Commonwealth Bank says its most over-leveraged borrowers – those whose prospects for returning to work after the coronavirus look the bleakest – could be encouraged to downsize the family home or sell multiple investment properties.
Angus Sullivan, head of CBA’s retail bank, reassured all struggling borrowers that it won’t move too quickly to force them into making tough decisions, and it wants to maintain a close dialogue to understand the pressures on each customer.
CBA has been conducting check-ins with 135,000 borrowers with deferred mortgage repayments and remains willing to extend loan deferrals, on a case-by-case basis, beyond the March expiry of the prudential regulator’s leniency, Mr Sullivan said.
But a subset of borrowers will require conversations about “alternative solution paths”, he said, as CBA makes individual assessments about borrowers’ prospects of returning to work.
“If you had a lot of debt from [buying at the peak of the market] and you were in a difficult position from an employment perspective, [downsizing] would be exactly the type of solution that would be worth having a discussion about,” he told The Australian Financial Review.
Mr Sullivan acknowledged some owner-occupiers with mortgage repayments too big to service would need to consider selling and moving to a smaller home on a lower mortgage.
The bank would carefully manage such conversations, he said. Of its deferred loans, 72 per cent of borrowers are owner-occupiers.
If I can get one message to all CBA customers out there who have a mortgage and are under strain, it is: be in dialogue with us. — Angus Sullivan, head of CBA's retail bank
“That is a hugely stressful thing for a family to go through. We can empathise with that at a personal level,” he said.
“We know most people don’t make a decision like that quickly, they need quality and often repeated conversations to form the conclusion that is the best thing for them. We can support them through, and that is the reason we have geared up resources.”
With property investors representing 28 per cent of its deferred loans, Mr Sullivan said those with multiple investment properties who are “in a position of real [financial] strain”, could be told that an extended deferral “might not be the best solution”.
The bank’s message could be: “The property market is holding up pretty well, you may want to make the decision to liquidate one of your investment properties and put yourself on a stronger footing.”
Mr Sullivan said CBA will have more than 250,000 conversations with customers between now and the end of the year, when it expects the “majority” of those with paused repayments to have started paying something – even if it is just interest – compared with 25 per cent now.
CBA’s triage process after the recent earnings result showed deferred loan numbers are coming down.
CBA has increased its hardship and collections team from 650 to 1700 people and is using better data tools to assess customer circumstances. More than 30 per cent of customers with deferred loans have less than 20 per cent equity in their property. Tough conversations
The hardest conversations will involve customers who have “really stretched themselves from a borrowing perspective, and that would most likely be folks who came into homes in the most recent cohorts, with property prices at their peak in 2017”.
“But if I can get one message to all CBA customers out there who have a mortgage and are under strain, it is: be in dialogue with us,” Mr Sullivan said.
“There are a range of solutions, it is not one-size-fits-all. We have a really good process to work with customers to work out what is the best path for them and us.”
CBA said at its full-year results on August 12 it considers 16,200 of its 135,000 home loan customers with paused repayments at “higher risk” of defaulting.
The Australian Securities and Investments Commission said the following day that lenders’ processes should be “flexible and empower staff to offer tailored assistance that genuinely addresses the needs of the consumer”.
ASIC said it expects lenders “to make all reasonable efforts to work with consumers to keep them in their homes if that is in their best interests”, while also recognising “there will likely be some circumstances where offering a consumer further temporary assistance may make their situation worse”.
Mr Sullivan said decisions made by CBA would not be motivated by additional capital the bank would need to hold for loans formally in “arrears”, when the Australian Prudential Regulation Authority removes its special treatment at the end of March.
“The capital treatment won’t be a trigger for us to treat our customers differently,” he said.
At its full-year results, which showed mortgage lending growth at 1.3 times the average of competitors and record growth in deposits, CBA said it would encourage challenged customers to shift to fixed rate loans of 2.29 per cent and repay only interest.
“That gives us quite a lot of scope to support customers to stay in their home, because even with the modest drops in rental yields … you are not moving out of home and into a rented property and saving a lot of money,” Mr Sullivan said.
National Australia Bank chief executive Ross McEwan said on August 14 that NAB would also take “every reasonable step to keep people in homes, [but] we all know there will be some circumstances where people are better off selling up early and taking some equity out of their homes, or keeping some equity before it disappears, and that’s what we will work with every individual customer on”.
In Melbourne, Mr Sullivan said there had been a “modest” increase in CBA customers asking for loan deferrals, but the overall number was still falling as more borrowers around Australia got back on track.
“I know what is happening in Melbourne is very hard for folks down there, and they are doing it tough, but what we are seeing from deferral requests is only a modest impact.”