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RBA lauds ‘effective’ tightening of lending standards

The Reserve Bank has pointed to new research suggesting that tighter lending standards have improved financial stability in the mortgage market.

In an address to the 2019 Property Leaders’ Summit in Australia, the Reserve Bank of Australia’s (RBA) head of financial stability, Jonathan Kearns, discussed the factors contributing to the continual rise in home loan arrears.

The latest data from ratings agency Standard & Poor’s reported that over 30-day delinquencies underlying Australia’s residential mortgage-backed securities (RMBS) increased to 1.53 per cent in April, up from 1.51 per cent in the previous month and from 1.36 per cent in April 2018.

Mr Kearns claimed that “cyclical upswings” in arrears are attributable to weak economic conditions, which include falling or stagnant wages, and softness in the housing market – which may inhibit some borrowers from selling their property to ease their mortgage burden.

The head of financial stability also acknowledged that tighter lending standards can conversely impact a borrower’s ability to meet their mortgage repayments, pointing to previous restrictions on interest-only lending, which prevented borrowers from rolling over the interest-only period.

Mr Kearns also conceded that tighter serviceability measures may prevent distressed borrowers from refinancing their loan, cited by S&P as one of the factors contributing to the rise in delinquencies.

However, Mr Kearns pointed to internal data collected by the Reserve Bank, which suggested that the application of tighter lending standards has been “effective” in improving credit quality.

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“Using the Reserve Bank’s Securitisation Dataset, we find evidence consistent with more recent cohorts of loans having lower arrears rates than earlier cohorts,” he said.

“Specifically, those loans originated in the past few years have an arrears rate that is up to one-quarter of a percentage point lower than loans originated prior to 2014.

“The lower arrears rates for more recent loans suggest these tighter lending standards have been effective.”

The Australian Prudential Regulation Authority (APRA) has since eased some of its lending restrictions by removing its caps on investor and interest-only lending.

APRA is also proposing to remove its 7 per cent interest rate floor for mortgage serviceability assessments.

However, despite noting the improvement in credit quality for less-seasoned loans, Mr Kearns said he expects the overall arrears rate to continue rising but claimed the trend would not pose a significant threat to financial stability.

“To the extent that we can point to drivers of the rise in arrears, while the economic outlook remains reasonable and household income growth is expected to pick up, the influence of at least some other drivers may not reverse course sharply in the near future, and so the arrears rate could continue to edge higher for a bit longer,” he said.

“But with overall strong lending standards, so long as unemployment remains low, arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector.”

[Related: Rate cuts tipped to ‘boost’ GDP if global risks temper]

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