Weighting

40%

Learning outcomes

2. Analyse financial calculations and risk factors that impact on residential property lending advice.
3. Apply environmental, technical, procedural, financial calculation and risk factors in a residential property lending context.

Instructions

Complete and submit your assessment according to the Open Polytechnic’s Assessments webpage. This includes information on academic integrity, formatting, word limits and referencing.

• Include your name, student number and the assessment number.
• Number your pages.

Submission

• Submit your assessment in one file.
• Submit your work through your iQualify course.
• Emailed assessments will not be accepted.
• You will receive an automated notice advising you of your successful submission.

By submitting your assessment, you confirm that it is your own, original work.

Case Study 1: Justin and Mary Jones

Justin and Mary are a successful couple who own their home and three rental properties. Justin is a tour van operator who owns five tour vans and contracts several drivers for these. Mary works part-time at a local cafe. All bank accounts and loan facilities are held with Metro Bank, and they have a particularly good relationship with Francine Smith, a branch-based senior lending officer.

Event 1: Justin and Mary make an appointment to see Francine at her branch office.

They advise that they want to top up their home loan by $60,000 in order to renovate their kitchen at an estimated cost of $40,000, complete some landscaping at an estimated cost of $12,000 and to create a small contingency buffer of $8,000. They want to manage all the home improvements themselves, and they produce a range of kitchen brochures to demonstrate the costs for the modern standard that they are looking for.

The interview is short, as Francine tells them that Metro Bank will be unable to assist them. She reminds them that they have already had several top ups over the past two years to fund their property and tour van business expansion. At the time of the last approval (only three months ago), they had been clearly told that this was the last one and that they needed to demonstrate their ability to reduce debt, rather than continually increase it.

Event 2: Justin and Mary make an appointment for a mortgage adviser, April Rodrigues, to visit them.

They tell April that they want to top up their home loan by $60,000 for the reasons stated above. They say they feel that their relationship with their banker from Metro Bank has deteriorated and no longer wish to deal with them. They want to explore the wider market.

April gathers and confirms the following information:

A general discussion follows. This allows April to understand the above information better and to look at their bank statements, which show satisfactory conduct. She challenges the reduction in business income, and Justin advises it is just a case of higher-than-normal van maintenance and depreciation costs during the year. He is not concerned about this and is confident in achieving consistent levels of profit. At the conclusion of the meeting, April states that she will try to obtain an approval.

Event 3: April obtains loan approval.

April considers the lenders that she can place business with and decides that KoruBank would be the best choice for Justin and Mary. She makes this choice base on her experience with this lender and their lending criteria for customers with multiple properties, which include:

• The DSR must be a maximum of 40%.
• The LVR must be a maximum of 60%.
• The debt-to-equity ratio must be a maximum of 1.5.
• Rental income will be scaled at 70%.
• A standard monthly allowance of $400 for property rates applies for owner-occupied properties only.
• KiwiSaver contributions do not need to be included in serviceability calculations.

She submits the loan application to KoruBank, disclosing all information held and includes an additional request to refinance the $44,000 finance company loan secured against the vans. The loan application is approved by KoruBank on this basis.

Event 4: April advises Justin and Mary of the approval.

April arranges for Justin and Mary to call into her office. She gives them the good news that KoruBank has agreed to refinance their existing mortgages and finance company loan, as well as providing the requested $60,000 top up. They are delighted by this news, and a discussion then follows about the loan structure. It is decided that:

• part of the loan will be in their personal names and part will be in their LTC name (as per previous advice that they have received from their accountant)
• all properties will be linked to all loans for security purposes
• a mix of floating and fixed interest rates will be documented to allow transactional use as well as provide protection from adverse rate movements.

For the purposes of this assessment and based on the test rate that KoruBank uses, the repayments on the total loan amount will be $11,225 per month with a breakdown of $8,800 interest and $2,425 principal.

Based on the events in this case study, answer the following questions.

Task 1

Provide a breakdown of the loan request. Explain the purpose for each element of Justin and Mary’s request as well as what they are trying to achieve.

