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Banks are clamping down on home loan borrowers

The banking regulator says banks have tightened their lending criteria for home loans in a number of areas — which could lead to more home buyers leaving the market.

In a statement today, the chairman of the Australian Prudential Regulatory Authority (APRA) Wayne Byres reported that “while housing lending continues to grow at a soldi rate – around 7% per annum – there is a compositional shift occurring as investors are less prominent and owner-occupiers account for a greater share of new lending”.

Mr Byres also noted that “serviceability assessment standards have improved across the industry – but says the regulator has more work to do to ensure improved lending policies are fully implemented, monitored and enforced”.

APRA noted on Thursday that while banks’ assessment of PAYG salary income hasn’t changed much in the past 12-14 months, a number of lenders have applied large haircuts to less stable sources of income such as overtime, bonuses, commissions, investment dividends and rental income. In simple terms, when a bank assesses a borrower’s ability to repay a home loan, the sources of income above receive a bigger discount, suggesting a more-conservative approach to lending.

It also likely means that fewer borrowers will be able to get a home or property loan.

The regulator also wants all banks to use higher interest rates when assessing serviceability. APRA says that all banks are now operating with a buffer over the 7% floor for new home loans, and all but two have a buffer above the 7% level for new and existing loans.

The big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) also appear to have received a temporary reprieve when it comes to raising more capital.

APRA says it intends to take a measured approach towards implementing changes coming from changes to bank credit and operational risk models, as well as follow the international time frame for the introduction of a minimum leverage ratio requirement, currently scheduled for 2018.

That could mean the banks have 12 to 18 months before they need to start raising more capital (if at all), and could even start sooner, by using underwritten dividend reinvestment plans (DRPs). DRPs allow shareholders to receive shares instead of cash as payment for dividends. An underwritten DRP means that for all of the dividend the company pays out in cash, an underwriter will pay the same amount of cash to the bank in exchange for shares. For the bank, it essentially means that from a capital point of view it hasn’t paid out billions in dividends that it might need to shore up its balance sheet.

The big four banks have frequently used underwritten DRPs to raise capital – but most shareholders don’t realise that their shareholding is being diluted by stealth.

Foolish takeaway

Clamping down on borrowers could well hurt the banks because it means they’ll write fewer loans or loans of lower total value. The problem they face though is that with a large fixed cost base, that leverage means a small fall in revenues can translate into a massive fall in profits.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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