Concern over ‘liar loan’ deferral extensions

Credit quality of customers intending to ask their bank to extend their deferral is “concerning”.

A survey of new mortgages has found that the credit quality of customers intending to ask their bank to extend their deferral past the end of a six-month period this month is “concerning”.

The sixth annual Australian Mortgages Survey by UBS found that the credit quality of new home buyers is weaker than shown by the banks and the Australian Prudential Regulation Authority.

“The 2020 survey illustrates factually inaccurate mortgages are a materially higher credit risk,” UBS analyst Jonathan Mott said. “We believe the banks need to undertake significant due diligence before extending deferrals or moving deferred customers to interest-only loans, as a large number of these borrowers are likely to be under more stress than the banks perceive.”

In his view, many who want to go to interest-only loans should be considered “delinquent”.

The anonymous survey of 904 Australians who took a mortgage in the past 12 months was conducted by UBS Evidence Lab from late July until September.

It comes after the federal government said last week it would ease responsible lending rules that put the onus on the banks to ensure would-be mortgagors were able to repay their loans.

Consistent with results from past years, the UBS Mortgages Survey found that 37 per cent of the sample stated that their mortgage application was not “completely factual and accurate”.

More concerning was the finding that the credit quality of these “liar loans” — mortgages where the lender does not verify the borrower’s income by looking at their pay slips, income tax returns or other records — were “significantly weaker than truthful customers”.

“We found that factually inaccurate mortgagors have seen household income fall by an average of 13 per cent, 36 per cent have deferred repayments, 66 per cent have a household member on JobKeeper/JobSeeker and 71 per cent withdrew superannuation,” Mr Mott said.

As the bulk of deferred mortgagors approach the end of their six-month deferral period, 47 per cent intend to revert to normal payments, 32 per cent intend to switch to interest-only loans, and 21 per cent intend to ask to extend deferral.

“However, the credit quality of customers intending to ask their bank to extend their deferral is concerning,” Mr Mott said.

“Of these customers, we found that 40 per cent overstated their income in their mortgage application by 21 per cent on average, 15 per cent understated other debts, 67 per cent are on JobKeeper, 25 per cent are on JobSeeker, and they have seen their income fall 19 per cent since the coronavirus pandemic on average in addition to the amount they overstated.

“Unfortunately, we found the financial position of those asking to move to interest only is only marginally better.” Thus, a recovery in employment and house ­prices is now “critical” to the banks’ performance.

But while some say mortgage stress will have a major adverse effect on the housing market, deferrals are “clearly in decline” and the high level of loan repayment deferrals won’t stop a housing market rebound in 2021, according to Pete Wargent, from buyerbuyers.com.au.

APRA’s latest figures reported housing loan deferrals decreased to $160bn in August from a total $1.8 trillion loan book for authorised deposit-taking institutions, representing about 9 per cent of loans still subject to housing loan deferrals. Small business loan deferrals are running at $53bn, down from $55bn.

Ongoing improvement

“There is a significant ongoing improvement under way, although clearly 9 per cent of loans subject to deferral is still an elevated number, and significantly higher than what would be considered a typical figure for mortgages in arrears,” Mr Wargent said.

Even in Victoria, consumer confidence rebounded (albeit to low levels), according to ANZ-Roy Morgan’s latest survey, as signs emerge that newly confirmed COVID-19 cases have been brought under control, implying that restrictions on movement may be relaxed sooner than previously feared.

“However, some risks remain, especially relating to landlords with rental apartments in the major capital cities,” Mr Wargent said. “For example, the continued impact of COVID-19 has led to the extension of an eviction freeze-out until March 2021 in NSW. This applies further cashflow pressure on landlords, who very often rely on the rental income to service their mortgage.”

Doron Peleg, of Riskwise Property Research, said banks would minimise forced sales as much as possible and a significant improvement in homebuyer sentiment, demonstrated by preliminary auction clearance rates consistently above the 70 per cent mark for houses in Sydney, show “the risk associated with the vast majority of the deferred loans is lower than expected”.

Mr Wargent said many borrowers had opted to defer repayments without necessarily being at risk of default. “Mortgage brokers have signalled that many borrowers elected to take a repayment holiday in order to maintain a financial buffer, as a form of insurance policy, rather than through genuine duress,” he said.

“Targeted stimulus measures providing income support have been very effective, as has been borne out by the lowest bankruptcy and insolvency figures in a quarter of a century.

“Moreover, banks have reported lately that increasingly owners are beginning to make repayments again, with about 109,000 loans being repaid again by the end of July, suggesting the figures will continue to improve over the coming six months.”