No further pressure on the housing market from the Banking Royal Commission Report

The Haynes Commission report did not deliver a sledge hammer that would further crush the property markets as some property investors feared.

Over the last year the big banks have pre-emptively made changes to their lending practices which together with the macro prudential controls imposed by APRA have led to the current credit squeeze being experienced by investors. 

So the good news is that there were no recommendation for further tightening of the Bank’s lending criteria which would have obviously worsened the current property downturn.

In fact the report recognised the Banks’ the steps that had been taken by banks to strengthen their home lending practices and their improved adoption of tougher serviceability assessments which involved a much closer scrutiny of borrowers’ financial situations including verify specific expenditures.

The Commission was pleased that the banks had reduced their reliance on the HEM, the household expenditure measure which reflected their moves to comply with existing consumer credit laws and responsible lending.

However Haynes rejected suggestions the Royal Commission has forced a “credit squeeze” saying the current tighter lending restrictions are the consequence of the Banks “complying with the law as it has stood since the NCCP (National Consumer Credit Protection) Act came into operation.”

 A major change for mortgage brokers

The big change for property investors will be how the mortgage broker industry copes with the Haynes Commission recommendations.

Currently just under 60 per cent of all mortgages are organised through around 20,000 mortgage brokers, who settle around 30,000 mortgages every month. 

At the moment broker fees are paid by the lender (the Banks) as an upfront commission payment plus a smaller trailing commission for the life of the loan.

The Haynes Royal Commission has recommended the borrower, not the lender, should pay the mortgage broker an upfront fee and that mortgage brokers should not receive trailing commissions.

It looks like the banks have convinced the Commission that mortgage brokers are the bad guys.

Sure there was a small percentage of brokers who “bent the rules” and organised loans that clients should not have received if prudent lending practices were followed.

But on the whole mortgage brokers did the right think by their clients and played a vital role in providing competition in the industry.

They provide an important service to borrowers, both home owners and property investors, helping them choose the most appropriate loan in the midst of a maze of options.

Currently the government has not adopted the report’s proposal to ban commissions for upfront commissions for brokers, but it will move to remove trail commissions.

However, Labor has indicated it supports the Hayne reforms.  

It will be really interesting to see how all this plays out, but it may mean mortgage brokers will have to start charging clients an upfront fee.

Savvy property investors will see this as just another cost of doing business recognising that as the Royal Commission’s enquiries revealed, the banks are not on their side, and this means investors will have to pay for a mortgage broker to level the playing field.

Those borrowers who chose not to pay a broker’s up-front fee are likely to fall back to one of the big four banks since that’s most likely where they have a credit card or another account.

This would reduce competition and allow the banks to raise fees as some of the smaller lenders could be squeezed out.

Currently the smaller banks and second tier lenders have provided the critical competition we needed in the lending market rely heavily on brokers as they don’t have a branch network.