Trade Commission Looking At COVID-19 Mortgage Vacation Through CCCFA Lens, What RBNZ Capital Concession Means, And What About Depositors That Are Not Banks?
By Gareth Vaughan
After the government and reserve bank allow banks to repay borrowers on mortgage repayments, the Trade Commission is preparing guidelines for lenders on how to apply the Loan Contracts and Consumer Financing Act (CCCFA) to borrowers facing financial difficulties due to COVID-19 to have.
On Friday, ANZ, ASB, BNZ, Kiwibank, TSB and Westpac said they had their ducks in a row too offer repayments for the repayment of mortgages for those whose incomes have been hit by COVID-19. The repayment relief is available to borrowers with loans backed against residential real estate, including owner-occupiers, investors, and corporations. This is after Treasury Secretary Grant Robertson announced plans for a mortgage vacation program Last Tuesday.
Consumer protection officer supervised by the trade commission the CCCFA. Its purpose is to ensure that consumers can make informed decisions, know what they’re okay with, and are able to keep track of their debts. The CCCFA requires lenders to act responsibly at all times.
“We are working on guidelines for lenders to apply the requirements of the CCCF Act to their work with borrowers facing financial difficulties due to COVID-19. We anticipate we will be able to do so later in the week to update.” A. The trade commission spokesman told interest.co.nz.
What the RBNZ Capital Concession means for distressed mortgages
As reported on Friday, the reserve bank issued guidelines to the banks that for borrowers who avail of COVID-19 mortgage deferrals, the loans should be treated as performing and not retrospectively for capital purposes. Typically, when a loan is found to be arrears, it significantly increases the amount of principal that the bank lender must hold on that loan.
How much relief will this Reserve Bank concession bring to banks for loans raised by COVID-19?
It differs for banks that use the standardized approach, in which their credit risk is mandated by the reserve bank, and for banks that use the internal ratings-based approach (IRB), in which banks define their own models for measuring credit risk, which then must be approved by the reserve bank. The IRB approach is used by ANZ, ASB, BNZ and Westpac, while all other New Zealand banks use the standardized approach.
The Reserve Bank says that for standardized banks, the average home loan risk weight is around 38%, while overdue loans have a 100% risk weight. This means that a standardized bank loan, which, due to its performance, merges into the past, requires around 2.5 times the capital.
IRB banks have an average risk weight of around 30% when granting home loans. When an IRB bank mortgage changes from an already issued to a distressed mortgage, a significant capital increase is required.
“The calculation for default residential mortgage loan effectively means that the bank will need sufficient capital to cover the full loss when the default estimate on the loan is in. There are several other adjustments to the calculation that affect how expected losses are handled and the amount of the bank’s provisions for any losses relate losses once the loan defaults, “says the reserve bank.
“Using typical New Zealand IRB bank estimates, we estimated that an IRB bank would need approximately eight times more capital per dollar of loan if the loan transitions from performance to insolvency.”
The following example from BNZ’s 2019 annual report shows an average risk weight for all residential property mortgages – both high-performing and defaulted – of 30% and an average risk weight for defaulted loans of 232%. (See red circle below). It also shows that the bank needs a minimum capital of $ 1.124 billion versus $ 46.484 billion in commitments.
What about building societies and credit unions?
Non-bank depositors (NBDTs), including building societies and credit unions, are not included in the government-RBNZ arrangements that allow banks to offer deferrals on mortgage repayment
“We are in contact with them and are considering options,” said a Reserve Bank spokesman.
NBDTs accounted for just 1.14% or $ 3.165 billion of January’s outstanding home loans of $ 278.387 billion and 4.2% or $ 5.086 billion of business loans of $ 121.212 billion, according to Reserve Bank statistics. However, their customer base is regional and includes some customers that the big banks would not do banking with.
First credit unionThe 65,000-member company has been introducing a COVID-19 interest rate option on loans for 12 months, says General Manager Simon Scott.
“The prerequisite is that the member’s circumstances have been affected by COVID-19, lost earnings, etc. The member can return to principal and interest at any time within the 12 months,” says Scott.
“As a member-owned financial cooperative, we want our members to understand that it is in their best interests to begin repayments as soon as possible. Ours average LVR [loan-to-value ratio] is very low so we are more than happy to help our members in this way. “
“We had direct contact with the RBNZ and are very happy with the way they interacted with us,” says Scott.
Tony Cadigan, CEO of Nelson Building Society According to NBS, NBS is working closely with customers affected by COVID-19.
“As a small local building society, we have an in-depth knowledge of our customer base and a real willingness to help them through this difficult time. We offer loan restructuring, interest only, loan holidays, overdrafts and temporary surpluses. Like most customer needs, we personalize a package, best equipped to support them individually, “says Cadigan.
“NBS is fortunate to have maintained a conservative lending policy, so with low average LVRs we are well positioned to serve our customer base when they need us most.”
CEO Paul Bywater says the Wairarapa Building Society is “very responsive” to its customers and introducing financial hardship packages. For more information, see the Wairarapa Building Society website.
However, Bywater warns that for many people, mortgage vacation isn’t the answer, just kick the can down the street.
“”[We are] We look for the best option for each customer, “says Bywater.
Gavin Earle, CEO of NZCU Baywide The credit union, which has around 60,000 members, is in contact with the reserve bank and is working out a number of options with the regulator.
“We continue to work with our affected members to find the best solution for their individual circumstances. Our team has a number of tools in place to adequately support these members with personal loans and / or home loans that may arise due to COVID-19 issues with affordability, “says Earle.
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