Boiling real estate market tests banks’ mortgage factories

Amit Sachdeva wanted to buy a family home in Noble Park, in the south-eastern suburb of Melbourne. The three-bedroom house was within walking distance of her six-year-old’s school and “beautifully built.”

Sachdeva and his wife both work full time and have an existing mortgage with ANZ after refinancing their CBA mortgage last year to take advantage of better rates and a repayment offer. With a 30% deposit ready to go, Sachdeva assumed the loan application process would be quick.

“I’m an existing customer, they have all my information,” says the 37-year-old father of two. “But I lost the house I really wanted to buy at the time.”

Amit Sachdeva with one of her children. He lost the house he wanted to buy due to a slow approval process.Credit:Wayne taylor

Sachdeva applied for the loan through a mortgage broker and said painful delays meant another buyer took over the property before ANZ could secure the financing.

Both stories reflect what has become a critical battleground for the country’s major banks: the rapid and consistent processing of mortgages amid a tsunami of loan applications.

How banks have handled this flood of loan applications has become a major issue for some, and a big plus for others.

For ANZ, the treatment of mortgages has been a major weakness. Its latest financial results showed slow growth in its home loan portfolio, with chief executive Shayne Elliott admitting the bank was not ready for the mortgage boom caused by low interest rates, high government stimulus and blockages that have skyrocketed savings.

“The last thing buyers want is for their bank to lag behind when a deadline approaches.”

Sally Tindall, Research Director at RateCity

A few years ago, ANZ made the decision to rely on manual processing of mortgages through broker channels as a means of reducing risk in the wake of the Royal Banking Commission that exposed predatory lending.

But now, as the big banks struggle to reduce their “time to yes” in order to increase their mortgage market share, ANZ has fallen behind.

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With 53 percent of ANZ mortgages going through the brokerage channel, ANZ Retail Banking Director Mark Hand has taken responsibility for overloading the bank’s systems and pledged to change. things. “It’s mine,” he said.

‘Perfect storm’

However, ANZ is far from the only one. Wholesale mortgage broker AFG chief executive David Bailey said that over the past year, some banks’ systems were unprepared for the influx of loans taken out by brokers. Ultra-low interest rates, a buoyant real estate market and a surge in refinancing spurred by generous cash-back agreements have also fueled the flames.

“It was almost a perfect storm,” says Bailey. “With very low interest rates, people were saying ‘let’s block this’.”

RateCity research director Sally Tindall cites official figures showing that one million home loan applications were settled last year, up 30% from the previous year. She says the massive increase has put a strain on the outdated legacy systems of many banks, as banks also struggled with staffing issues due to the COVID-19 pandemic. For many customers, the result was long delays.

“Mortgage turnaround times can be critical when buying a property because the last thing buyers want is for their bank to drag their feet when a deadline approaches,” Tindall said. .

AFG figures show that the average loan approval time peaked at 27 days around the middle of this year, up from 18 days in 2018.

Meanwhile, for banks and their shareholders, there have been winners and losers from the boom in mortgage lending – which is the biggest source of profit for the Big Four.

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EY banking and capital markets leader Tim Dring said that although mortgage lending has nearly doubled over the past year, there has been a marked divergence in mortgage performance between major banks. “I think it’s a very important battleground,” he said.

In addition to ANZ’s mortgage processing problems, Westpac’s latest results were also hampered by a poor performance of its flagship mortgage lending business, causing its share price to drop dramatically.

After hemorrhaging market share last year, the bank managed to expand its portfolio of online home loans with other major banks in the past half year.

But it came at a price, as new customers who take out loans pay much lower rates than existing customers. Westpac’s net interest margin – which compares financing costs with what it charges for loans – slumped 10 basis points to 1.98% in the second half of the year.

Westpac chief executive Peter King said there was a lot of capital being pumped into mortgages and alongside low interest rates margins were tight. But the lender seems determined to hold on.

“There’s a lot of competition, there’s a lot of capital, and then, because we’ve chosen to expand into this low-yielding market, the margin goes down,” King said of his results.

Macquarie Group CEO Shemara Wikramanayake said there are opportunities for the bank to increase its share of the home loan market.

Macquarie Group CEO Shemara Wikramanayake said there are opportunities for the bank to increase its share of the home loan market.

While some banks have struggled, the banks with the best investor ratings for their mortgage processing are typically the Macquarie Group and the Commonwealth Bank. The two credit giants attribute their success to investments in technologies and systems that allow rapid turnaround times.

Macquarie said in its latest results that its home loan portfolio has swelled 14% since March, giving it 3.8% of the Australian market. The bank has built a reputation for quick turnaround times with brokers and targets low-risk borrowers such as professionals who have lower loan-to-appraisal ratios. Managing Director Shemara Wikramanayake said at the time that there was a lot of potential for him to take more stakes. “We are still small in a large market, and [there’s] lots of opportunities to keep growing there, ”she said.

The CBA will release its September quarterly trade update next week, but the lender has carved out an even more dominant position in home loans throughout COVID-19, with its market share reaching 26% in its latest results.

With the huge profits available on home loans, banks that have struggled to keep up with the wave of loan applications are pledging to improve their game.

As fintechs watch the marketplace and more customers bank online, all lenders are desperate to simplify their loan processing as they roll out digital mortgages that make more use of automation to test whether borrowers can afford a loan.

“One thing that’s really clear… given the heat of the real estate market, being able to make a quick decision for a client is just super important.”

Rachel Slade, NAB executive in charge of personal banking

Rachel Slade, NAB executive in charge of personal banking services, says buyers are often stressed out trying to find the right home, so a quick decision to give them confidence to bid is “absolutely critical.”

“One thing that’s really clear, especially over the past year, given the heat of the real estate market, being able to make a quick decision for a client is just super important,” says Slade, who notes that october was also an exceptional month. for loan applications.

Bendigo and Adelaide Bank have managed to carve out a larger share of mortgages for three consecutive years, and its managing director, Marnie Baker, also highlights measures to simplify approvals and sell loans through branches, brokers and online. “We’re pretty happy to have these ingredients right now,” Baker said this week.

With the housing market still hot as the economy reopens, most banks remain optimistic about lending growth in their most important mortgage businesses in the coming months.

How quickly they manage flows will remain a critical test for these companies.

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