Game over. Via ABC coverage of CBA CEO Matt Comyn at the Hayne Royal Commission yesterday afternoon:
Rowena Orr has moved on to CBA’s own lending practices, particularly its extensive use of the Household Expenditure Measure (HEM).
For those of you who don’t remember the HEM from the first round of hearings, it is a relatively low-ball measure of household living costs.
Banks have used it as either a floor or even default measure of living expenses when they decide how much people can afford to borrow.
When the bank regulator APRA ordered a targeted review of major bank lending standards, conducted by PwC, it found CBA used the HEM in 75-80 per cent of loan approvals.
Given that the HEM represents the median (middle, or typical) spending on essential items for people in a particular region and the 25th percentile (top of the bottom quarter) spending on discretionary goods and services, Matt Comyn says only 40-50 per cent of loans should be approved using the HEM as the measure of living costs.
All by itself, that is the bubble’s pin right there. The nation’s bellwether bank just confessed that roughly one quarter of its book is unexpectedly sub-prime and, worse for house prices, that that lending will no longer be available. In Westpac’s RC’s loan data the number was as high as 50% sub-prime. Add the other banks and it implies that at least one third of Australian mortgage lending is liar loans that will never be repeated, rolled over nor renewed. This is conservative. Other estimates are much higher.
It also means CBA and NAB will be following ANZ’s recent draconian lending standards tightening. It may also implies that the legality of the banks using the HEM remains a live issue at the RC and class actions.
There is no legislative fix for it. The banks are already raising lending standards and that will continue. Call it a credit squeeze, crunch or anything you like. Where the government may be able to stem the pain is in not allowing retrospective HEM legal fallout. That might prevent jingle mail. But the initial hit to credit availability and house prices will likely be large enough to break sentiment and trigger a price overshoot that hits the macro anyway leading to RBA rate cuts.
There was more bad news for property lovers:
Ms Orr shifts the focus to mortgage brokers, a channel CBA is the least reliant on of all the banks.
Mr Comyn says mortgage brokers provide a valuable service to customers, and are seen as independent of the financial institutions, providing choice, make the loan application process easier, and customers have “perceptions” they will get a better price.
The CBA boss agrees with a Productivity Commission proposition that the home loan market is “intimidatingly complex”.
Orr: “In your view, do mortgage brokers provide customers with advice?”
Comyn: “Yes.”
Mr Comyn says he thinks the average customer who walks into a mortgage broker would view them as an agent acting on their behalf.
Mortgage brokers are generally remunerated by commissions paid by the banks whose loans they sell.
Ms Orr questions why financial advisors are now banned from receiving conflicted remuneration while mortgage brokers are not. Clearly an area of interest for the commission.
More at Banking Day:
Mortgage brokers will be bracing for the elimination of trail commissions and even up front commissions, if the financial services royal commission’s questioning of CBA CEO Matt Comyn is any guide.
Discussing ASIC’s 2017 report on mortgage broking, counsel assisting Rowena Orr asked, “What did you hope that the report would achieve”?
Comyn said he “hoped it would recommend a specific commission model and structure.”
Orr: “A change to the commission model towards a fee model. Is that what you were hoping for?
—Yes.
“A recommendation that that occur, which you could then adopt and the rest of the industry would also adopt?”
—Yes.
“But that wasn’t what happened?
—No.
Comyn eventually agreed that CBA was waiting for the royal commission to report its own recommendations on commissions, and to act on those.
To put it mildly, the great Australian property bubble is bursting at the Hayne Royal Commission. There is much more here.
It’s no wonder that bank shares are plunging:
It’s going to get worse.
