Less than four months after the changes to the Credit Contracts and Consumer Finance Act come into force, and sparked widespread criticism, the Government has reversed course.
It's clear why.
The law, which was designed to protect vulnerable people from rogue lenders, saw scores of Kiwis turned down for mortgages, with figures from credit bureau Centrix showing mortgage lending had dropped by nearly a third since December.
Squirrel Mortgage Brokers executive officer John Bolton launched a petition calling on the Government to amend the updated act, which he described as “reckless and dangerous”.
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When Katrina Shanks, chief executive of Financial Advice New Zealand, contacted her members about the act at the start of the year she was inundated with stories of hardship and frustration.
One such tale was of an airline pilot, who with his partner had a baby and had applied for a $15,000 top-up of their home loan for a new heating system in their home.
“They had strong equity and income,” Shanks said. “He received a meal allowance as he travels to different locations. The bank’s analytical bank statement system picked up that he had large number of coffees and takeaways. It declined the loan and said to come back in three months when the borrower could show they had stopped spending so much.
“The prescriptive matter of the new regulations meant there was no consideration for their circumstances. No consideration that his wife would go back to her job in six months, or that a maternity payment or Working for Families could be applied.”
Since December 1, the CCCFA has fast overtaken smashed avocado and greedy investors as the top reason many first home buyers are locked out of the market.
Lenders have been required to scour through customer statements and scrutinise spending, said Loan Market mortgage advisor Aaron Cooke. “To protect vulnerable borrowers, the onus has been on the lender to ensure they have accurately checked the clients' expenses.”
Squirrel Mortgage Brokers managing director John Bolton says the lending changes were reckless and dangerous. Photo / Doug Sherring
The proportion of mortgage loan applications successfully converted into new home loans significantly reduced from 39% in October 2021 to just 27% in January, according to figures from Centrix and new figures from CoreLogic show that first home buyers' share of purchases has slid from from 26% in late 2021 to 23% now.
The irony is that mortgage arrears have dropped significantly in the past two years. Centrix chief executive Keith McLaughlin pointed out that New Zealand had already imposed measures to protect borrowers. “We introduced comprehensive credit reporting, which gave lenders far more information [about how borrowers handle their money]. Then we had the Responsible Lending Code [in 2015], which put the onus on lenders to make sure that they've gone through due diligence. If you go back to January 2020, arrears were 1.5% of mortgages. Today it’s 0.9%.”
New Zealand’s arrears situation was already better than that of Australia even before the tightened CCCFA rules came in, said Shanks. “If you look at the ANZ home loans arrears in New Zealand, it’s 0.5% of their portfolio. That’s half the rate of ANZ’s Australian home loan arrears. There's no evidence [the CCCFA] needed to be changed.”
The sudden handbrake on mortgage and consumer lending is unprecedented, according to McLaughlin. Demand dropped off in the first lockdown in 2020, but this is the first time McLaughlin has seen such a dramatic reduction in loan approvals.
Bolton added: “We can all debate the merits; whether we're spending too much on housing and whether Kiwis borrow too much. But it's reckless and dangerous, just going through change without really understanding the consequences of that change."
Among the slew of mortgage hell stories recounted to OneRoof, Cooke cited a client who was living with his parents in order to save for a mortgage. Cooke’s client didn’t pay board, but contributed to the family with roughly $1000 per month in groceries. If Cooke hadn’t front-footed this with the bank, he said, the algorithm would have picked up this spending and declined the loan.
First home buyers used to be criticised for buying smashed avocado instead of saving for a home. Now trips to Kmart can be used against them. Photo / Getty Images
Another example from Shanks’ members involved a family whose original pre-approval lapsed. They managed to get pre-approval for a land-and-build package before their Christmas holiday, but were fearful, should they need a further extension, that their holiday spending would be misinterpreted by the bank.
Bolton had one client recently who he accepts readers won’t necessarily feel sympathy for because he has a $12m net worth. “The bank went all the way through their expenses and critiqued them for spending $2000 on groceries over Christmas. The critique went all the way down to them spending $50 a month on cat food. Bear in mind this is someone worth $12m."
Independent economist Tony Alexander estimates that nine out of 10 first home buyers have been directly impacted by the new CCCFA changes. Banks were also rejecting owner occupiers with less than a 20% deposit and investors with less than 40%, said Alexander. Movers, those building homes, and borrowers needing top-ups were also sent packing by lenders.
Jeff Royle, mortgage adviser at iLender, said the squeeze was a double whammy for a couple who were caught by both the tightened LVR restrictions and the CCCFA, despite being what would have been model applicants a year ago.
“They were young first home buyers. They had saved with KiwiSaver and their own savings a 15% deposit. They had very strong incomes, a little bit of consumer debt, but nothing excessive, and wanted to buy that first home,” he said.
“They banked with ANZ, which initially approved the loan back in October. The approval lapsed, and then ANZ stopped all applications from any source at over 80% LVR. The clients came to us and said ‘can we get a bank loan of 80%?’ But the other banks were not accepting new applications."
They still wanted to buy and Royle arranged a non-bank lender loan of 80% of the $1.3m purchase price, paying 0.5% above bank lending rates for the 80% loan.
Having to take out the $65,000 personal loan at 14% over seven years means they now can’t remortgage later with a bank, thanks to the CCCFA restrictions. “So they were a victim of the new CCCFA," Royle said.
The cost of building repairs can no longer be simply added to the mortgage. Photo / Getty Images
Loan Market mortgage adviser Lisa Meredith was speechless when a bank turned her clients down for a $150,000 loan to replace the roof on their home and build an artist’s studio. The couple earn $260,000, and have two rental properties. The husband, however, is self-employed in construction. “Builders have credit facilities at the likes of PlaceMakers or Mitre10. They need that because that’s how they run their business. But that was the sticking point for the bank. They’ve never had issues [borrowing] before.” Meredith was so shocked that she questioned the young bank staff member, who promptly hung up on her.
“Some of the stories almost defy logic,” said Shanks. “A couple were seeking to purchase at auction and had moved to Auckland on a new salary in excess of $200,000. The pair had a double income with no children. They were repaying an investment loan rapidly, and staying with family for free.
“They had significant disposable incomes so they were eating out at restaurants and enjoying life. The bank assessed on the existing expenditure and discounted the bonus received by 50%. The lender requested six months of bank statements to dive deeper into personal living costs.
“The approval for finance was $240,000 less than requested and what would normally have been approved before the changes to the CCCFA occurred. The bank then had to request a whole new submission based on lower food costs due to internal audit requirements which needed to be fulfilled to meet the new CCCFA regulations.”
Royle said the CCCFA had no place in residential mortgages. “We've never had reckless mortgage lending in New Zealand with banks and even non-banks. There was nothing wrong with the existing framework. We've already got the Responsible Lending Code, which came into place in June 2015. So this is just a sledgehammer to crack a nut and the nut doesn't actually exist. The Government was warned three years ago by the New Zealand Bankers’ Association that if you do this, you will adversely affect mortgage lenders.”
He estimated that mortgage lending from non-banks would likely to double from to 9%, thanks to the LVR, CCCFA and other rule changes. “The blame lies fairly and squarely with the Reserve Bank, and the ill-conceived and badly worded changes to CCCFA.”
