, according to a new survey of the mortgage market by investment bank UBS.

The latest UBS mortgage survey showed a sharp rise in the amount of borrowers claiming their mortgage application was “completely factual and accurate”, rising to slightly more than three-quarters of borrowers compared to just two of three borrowers a year ago.

UBS analyst Jonathan Mott last year highlighted the threat of a potential $500 billion worth of so-called “liar loans” in which borrowers had misled banks or fudged information to brokers to obtain home loans.

“The sharp improvement in underwriting since April corresponds with the beginning of the royal commission,” Mr Mott said.

Meanwhile, mortgages taking more than four weeks to be approved rose from 7 per cent to 12 per cent. “Underwriting tightening post April was heavily skewed to the broker channel, albeit off a lower bas,” Mr Mott said.

The evidence from this year’s survey of more than 1000 borrowers showed previous attempts to improve underwriting standards in the financial system, led by the Australian Prudential Regulation Authority and the corporate watchdog, were “largely ineffective”.

Mr Mott said customers only started seeing a tangible tightening of lending standards in recent months, since Kenneth Hayne’s royal commission started.

“While APRA recently stated ‘the heavy lifting on lending standards has largely been done’, from a customers’ perspective we believe this survey provides compelling evidence that tightening is accelerating, not peaking,” Mr Mott said.

“We believe there is likely to be much work required for the banks to comply with the royal commission’s likely more rigorous interpretation of responsible lending and improve mortgage underwriting standards,” he said.

In July, APRA chairman Wayne Byres declared “mission accomplished” on shoring up standards in the scandal-ridden home loan sector, and dismissed concerns of a ticking debt bomb of liar loans and fears of rising interest-only mortgage stress. Mr Byres also gave the $1.7 trillion mortgage system a clean bill of health following his latest “stress test” of the industry.

His remarks were a surprise to banking analysts and economists who had been expecting APRA to launch strict new rules to combat the perceived threat from the estimated $400 billion worth of loans held by highly indebted interest-only borrowers.

The Reserve Bank has repeatedly warned this year of the risk posed to the economy by heavily indebted households and the likelihood of higher mortgage repayments. Analysts are also concerned about the estimated $500bn worth of fraudulent loans held by borrowers who might have lied about their income and expenses to gain loans.

Mr Mott has also claimed the royal commission is likely to lead to a “credit crunch” which could impact economic growth, due to the restricted nature of credit in the wake of tougher lending rules.