A leading mortgage broker has called out brokers and lenders for their overreliance on using the household expenditure measure when submitting and accepting loans.
Louise Sanghera (pictured above), principal broker at Zippy Financial, said it was “incredibly frustrating” that people in the industry were just using the HEM system to save time and get loans approved without doing the due diligence and checking the living expenses of clients.
“Just using the HEMs figure goes against best interests duty and everything that we’re bound by as brokers – there’s no point,” Sanghera said.
Sanghera said she understood the temptation to rely on HEM because manual living expenses “can take hours” but in the long term it can be detrimental to clients, the industry, and brokerages.
“I had a manual living expense yesterday that took the one member of staff six-and-a half hours. It’s a big expense to brokers to do the living expense of houses manually. It takes a lot of time for them to do it,” she said.
“A lot of brokers these days just aren’t doing the analysis properly to save time so that they can process more mortgages to make more money.”
HEM’s rise and fall
Before the royal commission into banking, HEM was once a staple of the industry.
According to UBS, 70% to 80% of all home loans in Australia prior to 2017 were underwritten using the HEM benchmark to estimate living expenses.
But in the aftermath of the royal commission’s aftermath, the heavily scrutinised system was phased out with much of the industry committing to HEM alternatives to improve responsible lending frameworks.
However, Sanghera said the reliance on HEM was still happening, and it punished those doing the right thing.
“I know that brokers are using HEMs. I go to interview new staff for my business, and they all tell me that their old broker was just using HEMs,” she said.
The award-winning broker told Australian Broker that she frequently heard clients reporting that another broker could get them more funding with a certain bank.
“I say, ‘well, I’ve looked at X bank, but actually you can only borrow X amount of dollars with them, not the figure the broker is advising you and I think the reason the brokers advising you that figure is because it’s using HEMs’.”
Sanghera said that while some customers stayed after explaining HEM to her customers because she was doing the “right thing”, many did not.
“Sometimes the clients go, ‘oh well, I’m going to go with the other broker because I need the money,
I want more money’ and so we lose the client because we won’t do the wrong thing.”
What about lenders?
Sanghera said while brokers shared some of the responsibility for using HEM, it was also banks which accepted it that contributed to the problem.
“Some brokers will know that some banks may not want bank statements, or they might only want one month of statements rather than three,” she said.
Sanghera said that some banks were thorough and would come back and say that there wasn’t enough evidence, but many were not. “Banks should be picking it up but they’re not always, and brokers know that.”
It’s also not just brokers using HEM, according to Sanghera.
“The other big issue is that we have so many clients come to us. They’ve been into the bank themselves and we find out that the bank staff are using HEM,” she said.
“They come to us, and as a broker who’s trying to do the right thing, we can’t offer the clients the same thing because the banks are using HEM now.”
The impact of HEM on the current market
With Roy Morgan data finding an estimated 1.35 million mortgage holders (27.8%) are considered “at risk” of mortgage stress in the three months to April 2023, it’s easy to point the finger at rising rates.
However, Sanghera said that many of “those poor people that have been approved on HEMS” would be the ones most at risk.
“They’re the ones that will be struggling now because they can’t really afford the mortgage and that’s why I haven’t got one client in my book that is struggling,” she said. “We’ve got nobody in trouble because when we did the mortgages, we’re using the correct figures.”
Sanghera said frank discussions with her clients in the past about cash flow were now paying off.
“Even when people were at 1.79%, we were saying to our clients, ‘what if interest rates go up to 5%? 6%? You’re going to struggle.”
Sanghera said that if the wider public became aware of brokers frequently using HEM it could “damage the industry”.
“The industry spent years trying to build brokers’ reputations and the industry’s reputation and you know that’s why we’re getting 70% of mortgages these days … we don’t want to ruin that.”