Inquiry tidies up lending among banks

THE banking royal commission has sparked a clean-up of lending standards across the $1.7 trillion mortgage system, according to new research.

It indicates the inquiry has done in just a few months what financial watchdogs have for years been trying to achieve.

Borrowers are now being more honest with their bank and lenders are taking longer to approve loans as they scrutinise applications, according to the latest survey of the home loan market by investment bank UBS.

There was a sharp rise in the proportion of surveyed borrowers claiming their mortgage application was “completely factual and accurate”.

More than three quarters of borrowers made that claim, compared with two in three borrowers a year ago.

UBS analyst Jonathan Mott last year highlighted the threat posed by a potential $500 billion worth of so-called “liar loans” – where borrowers had misled banks or fudged information to brokers to obtain home loans – washing around Australia’s mortgage system.

Yesterday, Mr Mott said: “The sharp improvement in underwriting since April corresponds with the beginning of the royal commission”.

Meanwhile, the proportion of mortgages taking more than four weeks to be approved rose from 7 per cent to 12 per cent.

“Underwriting tightening post-April was heavily skewed to the broker channel, albeit off a lower base,” Mr Mott said in a report for investors.

The evidence from this year’s survey of more than 1000 borrowers showed previous attempts to improve underwriting standards were “largely ineffective”.

Those attempts were led by the banking watchdog, the Australian Prudential Regulation Authority, and the corporate regulator, the Australian Securities and Investments Commission.

Mr Mott said customers had only started seeing a tangible tightening of lending standards in recent months, since the royal commission led by former High Court judge Kenneth Hayne started.

“While APRA recently stated ‘the heavy lifting on lending standards has largely been done’, from a customers’ perspective we believe this survey provides compelling evidence that tightening is accelerating, not peaking,” Mr Mott said.

“We believe there is likely to be much work required for the banks to comply with the royal commission’s likely more rigorous interpretation of responsible lending and improve mortgage underwriting standards.”