Is Australia about to experience the darker side of credit-fuelled growth...?
IT TURNS OUT Australian banks and mortgage brokers used every trick in the US subprime book to expand lending during the housing boom, writes Dan Denning for the Daily Reckoning Australia.
Consider this from Anthony Klan, writing in 'The Australian' today:
'Subprime-style lending practices were rampant during the last property boom despite claims by lenders that local practices were superior to global standards. The Australian has exclusively obtained hundreds of internal emails between lenders and mortgage brokers that lift the lid on the extent of aggressive — and in many cases predatory — lending practices in the five years leading up to the global financial crisis.'
There were low-doc loans. There were no-doc loans. And mortgage brokers often did not even call potential borrowers to verify that their employment or income information was correct.
This was all standard practice in a credit bubble. Mortgage brokers work on volume, and they don't own the loan. Their incentive is to approve as many loans as possible. Those loans then go to a bank or bigger firm which securitizes them and sells them to investors. No one along the chain actually 'owns' the risk.
'In a series of precedent-setting legal cases,' Klan reports, 'nine judges before six courts have found in favor of borrowers stung by lenders who failed to ensure borrowers were able to repay before writing a loan...In almost all cases in which borrowers have lost some or all of the money borrowed, judges have overwhelmingly sided with borrowers and ordered mortgages to be extinguished, or drastically reduced, within 30 days.'
So Australia had its own dirty little secret subprime market after all. According to Fitch Ratings, low-doc and no-doc loans represent between 8–10% of the total national mortgage market, or between $96 and $120 billion. 'One in 20 loans held by the big banks is low-doc or no-doc, with the figure rising to about one in 10 across the market, as non-bank lenders hold the highest portion of such loans,' Klan reports.
Is 10% of the mortgage market nothing to worry about? Surely that entire 10% of loans won't go bad. But everything in economics happens at the margin. When the last marginal borrower is in the market — by definition, the borrower least suitable to take out a large loan — the market has reached its natural limits of expansion. Contraction follows.
Contraction is not good for business, especially if your business is lending money. You can see why the non-bank lenders were especially keen to keep the housing bubble growing. But don't be surprised if this lending boondoggle follows the global pattern: peripheral players get gradually wiped out as the asset rot moves its way inward to the core. The core of the system is Australia's Big Four banks.
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