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Will no one rid me of these evil moneylenders?

By Nicholas Gruen - posted Friday, 11 January 2008


For all these reasons there’s very little risk taking or predatory lending against residential mortgages among Australian lenders. Still, Graham Bell says this:

Quite a few of those who become victims of low-doc “loans” could well be true dropkicks and absolute dills, real born losers, but the rest are both impoverished and very ambitious … a very dangerous combination in our troubled times. Do you imagine that some very nasty groups would neglect to seek out willing recruits from among those who have lost everything?

Sorry but your present discussion, necessary and interesting though it is, seems to me to be like rearranging the deck-chairs on the Titanic when there is a far more urgent and potentially hazardous issue to be tackled.

I wonder if Graham has tried to take out a low-doc loan - that is a loan on which income is not fully documented.

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First, most of them have rates that are only about half a per cent above the discount rates available on fully documented loans.

Second, they are generally difficult to get without substantially more equity than those on full doc loans. More than 80 per cent LVR and your cost of money rises sharply and at 90 per cent the market is getting seriously expensive and thin.

Third, “low-docs” loans are still subject to the UCCC. The lender certifies their own income and if the amount they certify won’t service, the UCCC makes the loan unenforceable if the borrower defaults - i.e. it makes it commercially unviable (the spellchecker thinks “unviable” means “enviable” which gives you some idea of how widespread this moral panic is!). Anyway this kind of lending represents 15 per cent of the market in Australia and about the same in the US - where it’s not called “sub-prime” but “Alt-A” - sounds like a keypad shortcut. (If I press “Alt-A” in Word the “table” menu drops down - but I digress …)

There are also “no-doc” loans. It beats me as to why they’re more expensive when “low-doc” borrowers can lie about their income and if no-doc borrowers come with plenty of equity. But there you go. They are. And they’re expensive at 80 per cent LVRs and virtually impossible to get at LVRs over 85 per cent.

These are sometimes classed with “low docs” and sometimes with “non-conforming” loans. Non-conforming loans tend to be Australia’s equivalent of what the Americans call “sub-prime” loans. I used to think that banks overdid their abhorrence for those with credit defaults - I’ve certainly fallen for some sob-stories. Or perhaps they were legit. Stories of people living in group houses and moving out and finding that the people who’d moved in had made overseas calls on their telephone accounts etc, etc. Quite small defaults. Anyway, a recent study suggests that those with blemished credit records are five times more likely to default again - which doesn’t seem so surprising.

In any event, “non-conforming” loans are expensive and account for about 1 per cent of our home loan market - as opposed to the market share of “sub-prime” loans in the States of about 15 per cent!

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So when I think of what’s happened in the market for housing loans I think back to that empty parking space - the one that would be handy if it were there, but which, if it were there would still have a car parked in it.

What has happened is that as money becomes available, people find themselves effectively bidding their own borrowing capacity against that of their neighbours. And so people with similar incomes each compete with others of similar incomes (or of lower incomes and higher risk appetites and/or stronger desires to consume now rather than later).

So those parking spaces are filling up - and people are feeling the pinch. There is an interesting case one might make that we could all do ourselves a favour by rationing credit. I’ve not read or thought much about it, but the argument would be that competing against each other for houses is like standing up to get a better view at the footy. In the end everyone stands up and everyone is worse off. A decent model would bring out the ways in which that analogy is revealing and ways in which it misleads.

But a moment’s thought would show the political impossibility of re-imposing credit rationing, of governments interposing themselves between willing lenders and willing borrowers and effectively robbing people of the ability to become home owners. For while credit rationing would help lots of people who have got a good sized deposit (by keeping down the price of houses), all those without such a deposit would be the ones from which the government confiscates the Australian dream. I don’t think so.

It’s so much easier to let off a bit of steam against those evil, bloodsucking moneylenders who are driving us all to our doom, and to call for community action - regulation - to stop this cancerous evil.

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First published at Club Troppo on September 29, 2007.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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