As deferrals end for 450,000 mortgages, APRA sends banks a warning

The bank regulator has spelled out the obligations of banks as they resume the mortgage repayments of borrowers impacted by COVID-19 in an open letter to the industry.

The roadmap comes as banks work to get more than 400,000 people paying their mortgages again in an elaborate and delicate operation.

Do better, and here’s how: APRA

The Australian Prudential Regulatory Authority, the financial watchdog monitoring banks, insurance and superannuation companies, called on the banking industry to adopt a series of best practices when it comes to resuming people’s mortgage repayments.

Specifically, they asked banks for: 

• senior management executives to be regularly briefed on issues
• borrowers to be contacted a range of ways six weeks before repayments resume
• contingency plans to be put in place for the rapid deployment of resources and trained staff.

The penultimate paragraph in the letter offered some insight into how closely APRA and the Australian Securities and Investment Commission (ASIC) are working together. Acting on advice from ASIC, APRA warned bank staff should be cautious when there’s talk of customers dipping into their superannuation to meet their mortgage repayments.

“Authorised Deposit-taking Institutions (ADI, commonly known as banks) should have appropriate controls in place to ensure that if they are informing borrowers about their ability to access superannuation, they are not providing unlicensed financial product advice and are ensuring compliance with requirements for giving financial product advice,” the letter said.

Under the government’s early release of superannuation scheme, people whose income has been impacted by COVID-19 can apply to make a withdrawal from their superannuation of up to $10,000. 

About $33.3 billion has been withdrawn from superannuation, since the scheme’s inception until September 13.

$240 billion in deferred mortgages

The timing of the letter is no coincidence. The first wave of loan deferrals are expiring six months after they were granted, on account of the widespread disruption caused by the COVID-19 pandemic.

Out of the 900,000 mortgage repayments put off by the 20 largest banks, about 450,000 are due to resume repayments in September and October, the Australian Banking Association said. 

Banks have had to recruit and train additional staff to cope with the task. APRA acknowledged the challenges banks face while it reminded them of their obligations.

“APRA appreciates … the material scale of the implementation effort that will be required to execute the plans,” the watchdog said in its letter.

APRA and ASIC sent another letter in August warning banks to exhaust their options when it comes to keeping people in their own homes, but the industry concedes some might have to sell.

Tens of thousands might have to sell

Executives at the big four banks have gone on record to warn it might be in the best interests of the financially overextended to sell their home.

This would be the case when extending deferrals or restructuring loans would not help -- but actually heighten financial difficulty, Peter King said, chief executive at Westpac, to a House of Representatives committee a fortnight ago.

“I think certainly, as we go through the next period, there will be some people who may not have enough income to service their loans,” he said.

“... People who have had a substantial drop in their income, we need to talk to them sooner than later.”

The decisions would be difficult but made with compassion, NAB’s chief executive told the same committee.

“Lending more money to customers who have little chance of repaying it will cause more harm in the long term,” chief executive Ross McEwan said.

“... Even though looking after customers will at times mean saying no, we will be compassionate when dealing with something as painful as selling a home or closing a business.”

The number of mortgage defaults remains difficult to forecast, bank executives have said, as it depends on factors including government subsidies and employment levels.

However, senior Westpac economists predicted about 60,000 homes would be ‘urgently’ put on sale next year due to borrowers struggling to make repayments. 

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