It’s harder now to get mortgage finance than it has been at any point since the financial markets were deregulated in the 1980s, says economist Tony Alexander.
Mortgage brokers are reporting that clients who thought they had finance in the bag are being refused, sometimes after going unconditional on purchase.
Credit in general and mortgage finance in particular has become steadily harder to get, thanks to a variety of measures by the Reserve Bank of New Zealand (RBNZ) and the major retail banks.
The credit crunch is real, says Alexander. It started hitting borrowers towards the end of last year, with banks telling customers they had previously approved that the finance was no longer available.
“The key tipping point was when the banks started pulling the pre-approvals for low deposit lending in the first half of November,” says Alexander. Buyers who had previously qualified for a mortgage found the bank said “no” when they needed to roll the pre-approval over because settlement or finding a property had taken longer than expected.
The banks feared that with their existing lending behaviour they were going to breach new RBNZ rules that restricted the percentage of lending to low deposit borrowers – mainly first home buyers.
Economist Tony Alexander: “This is the biggest tightening of credit conditions since Robert Muldoon was Prime Minister.”
“That was the trigger, but then overlaying that is the CCCFA [Credit Contract and Consumer Finance Act]. Buyers have to meet all these new rules,” says Alexander.
“This is the biggest tightening of credit conditions since Robert Muldoon was Prime Minister (from 1975 to 1981).” Alexander says he doesn’t believe credit has been crunched as it is currently since the financial markets were deregulated in 1984-1985. “We’ve seen bits of tightening up since then, but nothing like this.”
Alexander says there is an element of panic on the part of the banks. “They don’t know exactly how the legislation will pan out and what sort of mistake is going to lead to a $100,000 fine for directors,” he says.
“My expectation is that the banks will get used to it. They’ll get a feel for what is required and their assessment of borrower's income and expenses will ease. But that could take six or nine months.”
Mortgage brokers are seeing the fallout as the credit crunch hit their clients. All of the advisers OneRoof spoke with had seen clients’ pre-approvals pulled by the banks.
“It’s bad,” says Jeff Royle, adviser at iLender. “The biggie is the CCCFA.” Taking effect from December 1, the revised act requires banks to do a more in-depth assessment of affordability and suitability of a loan applicant’s ability to repay.
Royale says the latest iteration of the CCCFA was designed to curtail loan sharks’ activity, not affect home buyers. “The CCCFA is a sledgehammer to crack a nut,” says Royle. “There was no justification whatsoever in the mortgage world for those regulations to be in place.
Debt-to-income ratios are adding pressure to the crunch for some customer. BNZ and ASB have recently set up debt-to-income ratios for some home buyers meaning they could only borrow a certain multiple of their income, rather than simply a loan they could afford.
Robert Muldoon was Prime Minister from 1975 to 1984, during which time the financial markets were tightly controlled. Photo / Getty Images
The human toll of the credit crunch is harsh. “I’ve had people in tears,” says Royle. “I’ve had people shouting at me. I was threatened with being sued. It’s pretty bad.”
Royle cites the example of a couple on good incomes. Prior to December 1 the couple would have qualified for 90% lending with the bank to buy their new home in Gulf Harbour.
Had they been able to borrow with their bank they would have paid interest at around 4.5% on their entire mortgage once low equity premiums were added, says Royle. Instead, the couple had to apply to a non-bank lender for a mortgage and pay 5.75% on the first 80% of the purchase price and 15.95% over seven years on the remaining 10%. “It’s crap,” says Royle.
Another client who went unconditional on a new build in Auckland’s Hobsonville Point a year ago had to reapply for a mortgage after their build was delayed. Under the new application the client is $75,000 short on the money needed to settle on the property. “They’re extremely angry,” says Royle.
It’s not just homebuyers who are affected. Small developers find they can’t get the finance to build, says Royle. Non-bank lenders, their traditional source of funds, are short of finance to lend because it needs to be recycled from existing developments, which are running over thanks to materials and labour shortages.
The Reserve Bank headquarters in Wellington. The Reserve has tightened lending rules in the past 12 months. Photo / Getty Images
Squirrel Mortgages owner John Bolton has launched a petition to change the CCCFA rules. “As a country we are drowning in cotton wool,” he says. “It is an unfathomable increase in bureaucracy and real cost with no benefit,” Bolton says.
Like many other mortgage advisers, Stuart Wills of Mortgage Managers, has seen first home buyers have their pre-approval pulled after their builds were delayed. In the past, banks would normally have extended the pre-approval, but not now. “Our issue is those approvals that would normally be extended are needing to be completely redone,” says Wills.
In addition, the new CCCFA regulations have seen lenders go over the top with their investigations into borrowers’ finances. “Some seem crazy,” Wills says. “(Banks) not believing the applications which clients complete and making their own assumptions based on analysing bank statements.
“I had a crazy one this week where we had noted day-care costs of $2,002 monthly. The lender came back saying we were wrong as the payments being made were $948 fortnightly: hence $2,054 monthly. When questioned I pointed out that day-care is not a 52-week expense, and furthermore by the time the lenders picked up the application the day care had stopped for the year and as one child had turned five it would recommence in January at a lower amount of $588 fortnightly.
“This application was for a couple with incomes of $146,000pa and $167,000pa plus bonuses. So, if we had of underestimated by $52 a month it was hardly going to put them under any financial pressure.”
Adviser Geoff Bawden, of Bawden Consulting had what he calls a “robust discussion” with a bank that came back and accused his client of not disclosing what they spent on takeaways.
Bawden says it’s only a matter of time before borrowers who have their pre-approved finance taken away complain to the Banking Ombudsman.