(Word count guideline: 100 words)

(5 marks)

Task 2

1. Complete a DSR calculation for the loan. Show your workings.
2. Complete an LVR calculation for the loan. Show your workings.
3. Complete a debt-to-equity calculation for the loan. Show your workings.
4. Explain each calculation in relation to KoruBank’s policy.

(Word count guideline: 100 words)

(7 marks)

Task 3

Complete a three Cs analysis of Justin and Mary’s loan application. Use the following format:

(Word count guideline: 200 words)

(7 marks)

Task 4

Would you approve Justin and Mary’s loan application if you were a credit centre lending manager making the final decision? Explain your rationale and discuss the criteria you are considering in your recommendation.

(Word count guideline: 150 words)

(7 marks)

Task 5

Identify and explain each of the guarantees that will be required to link the security properties to the borrowers and to create full personal liability for Justin and Mary.

(Word count guideline: 100 words)

(7 marks)

Task 6

1. Identify and discuss the pros and cons of a construction loan in relation to this scenario.
2. Using the pros and cons discussed, provide a recommendation on how you would structure the loan if you were the lender.

(Word count guideline: 100 words)

(6 marks)

Task 7

Do you believe that the following professional participants should be involved in Justin and Mary’s loan refinance process? Use the following format:

(Word count guideline: 300 words)

(7 marks)

Task 8

Do you believe that April has breached KoruBank’s Code of Conduct expectations in that she did not further challenge the reason for Justin and Mary wanting to refinance away from Metro Bank? Explain April’s obligations and what would be reasonably expected of her.

(Word count guideline: 150 words)

(5 marks)

Case Study 2: Sophie and Christine Smith

Sophie and Christine are sisters who want to purchase a property for them to both live in. They are in the early stages of their adult lives and know that they need to combine resources to be able to achieve this. They have found a CBD apartment that meets their needs and have approached SunRise Bank for finance.

Event 1: SunRise Bank arranges for one of their recently appointed mobile mortgage managers, Gabriel Marx, to meet with Sophie and Christine.

The meeting takes place at the home of Tony Smith, Sophie and Christine’s father.

The CBD apartment that they want to purchase is in a former office building that is being redeveloped and is nearing completion. The licensed salesperson acting for the developer has indicated that an offer of $549,500 would be accepted. Tony has advised that he is keen to help his daughters get on the property ladder if he can.

Gabriel gathers and confirms the following information:

Tony has proposed a 10% deposit of $54,950 funded from their collective bank accounts and Sophie’s KiwiSaver. Tony has said that he will gift the shortfall in deposit to get them to 10%.

At this point, Gabriel states that as their bank statements and credit checks were all clear, SunRise Bank should be able to assist them, but that he would need to take advice on the loan structure. The meeting ends.

Event 2: Gabriel Marx phones the Smiths the following day.

Gabriel advises that after further consideration, he does not believe that the application is strong enough for a 90% LVR loan. However, he could immediately give a conditional approval under his own credit authority if Tony would put his rental property up as collateral security. Gabriel advises Tony that SunRise Bank offers two options for this, a ‘family loan’ or for Tony to act as a limited liability guarantor. After discussing the options, Tony decides he would prefer to act as a limited liability guarantor. Tony is happy with this outcome and states that they will contact the salesperson and put in a conditional offer that night. He jokes that he has never actually lived in a house that he owned himself and that his daughters would have one over on him in this.

The loan criteria that Gabriel considered in his decision-making process included the following:

• The hours worked above 40 a week are scaled at 50%.
• Rental income is scaled at 75%.
• The standard monthly allowance for property rates is $350 per property; this is treated as a fixed expense.
• The required monthly net surplus is $2,200 for two adults living together and $1,200 for an adult living on their own.
• The debt coverage ratio must be greater than 1.2.
• The LVR must be a maximum of 70% for apartments.

Event 3: Tony Smith phones Gabriel Marx a few days later.

Tony advises Gabriel that they have negotiated a great price of $543,000 and asks what the next step is.

They agree that a registered valuation should be ordered for the apartment and arrange to meet up again once this is available, to finalise the loan details. Tony mentions that Christine has just broken up with her boyfriend.

