QBE has begun notifying home lenders that it has suspended mortgage insurance coverage for new loans taken out by home buyers employed in industries hard hit by the COVID-19 crisis.
While the move reflects prudent risk management by the insurer amid rapidly deteriorating business conditions, it could rankle political leaders who last week called on the insurance industry to continue underwriting risks in the Australian economy.
It may also agitate mortgage brokers whose clients face being marooned, even though they secured conditional or unconditional loan approvals before the economic tumult of the last week.
Most home lenders take out mortgage insurance on loans where the borrowed amount exceeds 80 per cent of the value of a residential property.
Lenders who are unable to secure mortgage insurance are exposed to higher regulatory capital charges by APRA.
Details of QBE's insurance embargo were first revealed in a notification sent to mortgage brokers on Monday by ASX-listed bank, Auswide.
"Mortgage insurers yesterday (Sunday) advised that in response to what is a rapidly changing environment they are imposing a temporary embargo on applicants working in the industries most directly impacted by COVID-19," Auswide told brokers.
"Effective immediately a temporary embargo is in place on all new applications received for applicants working in the industries directly impacted by COVID-19, for example those working in gymnasiums, beauty salons, tourism and hospitality industries.
"Exceptions may be considered by the mortgage insurers on a case by case basis."
Auswide also advised brokers that where conditional loan approvals had been approved before this week, brokers would be required to confirm the ongoing incomes of borrowers employed in the heavily affected industries.
In response to questions from Banking Day, a QBE spokesperson defended the company's decision arguing that lenders would be inclined to curtail home lending in response to the global pandemic.
"We expect responsible lending obligations would have put a stop to much of the lending to those impacted by the COVID-19 crisis," the spokesperson said.
"The temporary embargo was issued to all of our lenders."
The spokesperson said QBE also recognised the need to assess the circumstances of individual borrowers and that lenders had the ability to seek exceptions to the embargo.
QBE last week said it would continue to support government moves to protect borrowers impacted by COVID-19 but it also noted that its LMI decisions would also need to accord with regulatory guidance and responsible lending practices.
The rein-in of LMI coverage came as QBE notified the ASX on Monday that it was withdrawing its earnings guidance for the current financial year citing the economic effects of the COVID-19 pandemic.
Auswide also revealed that it was introducing an across-the-board suspension of lending to people employed on casual contracts.
"Effective immediately, the acceptance of casual employment as an income source has been suspended," the bank told brokers.
"It is important to note that this is not a permanent change, however at this stage it is considered a prudent and responsible lending measure for customers with this income type."
A spokesperson for Australia's other big LMI provider, Genworth, said the company had not changed its underwriting standards "at this time".
"We support our lenders who must apply responsible lending standards and assess applications on their merits," the Genworth spokesperson said.
"We note the standards require lenders to consider borrower's current circumstances at the time of lending."