Twenty-seven authorised deposit-taking institutions (ADIs) participated in the Australian Prudential Regulation Authority’s (APRA’s) 2012/2013 targeted review of housing loan approval standards, which is discussed at length in the latest issue of APRA Insight.
The review was carried out by external auditors at APRA’s direction, with a focus on the income tests ADIs use to assess whether borrowers can afford the interest and principal repayments on their loans.
Non-performing housing loans have moved down slightly since peaking in mid-2011, and formed 0.7 per cent of total housing loans in June 2013.
The very low bad debt at the big banks, in particular, is a cause of concern for some analysts because they believe things can only get worse from here. Fidelity’s Kate Howitt, however, recently talked down the risks within the Australian banking sector.
The APRA review identified a number of sound practices related to loan serviceability, including good credit risk management procedures and effective governance frameworks.
The review also found that ADIs have been conducting regular reviews of their loan serviceability policies to align appetite with the changing external operating environment.
Banks are using an interest rate ‘buffer’ over the current lending rate when they evaluate loan serviceability, according to APRA.
Finally, the participating ADIs conduct reviews of their housing loan portfolios to ensure that serviceability policies have been complied with.
Despite a mostly positive assessment of the way in which ADIs evaluate their housing loans, APRA found a number of differences in the policies for each product line.
“ADIs need to develop a set of consistent serviceability criteria across all their mortgage products if they have not already done so,” APRA said.
The regulator also stressed the need for ADIs to use an interest rate ‘floor’ in their serviceability assessment, along with formal procedures to verify a potential borrower’s existing debt commitments.
