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Special Article - Housing Finance Wholesale Lending Reporting Changes (Oct, 2000)
These revisions, which are largely offsetting, have been backcast to July 2000, increasing the level of total housing finance commitments in that month by a net $11 million. However, the gross revisions to the affected series are much larger, with improved coverage and reclassification increasing the Wholesale Lenders n.e.c. series by $249 million in July 2000, and reclassification and the removal of double counting reducing the Banks series by $173 million. The number of commitments by type of lender, and therefore the average value of commitments by lender, have also been significantly revised.
The cancellation rate (measured by cancellations as a percentage of finance commitments) is also much reduced for Wholesale Lenders n.e.c. compared with Mortgage Managers, indicating that wholesale lenders' reported commitments are more likely to be ultimately advanced.
Wholesale lenders, like mortgage managers, are generally unable to report accurate first home buyer information. Therefore a new and improved methodology has been applied to the First Home Buyers series. The background to, and significance of, these changes and the associated reduction in the reporting load on lenders are discussed below.
Background to the Changed Reporting Unit
Traditionally, housing finance has been mostly provided by banks, permanent building societies and credit unions. These institutions dealt directly with borrowers, lending funds from the institutions' own balance sheets, financed primarily by deposits, and managing the on-going relationship with borrowers for the term of the loan.
Over the past decade an alternative method of providing housing finance has become more accessible to borrowers, in which the retail and the wholesale functions of providing finance are separated. The retail function involves arranging for finance to be provided to the borrower (e.g. valuing the property, insuring the mortgage, etc.), and then in many cases managing the on-going relationship with the borrower. The wholesale function involves providing the finance. The legal lender of the funds, the wholesale lender, generally sources its funds by selling mortgage-backed securities (a process known as securitisation).
The publication Housing Finance for Owner Occupation, Australia (Cat. no. 5609.0) defines mortgage managers as the entities undertaking the retail functions of housing finance provision. Mortgage managers previously reported to both the Housing and Personal Finance collections as proxies for the legal lenders of the funds (wholesale lenders). The Mortgage Managers series appears in this publication as a separate lender type from July 1995.
The proxy reporting arrangement of mortgage managers for wholesale lenders gave an adequate measure of lending for housing finance while there were relatively few mortgage managers working exclusively with one of a few wholesale lenders. However, such simple relationships between mortgage managers and wholesale lenders no longer exist, with a large number of mortgage managers now sourcing their funds both from a range of specialist wholesale lenders (typically securitisation vehicles), and from banks themselves which may lend in the traditional way, as well as undertake wholesale lending through a network of funding retailers.
Wholesale Lenders n.e.c.
A wholesale lender, the new reporting unit, provides funds to borrowers through a retail intermediary which is responsible for the ongoing relationship with the borrower. The Wholesale Lenders n.e.c. series almost exclusively comprises securitisation vehicles established to issue mortgage-backed securities.
Commitments by a bank or permanent building society (PBS) acting as a wholesale lender continue to be published in the Banks (or PBS) series if the bank or PBS is identified as the legal lender on the loan contract.
Effect on Published Estimates
Lender type estimates: The net effect of the changed reporting unit and the associated increased coverage, along with the reclassification of some lending and the resolution of double counting, has been:
The net effect in July 2000 of the changed reporting unit on the number of commitments has been:
Trend breaks have been applied at July 2000 to the affected Banks and Other Lenders series. The Wholesale Lenders n.e.c. series is not seasonally adjusted.
State and Territory estimates: The net effect of the change on all State and Territory estimates has been negligible.
Graphs 1-3 below illustrate the impact, in original terms, of the changes on the Banks series, the Wholesale Lenders n.e.c. series and the Total series.
First home buyers: Wholesale lenders are generally unable to provide accurate information on commitments to first home buyers (FHBs). The average percentage of First Home Buyers commitments over the course of 1999 was 21.4% for all lenders. Banks and building societies together reported a FHB percentage of 22.2%, while the percentage for mortgage managers was just 8.7% (table 1), supporting the anecdotal evidence that mortgage managers' FHB reporting was inaccurate and understated. With the introduction of the Wholesale Lenders n.e.c. series from July 2000, the percentage of First Home Buyers commitments by banks and building societies is applied to wholesale lenders total commitments. As a result, the percentage of First Home Buyers commitments has been revised upwards by 0.8 percentage points in July 2000.
TABLE 1: COMMITMENTS TO FIRST HOME BUYERS IN 1999
Cancellation rate: There is reason to believe that the interpretation of a commitment to lend used by mortgage managers has been somewhat broader than that applied by banks and permanent building societies, resulting in a high cancellation rate (calculated by dividing cancellations by the value of commitments).
Replacing Mortgage Managers with Wholesale Lenders n.e.c. from July 2000 has reduced the cancellation rate. For the September 2000 quarter, the Mortgage Managers' cancellation rate was 17.1%, compared with 9.4% for Wholesale Lenders n.e.c. over the same period. The reduced cancellation rate will enhance the usefulness of the published statistics as a greater percentage of reported commitments will be ultimately advanced.
Reduced Reporting Load
Apart from the coverage, classification and measurement improvements achieved from introducing the Wholesale Lenders n.e.c. series, there will no longer be the need for the ABS to maintain annual coverage contact with, nor collect monthly statistics from, the increasing number of mortgage managers. A smaller number of wholesale lenders can report lending commitments which may have been arranged by a much larger number of mortgage managers, reducing the total load placed on all lenders.
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