The future of pre-approvals in doubt

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ASB’s decision to withdraw pre-approved loan applications is a very company specific issue, but highlights that this practice is likely to stop anyway.

Friday, September 27th 2013, 3:12PM 3 Comments

ASB’s move hasn’t been copied by any other trading banks which indicates that the company had such a large pipeline of pre-approvals that they became unmanageable under the Reserve Bank’s lending restrictions which come into force next week.

Under the restrictions banks are allowed to write no more than 10% of their loans each month with deposits of less than 20%.

This measure is counted at the time the loan is approved rather than at drawdown meaning that ASB could well breach the new rules in their first month.

The maximum penalty for breaching the rules, or even the “spirit” of the rules, is that the Reserve Bank could withdrew the errant bank’s licence to operate.

Banks we have spoken to say that they are entering into administrative nightmare territory and none of the banks have the ability to measure these loans.

With such pressure pre-approval for home loans is an amenity  which is likely to disappear from the market, something that banks and brokers may both be happy about once the dust settles. Under the process all the work in making the application is done, yet the large majority of pre-approvals don’t get drawn down.

This is cost for banks and brokers.

The other frustrating thing for lenders is that often a borrower will get pre-approvals from more than one bank.

Prosper Group boss Geoff Bawden told the NZ Mortgage Magazine’s Round Table that pre-approvals are nothing but a licence to shop.

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