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To lend or not to lend

By Niall Cook - posted Monday, 21 January 2008


So, how does all of this impact on so-called predatory lending practices? Simple. One word. Risk.

Australia is called the “Lucky Country” and over the past 15 or so years, we have indeed been a lucky country in economic terms. Inflation has been low and productivity, while atrophying over that time, has been high. We've earned well, in average terms, while the cost of living and consuming hasn't really worried us to any urgent degree. We've had exceptionally low interest rates in historical terms. Combine all those ingredients and you'll find we've been numbed to the longer term effects of the never-never. Let the good times roll, and we did.

Consumer debt in this country is higher now, per capita, than at any other time in this country's history. Within the finance industry, because the good times were rolling, the lending institutions - bank and non-bank - realised that making hay in the sunshine was what their shareholders wanted, so the drive for market share really ramped up. Especially in the early part of this century.

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Risk was deemed secondary to market share by so many lending institutions that it ceased being taught to up and coming credit analysts. The focus turned to sales volumes. Dollars lent per month. The focus was on assets. “Can we take a mortgage? Then why worry? Keep exposure to known recoverable margins and we can't really lose, can we?” In industry circles, it's known as Pawn Broking.

Take a mortgage and lend the money. Get that market share and paint that borrower into such a position that they dare not go elsewhere for fear of not being able to refinance if things get tight. If worse comes to worse, sell the asset. Simple!

Is that predatory? I don't think so, in grand terms. It clearly depends on your definition, but to me, it's a simple evolution of the industry under given prevailing conditions.

Of course, the God of Market Share demanded more 30-year terms and more recently, 40-year terms. Commercial loans on similar terms to home loans. Some lenders will even lend you 105 per cent and 110 per cent of the value of the asset you offer them, on the lick and promise that it will appreciate within a reasonably short space of time, and cover your debt when the boom comes down.

Lending in some institutions, and I could name a few, has become real edge of the envelope stuff. I know of one mortgage manager - the largest privately owned MM in the country - which has a turnover of credit staff exceeding 75 per cent. Why? Not because they're a bad employer, or WorkChoices let's them lash their staff, but because credit decisions are being actively over-ridden by sales-oriented credit managers, who in turn are being whipped ceaselessly by senior management to “approve that deal”.

As a former holder of a credit discretion, I completely understand why those with the power to approve are voting with their feet. When you sign off on a deal, you still like to sleep at night.

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In my mind, predatory lending, while it might exist as a fringe occurrence, is not the causal factor in people losing their homes and businesses. The major impactor is an almost complete abolition of the understanding of risk and prudentiality among financial institutions. Particularly among those institutions which lend into the home mortgage market.

Market share has usurped risk as the primary consideration to lend, and purely because that chook wheel I mentioned above has to be kept turning. If it falters, even in the slightest, massive losses can result for the lenders, and subsequently, the borrowers.

RAMS is a prime example. Cheap interest rates are fine and well, but all things, particularly in financial circles, are cyclic. That's why an understanding of risk, as I was taught to understand it, must lie at the heart of every credit decision, from the smallest to the largest. It's a gut feel, more so than balance sheet figures or taxation assessment notices. It's common sense and an understanding of impacting economic climates. Risk has nothing whatsoever to do with sales figures, market share or interest rates, just as prudentiality has nothing to do with the value of an asset offered as collateral. If predatory lending practices exist at all, they exist under the guise of market share and profitability.

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First published at Hyperidian Bannerman on October 2, 2007.



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About the Author

Niall Cook blogs at Hyperidian Bannerman.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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