APRA crackdown is good news for some lenders

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The Law of Unintended Consequences does not sleep. The Australian Prudential Regulation Authority’s crackdown on real estate lending by the banks it regulates is driving business to the financiers it does not regulate.



RBA not moving, but monetary policy is



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Non-banks blossoming without APRA

New regulations on mortgage lending are helping generate business for smaller lenders not regulated by the Authority. Michael Pascoe comments.

The financial system tends to be a bit like a water-filled balloon – push into one part of it and another part will bulge out. So making investor loans more expensive, smaller and harder to get from regulated banks means unregulated “banks” gain an advantage.

APRA regulates deposit-taking institutions. Institutions that don’t take deposits, that fund themselves on the wholesale market such as Pepper Money and Liberty Financial, have not been required to get tougher with borrowers.

A mortgage broker has shown me a simplified real-world example of the considerable difference APRA has made for the unregulated players:

A client with an investment property worth $600,000 wanted to buy another property for $500,000 with minimal equity. APRA now requires banks to assess applications on the assumption that the interest rate on all loans is 7.25 per cent. The client had annual income of $110,000. On that basis, banks assigned the client total “borrowing power” of $624,000.

An unregulated lender, free to make  their own credit assessment, looked at the rate the applicant actually paid on the existing property – 4.5 per cent – and allowed a borrowing limit of $1.05 million.

Yes, the unregulated lender is likely to be more expensive than the deposit takers, but they make it possible to get a loan APRA won’t allow deposit takers to offer.

The particular attraction for mortgage brokers in having unregulated lenders in their portfolio is that it gives them another string to their bow when banks are forever suspected of wanting to further reduce commission.

Anyone can walk into a bank, credit union or building society and apply for a loan, or use the comparison sites to shop around, but the broker becomes more valuable when a loan is not entirely plain vanilla.

The unregulated players have only a tiny role in an Australian mortgage market dominated by the big four, but APRA’s efforts to keep the financial system stable is helping to rapidly grow their niche.

Pepper Group is listed on the ASX. Its shares are up 42 per cent over the past year. The S&P/ASX 200 banks index is up 14 per cent.

Its Australian residential mortgage business saw a 36 per cent rise in new originations in 2016 to $2.53 billion. The results announcement noted system growth across the whole market had been 6.5 per cent. The company pulled up short of thanking APRA on that occasion, but co-CEO Patrick Tuttle subsequently told the AFR:

“Clearly any additional macroprudential policies imposed by APRA could give rise to increasing loan applications in the non-bank sector.” 

The irony is that much of the unregulated lenders’ funding comes from the regulated banks. 



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