Financial Services Royal Commission to have big impact on home borrowers

The financial services Royal Commission seems set to have significant consequences for home borrowers, and the impact will hit a lot quicker than any interim or final report to the Federal Government.

It already seems likely Commissioner Kenneth Hayne will recommend sweeping changes to the home loan industry arising out of just the first few weeks' hearings.

He has uncovered dreadful lending practices by banks and mortgage brokers.

The worst was NAB employees in greater western Sydney accepting cash bribes over the counter in white envelopes to facilitate loans they knew were based on fake documents in order to collect bonuses.

The fraud and bribery came with the manipulation of a mortgage commission incentive program that incentivised gym owners, taxi drivers, hairdressers and sporting clubs who made money by referring customers to the bank.

Then there's the more prevalent, so-called liar loans, where mum and dad borrowers simply skirt around the reality of their income, expenses, debts and assets when filling in their successful loan applications without much checking by the banks.

"By and large customers are poor historians when it comes to identifying their outgoings," Commissioner Hayne drily noted.

The regulatory backdrop has been Wayne Byres, the chairman of the Australian Prudential Regulation Authority, moving over recent times to put the brakes on dubious lending.

Byres has sought to ensure that standards for property lending are prudent, particularly in what he viewed as an environment of heightened risk.

Given the Australian banking system's very high exposure to both the residential mortgage and commercial property markets, APRA's ultimate goal was to protect bank depositors, because it's their money that banks are lending.

You would expect as Commissioner Kenneth Hayne uncovers further misconduct or poor lending oversight, getting an honest home or investment loan will become a lot harder for borrowers.

And any reining in the bank's zealous willingness to lend will trigger the possibility of a Royal Commission-induced credit slowdown.

This could impact on interest rates.

According to Shane Oliver, chief economist at AMP Capital, tighter lending may have the effect of pushing the next interest rate rise back to 2020, rather than 2019.

"It seems a real risk around the issues of lax lending standards is that banks move to a far more rigorous assessment of applications for loans," Shane Oliver noted.

This was unlikely to cause a full-on credit crunch, Oliver forecasts, but more likely a slowing in credit growth.

UBS analysts have warned too there is a growing risk the RBA was under-estimating the downside risk from tightening lending standards.

“While a tightening of mortgage underwriting standards is prudent, it has a material impact on the economy,” UBS noted.

“It must be remembered that house prices are determined by the demand and supply of credit, not the demand for and supply of housing,” UBS advised.

This article first appeared in The Daily Telegraph.