Call to rein in unregulated shadow loans

A rush into ‘shadow lending’ has prompted calls for the banking regulator to oversee the sector.

Australian Bankers Association president Steve Munchenberg.

A crackdown on investor lending among major banks has seen offshore buyers and other property investors rush mortgage brokers and financiers that operate outside the scope of the banking regulator.

The move has prompted calls for the banking regulator to also monitor the so-called shadow banking sector, which is the fastest-growing player in the mortgage and investor lending market.

Australian Bankers’ Association chief executive Steve Munchenberg said the banking watchdog “arguably should have an interest” in monitoring the billions of dollars written by mortgage brokers and non-bank finance houses.

“It’s not so much that the banks are themselves lending, but if there’s lending that’s flowing through to an oversupply of apartments then that can rebound on banks through a (house price) correction,” he told The Weekend Australian.

The Australian Prudential Regulation Authority’s 10 per cent annual “speed limit” on bank investor lending growth appeared to momentarily cool property prices after its introduction at the end of 2014, but has since failed to curb a heated east coast market.

But investors are now being financed by smaller lenders and shadow banks as the major banks approach their individual limits.

Official figures released yesterday showed a rapid 4.2 per cent rise in investor loans over the month of January — the sixth straight month investor lending outpaced the owner-occupier segment. Auction clearance rates in recent weeks have hit record highs above 80 per cent.

According to brokerage Citigroup, APRA’s investor lending limit appears not to apply to a number of “micro-banks” that sit outside the four major banks and the second-tier regional lenders, such as Beyond Bank and Auswide bank, which are experiencing growth in lending at rates close to 20 per cent. Sydney-based Teachers Credit Union last year froze lending after experiencing investor lending growth at a rate of more than 16 per cent.

But while such lenders are within the remit of APRA’s regulation, which imposes tight guidelines on a borrower’s ability to service the loan and keeps an eye on the overall health of a lender, the increasingly energetic non-bank sector continues to escape such scrutiny.

At the same time, more investor loans are being written by country’s network of mortgage brokers, with more than 50 per cent of the home lending market.

Mr Munchenberg said the APRA limit didn’t mean there was less lending — “it’s just means people are moving into the less regulated space”.

“We need to be careful that we are not just focusing on one area of the market and not just sending the problem elsewhere into places that are less obvious,” he told The Weekend Australian.

John Flavell, chief executive of the country’s largest mortgage broker network, Mortgage Choice, said the APRA limit had created an opportunity for lenders who were not regulated authorised deposit-taking institutions.

“Lenders such as Liberty, Bluestone, Pepper — non-banks who are not subject to those prudential limits,” Mr Flavell said. “I don’t know that their (underwriting) standards are any looser — they’re just different,” he told The Weekend Australian.

Although non-banks are outside the scope of APRA, they must still comply with ASIC laws requiring credit to be written only when suitable and when consumers can meet their repayments. According to the RBA, non-banks had about $140 billion of assets as of last June.

“With Commonwealth Bank not refinancing investor lending, I reckon there’s a billion dollars a month looking for a home. That can get absorbed pretty well across most of the traditional lenders until it no longer can. Then it gives the non-banks a chance to step in,” Mr Flavell said.

Apartments targeted at overseas buyers have the banks and APRA worried.

Westpac chief executive Brian Hartzer told the parliamentary review of the major banks this week that high-quality buildings designed for local buyers were fine, but “you can go half a dozen blocks away and find another apartment building with a very small footprint, targeted at overseas buyers who don’t plan to live there, and it’s in trouble”.

APRA this week sent a warning shot to the nation’s lenders over the poor standards of their commercial and apartment lending books.

Some construction companies unable to secure finance through banks have looked at non-bank lenders for funding. Industry sources said that for non-banks such as Pepper, that rolled up mortgages into bonds and sold them to investors using bridging finance from the major banks — known as warehousing finance — the lending had sound prudential standards. But it became more complicated for companies that don’t seek warehouse financing.