LOW-DOC loans — or “liar’s loans” as they are known in the US — have become even easier to obtain as lending standards loosen, with non-bank lenders aggressively spruiking the controversial products by slashing interest rates and offering cashback giveaways and cruises.
The loans, which do not require borrowers to provide tax returns and are used by tax-avoiding small business owners, have traditionally carried interest rates substantially above standard loans.
However, as lending standards across the financial sector weaken — and the demand for residential mortgage-backed securities grows — some lenders have slashed low-doc lending rates to equal that of standard mortgages.
The article fingers Liberty and Pepper, two of the pioneers of the pre-GFC low-doc surge. Low doc is always the baby of the non-bank lenders and securitisers. A brief history is apposite.
Securitisation arose largely after the 1991 recession so it hadn’t faced a stern test until the GFC. When it did face such a test from an offshore shock, it totally collapsed and the non-banks disappeared into the banks for chump change quicker than you could say “bust”, as did two leading mid-tier banks dependent upon the same process. Is this robust and sustainable competition?
Second, securitisers led the decline of lending standards in Australia. It was they that first issued low doc loans, then no doc loans.
Third, securitisation began by issuing domestic securities but by 2007 was issuing well over half of them offshore, a higher percentage of international funding than even the big banks pursued. They increased the nation’s already extreme liquidity risk and was central to the creation of an offshore funded housing bubble. Hence the boom and bust in green.
Fourth, there was widespread abuse of lending rules and required documentation by securitisers. Most of the documented cases are in the non-bank sector. For instance this Boby Dazzler:, “In 2007, the Federal Court ordered Skeers to pay former client Aj Biega $32,000 in compensation after the broker falsified documents to arrange a $365,000 mortgage in 2004 for the then 20-year-old unemployed, dyslexic and homeless man.”
Let’s do it all again!
But but but surely this can’t happen! Not in Australia, where our system is so well regulated?
How about all the loans to non-residents bundled into mortgages via securitisation?
There are many bad apples hiding in these portfolios of risk, from liar loans to non-resident loans to investment loans which only survive due to interest cost deductions akin to ARM loans from the US.
I’m sure Peter will deny it all, saying everyone has ‘rigourous lending standards’ but frankly that is complete BS. Even when undertaking a thorough due diligence on an RMBS issuer from a Warehouse provider you will only sample a fraction of the mortgages being underwritten.
This is the classic case of ‘when the tide goes out you will see who is swimming naked’ and I’m sure that Peter and his broker mates who write mortgages for sub-prime lenders like Pepper and Liberty will be shown completely sans-swimming trunks when the tide eventually does recede.
Maybe the AOFM will have to step in again and use the public balance sheet to ensure spruikers underwriting poor loans don’t get caught in a liquidity trap again.
Hmm - I read this at MB today although I didn't read Gunna's remark as it went behind a paywall. Really I don't think that even Gunna is so completely uneducated that he would have written this drivel, unless he had been on the vodka again.
Low Docs never went away, they are excellent products and lenders like Liberty, Peppers, and Bluestone got the formulae right well before the banks did. Most of the Banks BTW are also still writing Low doc loans.
I wrote one recently that's about to settle next week using Peppers.
the fact that some commentators think that they went away and are now back just shows how little some commentators know about the industry they pretend to be knowledgeable about.
One day ABN qualification no longer exists, but Low Doc loans are options for borrowers with a genuine business who can provide their working account statements, BAS returns, an ATO Portal Printout, or in some cases a letter from their accountant confirming their income declaration. Not many will understand that jargon, so I'll explain it:-
1. Working Account statements = the business bank account statements showing the income being banked and normal payments being met. Lenders can tell a lot from observing the cashflow.
2. BAS Returns - these are done quarterly (sometimes monthly and sometimes annually) It's a return sent to the ATO declaring turnover, wages paid, GST collected etc - experienced lenders can easily calculate a likely profit from these returns.
3. ATO portal printout - this is very much like a bank account maintained by the ATO. every taxpayer has one but a business client has debits recorded as BAS returns are lodged and credits as payments to the ATO to cover the amounts in those BAS returns are met. By looking at these "ATO accounts" lenders can check that the BAS returns shown to them are the same as those sent to the ATO, and that the business is up to date with their payments to the ATO.
4. An income declaration is a signed statement by the borrower declaring the income that the business owners is earning even though they may not have up to date tax returns for the last two years to prove that income.
5. An accountants letter is similar to a declaration but this is signed by the accountant of the applicant stating the borrower income. Cynics often say that it's easy to get a dodgy accountant to sign a letter like this. The cynic in me knows that it's easier to get a cynic to believe something ridiculous like that than it is to get a professional like an accountant to risk everything that they have worked hard for by signing a dodgy letter.
Borrowers also have to have held an ABN for two years (Australian Business Number ie registered with ASIC) and be registered for GST collection with the ATO for two years, although the CBA will accept just one full year. There are small variations between lenders.
So there you have it. They are not liar loans, they are useful loans for business owners who need finance but who may not have their tax returns up to date, or they may have income from sources that are outside lender policy. Many may be surprised to learn that many lenders won't count certain types of income even though they are legitimate and they exist.
Happy to answer any reasonable questions.
Any expressed market opinion is my own and is not to be taken as financial advice
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