Event 4: All parties meet in Gabriel’s office.

Gabriel leads off by advising that the registered valuation has come in and shows a value upon completion of $570,000. The apartment is 62 square metres and has two bedrooms. The title document is of a stratum estate nature, subject to a building height restriction covenant and a power company easement. Gabriel also discusses Tony’s existing property, which is a three-bedroom house in the suburbs with a fee-simple title, no encumbrances and a current rateable valuation of $475,000. Based on these things, Gabriel confirms that the ‘loan is approved’.

The discussion then turns to the loan details, with Tony stating that he would prefer to retain his cash and contribute by way of collateral only. Based on this, the loan amount is finalised at $500,000 over a 25-year term, with Sophie and Christine to be joint borrowers / property owners and Tony to act as a limited liability guarantor. Tony will provide a limited guarantee of $119,900.00, based on SunRise Bank’s maximum LVR restrictions on apartments. A mix of floating and fixed interest rates is agreed upon to allow transactional use as well as providing protection from adverse rate movements. For the purposes of this assessment and based on the test rate that SunRise Bank uses, the repayments on the total loan amount will be $3,400 per month, with a breakdown of $3,000 interest and $400 principal. Tony will need to be able to support $825 per month to meet the servicing requirements for a limited liability guarantor.

Event 5: Sophie and Christine are in financial difficulty.

A year down the track, Sophie and Christine find themselves in financial difficulty. Sophie has lost her job and been unable to find a new one. They are unable to pay the mortgage and are well behind in payments. Sophie and Christine have become uncooperative with SunRise Bank, and Tony is unaware of the situation.

SunRise are aware from previous conversations that Sophie and Christine are due to receive an inheritance from their grandmother’s estate. However, they have reason to believe that Sophie and Christine do not intend to use these monies to repay the debt.

Sophie and Christine’s accounts have just been given a no-further-drawings status; Tony is yet to be contacted.

Task 1

1. Complete a net surplus calculation for:
   1. Sophie and Christine
   2. Tony.
2. Complete a debt coverage ratio calculation for the loan.
3. Explain each calculation in relation to SunRise Bank’s policy.

For the purposes of these calculations, allow for a flat 20% tax rate for each party and ignore KiwiSaver contributions. Show your workings.

(Word count guideline: 100 words)

(7 marks)

Task 2

Write an email to Tony, Sophie and Christine, requesting the full documentation that you will require to assess the loan. Assume that you have not received or reviewed any documentation yet.

Begin your email, ‘Dear Tony, Sophie and Christine’.

(Word count guideline: 150 words)

(7 marks)

Task 3

Complete a three Cs analysis of Tony, Sophie and Christine’s loan application. Use the following format.

(Word count guideline: 200 words)

(7 marks)

Task 4

Would you approve Tony, Sophie and Christine’s loan application, along with the proposed security presented, if you were a credit centre manager making the final decision? Explain your rationale and discuss the criteria you are considering in your recommendation.

(Word count guideline: 350 words)

(7 marks)

Task 5

Do you believe that Tony, Sophie, and Christine would be affected if the New Zealand Government experienced an extraordinarily large budget deficit? Give reasons for your answer.

(Word count guideline: 100 words)

(7 marks)

Task 6

Sophie and Christine’s loans have gone well into arrears, and a no-further-drawings status has been placed on the accounts. Tony is upset that he was not contacted by SunRise Bank sooner and would like his guarantee released immediately.

He asks, ‘How much money do you want in return for immediately releasing my guarantee to Sophie?’

1. Should SunRise Bank have contacted Tony sooner? Give reasons for your answer.
2. Provide a response to Tony’s question.

(Word count guideline: 200 words)

(7 marks)

Task 7

A no-further-drawings status has been placed on the accounts.

1. Explain the loan recovery steps to be taken from here.
2. If the loan recovery actions are unsuccessful and a loss situation arose, describe two methods that SunRise Bank could use to enforce a claim against the inheritance that Sophie and Christine due to receive. Give reasons as to which method is likely to be the most advantageous for the bank.

(Word count guideline: 250 words)

(7 marks)