Analyst raises concerns over $52bn in reclassified loans

A banking analyst has questioned the accuracy of bank reporting after the RBA revealed that $52 billion worth of loans have been switched between investor and owner-occupier categories since mid-2015.

The RBA released its April 2017 financial aggregates on 31 May, revealing $1.1 billion worth of loans were switched between investment and owner occupier purposes in April, bringing the total since July 2015 to $52 billion. 

The RBA attributes the figure to the introduction of an interest rate differential between owner-occupier and residential loans in mid-2015.

However, Digital Finance Analytics principal, Martin North said that if loan categories were switched without a genuine change of use, it could be a case of investment borrowers “being flexible with the truth” in order to get a lower, owner-occupier rate.

Speaking to Mortgage Business, Mr North said that “narrow” reporting frameworks designed by industry regulators meant loan-to-income ratios were not recorded, while potential errors in lenders’ reporting could add to the figure as loan types are “misflagged”, with “no real consequences.” 

Mr North said: “Banks' systems are not necessarily very up-to-date and easy to get information out of, so there are definitely system issues within the banks. Secondly, the reporting frameworks that are used are quite myopic in their own right.

“The [APRA] forms are relatively narrow in the information that the regulators ask for. For example, we don't have any information on loan-to-income ratios which is something I think should be reported on.  The third thing is that the error rates inside the banks, in terms of when they originate loans or when they deal with all the record keeping, perhaps aren’t what they should be too.”

Mr North commented: “We seem to have a regulatory system that is myopic because the data that is received; it's culturally very much ‘quiet whispers in the back rooms’ rather than open public disclosure.”

However, head of investment strategy and chief economist at AMP Capital, Dr Shane Oliver said that while an element of financial rorting is “always” occurring, category-switching was more likely attributable to the RBA’s mid-2015 decision and that the RBA and lenders’ figures are reliable.

Dr Oliver said: “Obviously banks want to grow their business, owners want to pay the lowest possible interest rate and the only way that can be picked up is if a regulator does an audit, so we are very reliant here on self-reporting, to both the RBA and the regulators. But, by and large the figures are probably reliable.”

Pointing to the 2015 RBA decision, Dr Oliver said the rate of switching most likely was to do with owner-occupiers living in homes previously marked as investment properties re-categorising in order to dodge investment loan rate hikes.

“If you go back a couple of years ago, the mortgage rate for owner-occupiers and investors was identical — you might have gotten your mortgage as an investor and then you moved into the house and became an owner-occupier — so there was no point in changing it around because you were paying the same interest rates. Then when the interest rates started to diverge, you see a degree of category switching.”

The lending and credit aggregates also reported owner-occupier credit of $1,084.3 billion, up from $1,078.4 billion for March, while investor housing credit is at $579.7 billion, up from $577.6 billion in March.

The data showed total credit growth of 0.4 per cent, an annualised rate of 4.9 per cent, while housing lending grew by 0.5 per cent and 6.5 per cent over the past year.

[Related: Sydney and Melbourne ‘have peaked’: AMP Capital

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Lucy Dean

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